IMF considers asking for longer debt maturities in bailouts

Posted June 20, 2014, at 1:33 p.m.

WASHINGTON — The International Monetary Fund should ask private bondholders to hold onto the debt of financially distressed countries for longer, as the global lender seeks to improve its sovereign debt restructuring strategy, IMF economists said on Friday.

The IMF’s deliberations have been shaped in part by its experience bailing out Greece, where it agreed to lend to the euro zone country without imposing losses on private creditors, but later decided a debt write-down would be necessary.

The IMF now seeks to avoid a situation where its bailout loans are used to pay off private bonds rather than provide more direct help to the country in need.

In a paper published on Friday, the IMF economists argue having the option of pushing back debt maturity would give the IMF a middle option in deciding how to help heavily-indebted countries.

This “soft” restructuring would leave private creditors intact while relieving some of the stress on the country. The economists emphasized that private creditors would have to agree to any such plan.

At present, the IMF can either lend to a country it believes will be able to pay back the debt, or force a debt restructuring up-front if the debt is seen as unsustainable.

In 2010, when dealing with Greece, the IMF also amended its rules to allow it to lend to countries where there is a “high risk of international systemic spillovers,” even if the Fund worried the country would not be able to pay back the money.

At the time, the IMF worried Greece’s debt problems could spread to its neighbors in the euro zone.

“(But) it has become clear that the systemic exemption established in 2010 does not provide a coherent long-term solution to the problem,” the authors wrote.

Economists and market analysts have raised concerns about some of the Fund’s proposals, saying they could risk market contagion by prompting investors to flee a country as soon as the IMF got involved, or raising interest rates to untenable levels.

Critics also say new rules would not really help address problems around sovereign debt restructuring, since even the decision of whether a country has a “high” or “low” probability of paying back its debts is subjective, dependent on a host of intangible factors such as a country’s commitment to reforms.

But the IMF staff argue the proposed rules would still be flexible, allowing the Fund to decide on a case-by-case basis if and how a country needs to restructure its debt. And they say it may be desirable if investors think new rules would make an IMF bailout less likely, and demand higher interest rates to hold the debt, as it would lead to better risk pricing.

The IMF staff said the paper was still preliminary and they would consult with markets further. The IMF said its next paper on debt restructuring, later this year, will deal with collective action clauses between nations and their debtors.

 

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