IMF staff have launched a critique of the current bailout system of responding to debt crises, but which contains major contradictions and ignores many issues and debts.
The paper on Sovereign Debt Restructuring, discussed by the IMF board in May, ignores all the social impacts of debt crises, seeing successful responses to debt problems as just whether a country can borrow from the private market again.
And it ignores debts owed to the IMF itself and other multilateral institutions, which inherently make the IMF biased in its response to crisis.
The paper argues that from the recent history of debt crises, such as in Argentina, the Caribbean and Greece, “debt restructurings have been too little and too late”.
Unsustainable debts get paid for too long, facilitated by IMF loans which bailout the private creditors. When negotiations between the debtor and creditor on reducing the debt finally take place, the amount of debt reduced is too small, continuing the debt crisis.
The paper says that this means IMF money is sometimes used “to simply bail out private creditors”.
These criticisms match some of the points Jubilee Debt Campaign and others have made of the current system for dealing with debt crises.
However, the paper pretends that the IMF is a neutral body, containing no discussion of the fact that the IMF is a major creditor itself.
There are long discussions on negotiations between private creditors and governments on debt reductions, little on debts owed to governments, and none on reducing debts owed to multilateral institutions such as the IMF and World Bank.
The IMF and World Bank are responsible for 45 per cent of new loans to low income countries over the last five years.
Neither does the paper acknowledge that its governance is dominated by states which are themselves usually creditors.
Though the fact creditor governments want to use debt crises to force economic changes on debtors, whilst ensuring their banks do not suffer losses, is hinted at, eg:
“official creditors [governments] have sometimes contributed to delays, out of concern that a restructuring would reduce incentives for the debtor country to adjust force banks located in official lenders’ countries to recognize losses, and trigger market turmoil affecting similarly-situated countries”.
The same logic applies to the IMF and World Bank, but this is not mentioned.
Whilst the paper does outline some of the many problems of responses to debt crises, its discussion on changes is very limited.
• If a debtor cannot borrow from private markets, making IMF lending to that government conditional on some of the private creditors voluntarily restructuring their debt
• Making IMF lending conditional on a high participation by private creditors in debt restructuring [thus still allowing some vulture funds to holdout and get paid in full]
• Aggregate collective action clauses, to prevent vulture funds holding out by buying up one particular set of government bonds
One major contradiction in the paper is that it says “the Fund always recommends that the member [government] avoid default” but also assumes that debt restructurings should always take place in voluntary negotiations between the debtor and creditors.
Yet in the absence of mechanisms to compel creditors to reduce debts, the threat of a default, and creditors getting nothing, is the only thing which makes creditors negotiate in the first place.
Most fundamentally, the paper is based on an assumption that the sole definition of a debt crisis is when a government can no longer borrow from international financial markets. On this view, crises are resolved once a government can borrow again. This ignores the social impact of debt crises seen in increased poverty, inequality and decline in public services.
And it is this definition of debt crisis which leads to the slow and ineffective response to problems that the paper is supposedly critiquing.
When success is defined by being able to borrow from international financial markets, debt payments are restructured just enough that countries keep limping on with payments and taking out new loans, whilst the large debt remains.
Governments remain dependent on loans from international financial markets, rather than making economic changes which mean they no longer need large external debts.
The focus on still being able to borrow from international financial markets, and the lack of substantial debt cancellation, is why countries like Jamaica and Pakistan have suffered from 40 years of high debts, with no end in sight.
The IMF board discussion of the paper reached no conclusions, but asked the staff to do more work.
(The above reflects the views of the British-based Jubilee Debt Campaign which seeks to influence the UK government’s policy on debt, including a commitment to ensure that the maximum influence is brought to bear on the World Bank and International Monetary Fund (IMF) – on whose governing bodies the UK is represented)