Should Argentina Be Able to Declare Bankruptcy?
Anne Krueger is first deputy managing director of
the International Monetary Fund.
Wriston, former head of Citibank, famously remarked that countries don't
go bust. But over the past two centuries, more than 90 have in fact defaulted
on their debts, and a number have done so several times. When it announced
a moratorium late last year, Argentina became only the latest example.
Defaults are always painful, for debtors and creditors alike. And so they
should be. Countries-just like companies and individuals-should honor
their debts and suffer when they fail to do so. Otherwise people will
not be prepared to lend to them, and they will find it much more difficult
to finance investment. But when a country's debts become truly unsustainable,
it is in everyone's interest that the problem is addressed promptly and
in an orderly way.
Alas, all too often that does not happen. Like a toothache sufferer delaying
a visit to the dentist until the last possible moment, governments frequently
try to put off the inevitable. The result is that the citizens of the
defaulting country experience greater hardship than they need to, and
the international community has a tougher job helping pick up the pieces.
The lesson is clear: We need better incentives to bring debtors and creditors
together before manageable problems turn into full-blown crises. International
Monetary Fund (IMF) staff have been examining how this could be done-by
learning from corporate bankruptcy regimes like Chapter 11 here in the
United States. We are some way from having a formal proposal, but we look
forward to discussing these ideas with our executive board and other interested
parties in coming months.
In thinking about a possible new approach, we began by asking why some
countries wait so long to restructure unsustainable debts. Reluctance
to confront the economic and political disruption involved is obviously
part of the answer-and no new approach can or should entirely eliminate
those concerns. But logistical and legal barriers are important as well.
Debt restructuring was difficult enough in the 1980s, when you could bring
the holders of most of a country's debt together simply by gathering 15
bankers around a table. Things are much more complicated now. In recent
years, countries have increasingly borrowed by issuing bonds as well as
turning to banks. Bondholders are more numerous, anonymous and difficult
to coordinate. This increases the "collective action problem"
of getting agreement among creditors on the terms of a restructuring-even
if almost all of them would benefit.
The resulting expectation that restructuring is likely to prove difficult
and disorderly means that creditors may scramble to get their money back,
in an attempt to beat others to it. We need to create stronger incentives
for creditors to stay engaged rather than rush for the exits.
Another obstacle to orderly restructuring has been the growing threat
of legal action. In part this is because bondholders seeking repayment
do not have to share the proceeds of litigation with other creditors-as
banks have to do. A second reason is that litigants have recently overcome
one of traditional barriers to suing debtor governments, namely the difficulty
of locating and seizing their assets. In one recent case, for example,
a "vulture fund" in effect held Peru ransom by persuading courts
in the United States and Europe to prevent it servicing its debts to other
creditors. It is not clear whether this technique would survive legal
challenge in future cases, but it highlights a more general problem.
So how could the international community help? One answer would be for
the IMF to lend a country all it needed to repay its creditors. But this
would leave countries accumulating debt indefinitely. In any event our
resources are limited, not least by the reluctance of our members to see
taxpayers' money used to bail out private creditors. This reluctance is
well justified. Investors and lenders will act imprudently if they see
the IMF waiting on the sidelines to ensure they get their money back.
Just as we expect borrowers to repay their debts, so we should expect
lenders to accept responsibility for the risks they take.
Looking to corporate bankruptcy regimes for inspiration makes much more
sense. We could put a better set of incentives in place by creating a
predictable legal framework that would in all probability rarely need
to be activated formally. A country would have legal protection from its
creditors for a fixed period while it negotiates a restructuring. In return,
it would be under an enforced obligation to negotiate in good faith and
to adopt policies that will get its economy back on track. Finally, once
a restructuring has been approved by a big enough majority of creditors,
any dissenters would have to accept the same terms.
These key features would need the force of law throughout the world, which
won't be easy to achieve. But if and when they are in place, they are
likely to act as a catalyst, encouraging debtors and creditors to reach
agreement of their own volition. As in domestic bankruptcy regimes, most
restructuring would likely take place "in the shadow of the law."
The benefits could be considerable, and not just for the debtors. By removing
much of the uncertainty from the restructuring process, creditors should
find that the value of their claims on an emerging market country hold
up much better if it runs into economic trouble. And by helping investors
and lenders discriminate more clearly between good and bad risks, an international
workout mechanism could help countries with good policies secure capital
more cheaply. It will also increase the efficiency and stability of the
global financial system.
There are, of course, many practical and political obstacles to getting
such an approach up and running. With the best will in the world, it would
take two or three years to put in place. This is too late, alas, to help
Argentina in its current difficulties. But as an investment in a stronger
and less crisis-prone world economy for the future, the idea is well worth