Kerin Hope and Peter Spiegel report in the FT that Greece will delay payment of the first tranche of June payments it owes to the IMF:
Following a rarely used procedure permitted under IMF rules, the Greek government intends to bundle all the payments it owes in June totalling €1.5bn and transfer it at the end of the month.
In a Vox column, Olivier Blanchard distills ten takeaways from an IMF conference on “Rethinking Macro Policy. Progress or Confusion?’” He lists them under the following headings:
- What will be the ‘new normal’?
- What the new normal will be matters a lot for policy design
- Can we hope to limit systemic financial risk?
- Should monetary policy go back to its old ways?
- Instrument rules
- Macroprudential tools or financial regulation
- Should central banks keep their independence?
- Little progress on the design of fiscal policy
- The complex effects of capital flows
- How much can the international monetary system be improved?
Chris Gilles reports in the FT about Olivier Blanchard’s plans to retire as IMF chief economist. Olivier emphasized the importance of academic research and challenged the Washington consensus. Under his watch, the IMF
As the article points out not all of these initiatives were successful.
Joachim Jahn and Manfred Schäfers report in the FAZ about pressure by the European Commission and the IMF to liberalize personal services in Germany. The IMF expects less regulation/protection of architects, tax advisors and the like to increase services growth. The tax advisors warn that liberalization would create conflicts of interest for the service providers.
Kerin Hope and Shawn Donnan report in the FT that Greece used IMF special drawing rights to repay the IMF loan.
Members are required to pay a nominal interest rate to the IMF on the gap between their actual SDR holdings and their allocation, making this week’s move by Athens the equivalent of taking out a low-interest loan from the fund to pay off another.
Peter Spiegel reports in the FT that
Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors.
Update (May 6, 2015)
According to other reports the IMF downplays disagreement among lenders. Peter Spiegel and Stefan Wagstyl report in the FT:
Officials involved in the talks said the IMF was not seeking large-scale debt relief immediately. Instead, it was warning that any concessions to Athens that allowed the government to post lower budget surpluses — the likely trajectory of the current talks — would require debt relief to make up the difference.
And Ht reports in the NZZ: According to an IMF spokesperson
Poul Thomsen, der Chef der Europaabteilung des Fonds, [hat] in jener Sitzung darauf hingewiesen, dass der Bedarf an zusätzlicher Finanzierung und an Schuldenerleichterungen zur Sicherstellung der Schuldentragfähigkeit umso grösser werde, je mehr man in den Verhandlungen von den ursprünglichen, 2012 vereinbarten Massnahmen und Zielen (des zweiten Hilfspakets) abweiche.
… Doch Moscovici betonte am Dienstag, über die Schulden werde man erst nach einer Einigung über das Reformpaket reden können. Es ist ein offenes Geheimnis, dass dannzumal auch über ein drittes Hilfspaket gesprochen werden muss.
Richtig ist laut Verhandlungskreisen, dass der IMF an den Treffen der «Brussels Group» eine besonders harte Haltung gegenüber Athen einnimmt. Er muss seine eigenen Regeln unter anderem bezüglich der Schuldentragfähigkeit einhalten, um weitere Gelder auszahlen zu können. Am anderen Ende des Spektrums der beteiligten Institutionen steht die EU-Kommission, die ein Auseinanderbrechen der Euro-Zone um fast jeden Preis verhindern will. Werde deren Irreversibilität angetastet, komme sofort die Frage auf, wer der Nächste sei, sagte Moscovici.
In the meantime, the Greek government argues that disagreement among “institutions” makes it impossible to find a compromise. Panagis Galiatsatos reports in the NZZ:
… der Internationale Währungsfonds (IMF) bestehe mit Vehemenz auf strukturellen Reformen (Rentenreform, Liberalisierung des Arbeitsmarkts) und mehr Flexibilität bei der Bestimmung der Primärüberschusses, weil er von einem weiteren Schuldenschnitt ausgehe. Im Gegensatz dazu verlange die EU-Kommission, die einen Schuldenschnitt partout nicht wolle, hohe Primärüberschüsse. Das beweise, dass die Gläubiger in keinem Verhandlungsfeld kompromissbereit seien, während die griechische Regierung Kompromissbereitschaft signalisiert habe.
The concluding statement of the IMF mission to Switzerland (consultations under Article IV) includes the following top 5 recommendations:
The IMF also calls for an overhaul of the deposit insurance scheme. It sees three risks to its central scenario:
The considerations guiding the IMF’s debt sustainability analysis which crucially determines the Fund’s lending policy is explained on an IMF website.
The DSA framework is in place since 2002. It has three objectives: To assess the current state; identify vulnerabilities; and examine alternative debt stabilising policies. Both total public and total external debt are analysed. Market-access countries and low-income countries are distinguished. These charts and tables summarise the DSA indicators for a market-access country. An example of the DSA is at display on page 41 in the September 2014 report on Italy.
An IMF staff report published in September and entitled “Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring” discusses recent legal developments of relevance for sovereign debt markets and implications for the sovereign debt restructuring process.
The New York court decisions (NML Capital, Ltd v. Republic of Argentina) have rendered a holdout strategy more likely to succeed. This tends to exacerbate collective action problems and raises the risk of more protracted debt restructuring processes. Market participants, including the International Capital Markets Association (ICMA) are discussing contractual clarifications and modifications in response to this challenge. The IMF observes these discussions and supports the preliminary results.
The New York court decisions established a broader interpretation of the standard pari passu clause in sovereign debt contracts. Specifically, they extended the standard notion of “protection of a creditor from legal subordination of its claims in favor of another creditor” to the broader notion that a sovereign must pay creditors on a pro rata basis. The court decisions prohibited Argentina from making payments to holders of restructured bonds unless it paid holdout creditors on a pro rata basis, and it prevented banks from making payments on Argentina’s behalf. In this context, the decisions also interpret the U.S. Foreign Sovereign Immunities Act. The scope of the rulings is not clear, not least because the decisions also refer to Argentina’s “course of conduct.” If interpreted broadly, the court decisions change the legal framework and are likely to complicate the restructuring of New York law-governed debt contracts (while probably not affecting London law-governed contracts).
Box 1 of the report discusses in detail the history of the Argentine litigation in the U.S. The report also contains an annex on the history of pari passu clauses in New York law-governed sovereign debt contracts.
Sovereign issuers have already reacted to the court decisions, by modifying the pari passu clauses in debt contracts. Also, ICMA has proposed a new standard pari passu clause, emphasising equal ranking as opposed to pro rata payments.
Collective action clauses enable a qualified majority of bondholders (e.g., 75%) of a specific bond issuance to bind the minority to the terms of a restructuring agreement. If collective action clauses operate on a series-by-series basis rather than on the total stock of debt then a blocking minority can more easily be formed and a strategy of holding out is more likely to succeed, in particular in light of the recent New York court decisions. The possibility to aggregate claims across bond series for voting purposes works in the opposite direction. Some countries have included aggregation clauses in the debt contracts, and the ESM treaty requires standardised aggregation clauses (“Euro CACs”) in Euro area government bonds as well. These clauses feature a “two limb” voting structure, requiring a majority of bondholders in each series and across all series but a lower quorum (e.g., 66%). Currently, “single limb” procedures are being discussed. These would solely require a majority across all series. To prevent abuse, such single limb procedures would have to be accompanied by safeguards that ensure inter-creditor equity, in particular a restriction to offer all affected bondholders the same (menu of) instruments. (Offering the same (menu of) instruments would generally imply that some creditors suffer larger restructuring losses than others, depending on the type of instruments they held initially. But already today, this is common and generally accepted.)
Box 2 of the report discusses the history of collective action clauses. Box 3 of the report discusses disenfranchisement provisions. Their purpose is to limit the risk of a sovereign manipulating voting processes by influencing votes of entities under its control.
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.
Robin Harding reports in the Financial Times about the IMF’s critical review of its own policy recommendations in 2010. The IMF’s independent evaluation office commends the fund’s lending at the time but criticises the advice to cut budget deficits. However, important IMF officials dissent. According to the FT, (current, but not then) managing director Christine Lagarde notes that “[a]s the report acknowledges, this assessment is benefiting from hindsight.” And: “Considering the information and growth forecasts available in 2010, I strongly believe that advising economies with rapidly rising debt burdens to move toward measured consolidation was the right call to make.”
Christoph Eisenring reports in the NZZ about a critical internal assessment of the IMF’s recent policy vis-a-vis Greece. The relaxation of the “medium term solvency” requirement for IMF lending in a situation of acute contagion risk should be reconsidered; contagion should be addressed with different instruments; debt should be restructured earlier than happened in the Greek case; and bail-ins should be favoured.