Tag Archives: IMF program

Maturity Extension as Precondition for Large-Scale IMF Financing Operations?

An IMF staff report published in May and entitled “The Fund’s Lending Framework and Sovereign Debt—Preliminary Considerations” proposes to drop an exemption related to systemic importance and to give a larger role to debt maturity extensions.

Prior to 2002, when a member state sought funds in excess of established limits, the Fund often waived these limits on the basis of “exceptional circumstances,” and did so in a discretionary manner. Growing concerns over the problems this may create (moral hazard, early exit of private creditors, delays in necessary debt reduction measures, large-scale Fund financing operations) and the Argentinian collapse of 2001 triggered a review that gave rise to the 2002 exceptional access framework.

This required as a precondition for Fund support that debt be sustainable with a high probability. Whenever debt sustainability was clearly not given or remained in doubt, the framework called for debt restructuring with the aim to render the remaining debt sustainable. In retrospect, this restructuring requirement is viewed as too inflexible since it generates restructuring costs even when it turns out ex post that a restructuring was not actually needed.

During the Euro area crises, the Fund did not judge debt sustainability of the most affected countries to be very likely and the exceptional access framework of 2002 therefore would have required a debt restructuring as a precondition for IMF funding. However, pointing to high risks of international systemic spillovers of a debt restructuring, the Fund waived in 2010 the requirement that debt had to be sustainable with a high probability. By now, this modification of the exceptional access framework is also seen as unsatisfactory because systemic exemption structurally favors large member states and does not address the problems that gave rise to the 2002 framework. Against this background, a reform proposal is put forward.

The reform proposal is guided by two objectives: To improve debt service capacity without imposing debt reduction as a prerequisite; and to avoid that private sector claims are fully honored while debt sustainability remains in doubt. According to the proposal, the IMF would require as precondition for funding that measures are taken to improve debt sustainability even if they do not necessarily restore sustainability with high probability. Chief among those measures, the proposal suggests that creditors should be asked to agree on a maturity extension (re-profiling). That is, private creditors would remain exposed to the default risk and would be forced to contribute to the refinancing.

Collective action clauses might be needed to win creditors over. For a majority of them to be voluntarily participating, they must perceive the maturity extension as likely leading to renewed market access of the sovereign. Even in the absence of a payment default, re-profiling would likely trigger a credit event if collective action clauses were activated, and a credit downgrade among rating agencies.

Sovereign Debt Issuance under Domestic Law

In the second of his Munich Lectures in Economics, Kenneth Rogoff discussed financial crises. (His first and third lecture covered a proposal to phase out cash, see my post.)

In addition to reviewing his work with Carmen Reinhart, Rogoff returned to an earlier proposal (Bulow and Rogoff 1990, Journal of Economic Perspectives) according to which sovereigns should issue public debt under domestic law. This would avoid complications in an eventual debt restructuring process but would also make it harder to issue debt in the first place.

Rogoff reminded his audience that not only developing countries are and were subject to IMF programs; advanced economies were too (e.g., the UK in the 1950s).