At the upcoming semi-annual meetings of the International Monetary Fund (IMF) and World Bank, there is likely to be much talk about stemming cash flow to terrorists and maintaining the global economy in wartime. In the realm of things the institutions can actually do something about, there will be debt -- a regular feature of IMF/World Bank meetings.

This time the debt conversation will revolve not around reform of HIPC (the feeble Heavily Indebted Poor Countries Initiative of the IMF and World Bank), but around a proposal made at the September 2002 meetings by the Deputy Managing Director of the IMF, Anne Krueger. Krueger, who developed what she called the "sovereign debt restructuring mechanism" (SDRM) in response to the IMF's biggest failure yet, the crisis in Argentina, surprised many by securing the support of Paul O'Neill, then the U.S. Treasury Secretary, whose department had previously sent mixed signals about the proposal. With O'Neill in her corner, Krueger was able to get the IMF's Board to agree that a more detailed proposal would receive consideration in April.

The SDRM is worlds away from what is needed to resolve the continuing global debt crisis, but the very fact that it is being considered is something of a breakthrough. It represents the first time that the IMF, World Bank, or the major wealthy countries are officially considering some form of arbitration to address the debts that have hamstrung governments for decades. Until this moment, the sanctity of debt was always upheld by the IMF -- that is, there was never any hint that debts could be re-structured, re-scheduled, or reduced by anything other than the generosity of the creditor. The SDRM would, in extreme cases, compel creditors to accept a suspension of payments, to forego litigation, and to go along with a re-structuring. Ending the complete autonomy of the creditor could conceivably be the first step toward a rationalization of the financial system, perhaps one day reaching a point where the right to profit would not supercede basic human rights.

We should probably not assume that Krueger and the IMF have reached this point out of some recognition of the tremendous injustices of the current financial system. More realistic would be the assumption that taking the risk of challenging, however slightly, the power of the creditors was necessary if the system as a whole is to survive. In short, this is the band-aid the IMF proposes to use to cover the gaping wound in its own credibility in the wake of the Argentine financial crisis.

For all that, the SDRM would have the perverse effect of increasing the IMF's power -- to determine what middle-income countries (as opposed to the low-income countries included in HIPC) are deserving of assistance with their debt, and to impose conditionalities on countries that want the SDRM's benefits. The small benefit that the SDRM might provide in a few cases is not worth the risk of giving the IMF more ways to stifle economic sovereignty and development.

What is the SDRM?

The SDRM would be used to stem the major crises that have become more and more frequent in middle-income countries -- the kind of events that usually result in a huge "bailout" loan coordinated by the IMF. Mexico, Russia, Brazil, South Korea, Thailand, Indonesia, and Argentina have all been recipients of such loans in the last ten years. The bailouts have customarily been used to pay off foreign creditors, thereby avoiding default. The limits of the bailout strategy may have been discovered with the post-bailout default by Argentina on at least $141 billion in payments to private creditors in December 2001. Some other approach would be needed if more Argentinas were to be avoided.

Krueger's plan would, in essence, allow countries to receive some of the protections that companies or individuals in the U.S. (and many other countries) can get through declaring bankruptcy. A country like Argentina could apply to the Dispute Resolution Forum (DRF), an ostensibly autonomous agency to be created by the IMF. The IMF would be asked to judge whether the country was indeed facing an unsustainable debt crisis which required urgent attention. If it agreed, then a "stay" or "standstill" would be placed on the country's debts, meaning the country could suspend payments and be immunized against legal actions during the time required to negotiate a re-structuring. The debtor government would be allowed to offer "priority" terms to creditors in order to attract new capital during the period of the stay. Finally, the re-structuring of the debts would require the agreement of a majority of the country's creditors, rather than unanimity -- a provision designed to speed resolution and combat "vulture funds" which buy up sovereign debt and then sue to get the full value when a re-structuring deal has been struck. The IMF, too, would have to agree that the government had a satisfactory plan for living up to its end of the bargain.

It is easier to list the plan's virtues than its faults. The crucial omissions from the SDRM include: (1) the participation of indebted governments and civil society in setting up the system and the arbitration panel itself; (2) independence from the IMF, which would continue to decide who was eligible and when an economic plan was "sound"; (3) an acknowledgment that much of the debt in question should be declared illegitimate and annulled; (4) a guarantee that the panel will be empowered to cancel debt; (5) a requirement that the panel's determinations be binding; and (6) an application of the procedure to more than just privately-held debt -- that is, the debts claimed by the IMF, World Bank, regional development banks, and bilateral agencies cannot be excluded from the panel's reckoning.

Opposition from the Creditors

Insufficient as the SDRM appears, its significance was demonstrated by the explosively negative response of the banking lobby. Groups like the Institute for International Finance, which represents private banks, were incensed at the prospect of losing control over their outstanding debts, and waged media and lobbying campaigns to stifle the plan. O'Neill resisted their pressure, though the Treasury Department did also promote a plan to have re-scheduling terms written into virtually every bond contract and loan involving sovereign governments -- a proposal the bankers prefer.

O'Neill has since been fired by President Bush and replaced by John Snow. While it is too early to know what direction Snow will take, he appears less likely to appreciate the Krueger proposal than O'Neill. The first indication of Snow's direction is the recent announcement by the IMF that it was eliminating the "stay" from the SDRM, one of its key components. The IMF insists that this move does not alter the plan substantially, but it is clear that the pressure from big banks has forced Krueger to back away from the feature that made the proposal somewhat appealing to some Southern governments in the first place.

Controversy within Civil Society

Krueger's success in putting the SDRM on the IMF's agenda followed several years of lobbying by European Jubilee campaigns, notably those in Germany and the U.K., for consideration of an arbitration mechanism that would fairly and independently determine which debts should be paid. The SDRM, however, violates many of the principles of the most advanced of the Jubilee proposals, from the German chapter. The IMF's heavy involvement in the process is the most egregious violation, as Jubilee Germany insists that the process can only work if the arbitration panel members are accepted by all as impartial and qualified to make binding decisions. Krueger's proposal would have governments propose panelists through their representatives at the IMF, cutting out any civil society participation.

The Jubilee Germany proposal is based on University of Vienna Professor Kunibert Raffer's adaptation of U.S. bankruptcy law for municipalities -- known as "Chapter 9" -- to the circumstances of sovereign national government. This approach guarantees that governments have the flexibility to continue raising and allocating funds for the essential services the public requires. It also explicitly calls for the panel to consider questions regarding the debt's legitimacy and to have the power to cancel 100% of the government's debt burden.

Some civil society organizations are pleased to see the IMF beginning to talk about an arbitration procedure. Others are more ambivalent, for while they may accept that the IMF has been forced to take a step forward, they are very skeptical that any procedure initiated by the IMF can be made fair. In fact, the disagreement has become rather charged, with some campaigners demanding that other civil society groups avoid discussing the possible terms of the SDRM or any appearance of cooperation with an IMF plan. Other groups make the argument that they must engage in the debate in order to capitalize on the opportunity created by the IMF's desperate search for a solution to its own inadequacies.