Yet, having said that, the most protracted issue over the last twelve months were undoubtedly the details of a so-called "stronger involvement of the private sector" (in the prevention and resolution of emerging market financial crises), which is agreed upon in principle among the G7, but not yet in its operational details (for the seminal IMF document on "Private Sector Involvement" - "PSI" -, laying out the main issues, from March 17, 1999, please click here, for the latest, comprehensive update, dated March 26, 2001, click here, for the IMF's related attempt - from September 5, 2000 - to even obtain authority for imposing debt-service "standstills" on the private sector, click here, but see also in the same context Chapter V of the latest International Capital Markets Report and the Managing Director's Progress Report to the Prague Annual Meetings, September 19, 2000). While the Europeans continue to seek some kind of rules-based mechanism (diplomatic jargon: "general framework"), U.S. authorities have insisted on a discretionary case-by-case approach. The U.S. Treasury (at least, prior to the recent change of Administration) also seemed more generally inclined to downplay the whole issue of private sector involvement, in part because of concerns about damaging implications for the "leadership role" of politically controlled international lending agencies. Also the required degree of complementary private sector involvement as one of the four eligibility criteria of the IMF's new "Contingent Credit Line" facility (which because of its definitional complexity is unlikely to be ever used anyway and whose terms were modified at the Prague Annual Meetings to make it more "attractive" to countries in trouble) remains controversial between the U.S. and the Europeans. (Following Argentina's refusal in December 2000, pressure from the IMF on single countries to "apply" for a CCL loan has recently shifted to Russia and Mexico.)

In part to distract attention away from these disagreements, the IMF is now pursuing the side track of "reforming" the design of international sovereign bond covenants (official jargon: "creditor cooperation"). Seizing upon the welcome opportunity of Ecuador's recent (and Nigeria's looming) payment crisis, the general idea is to make public creditors' sovereign debt restructuring at the Paris Club contingent upon the inclusion of privately-held international sovereign bonds under any parallel restructuring of privately-held sovereign debt. (Here is the latest IMF progress report on this matter, dated January 11, 2001.) Sovereign bond issues in the international market would thereby be required to include "collective action clauses", allowing potential default resolutions to be legally imposable on the entirety of bond-holders by simple majority vote and no longer only unanimously. (Unfortunately, most G7 governments so far rejected calls to set an example by redesigning their own sovereign bond contracts first, with the laudable exception of the United Kingdom. Canada just announced to be ready to do so in the future as well.)

Ecuador had been forced by the IMF and by the U.S. Treasury to default on its outstanding Brady bonds in late 1999 (resulting in the collapse of the country's polticial regime in January 2000 and eventually in the introduction of the U.S. dollar as national currency by January 2001). While the IMF initially still maintained, the default option was to be strictly restricted to Brady debt and not to be applicable to other types of international bonds (which is why Brazil and other countries started immediately to replace their Brady debt by new "Global" issues, perceived to be better protected against IMF-imposed default risks), private creditors and borrowing countries alike are becoming increasingly concerned what the IMF's longer-term objectives really are, when it effectively tries to impose administrative ceilings on a client country's "permitted" capital outflows (i.e., debt repayments). In particular, Russia's post-Soviet bond debt, including Eurobonds (held by foreigners), but also so-called "MinFin"-bonds (domestically held foreign-currency debt, but with locally operating foreign institutions importantly involved), might be targeted by the IMF as cases of a potentially sufficient critical mass to induce an internationally accepted breakthrough on this strategic front. The political goal would presumably be to crowd out private bond-holders and creditors in the future (precisely by "bailing them in" short-term, i.e. by imposing losses on them), so as to bring Russia fully back under sole IMF control. Although still officially opposed by Germany - Russia's biggest single creditor -, the Paris Club has already established a number of smaller-sized precedents along these lines (a forced restructuring of privately owned Eurobonds) in the cases of Pakistan, Romania, Moldavia, Ukraine and Côte d'Ivoire (in addition to Ecuador). An intriguing question in this context is whether the official IMF slogan that "no one category of credits should be regarded as inherently privileged relative to others", as stated in an annex to the G7 communiqué of September 25, 1999, would not imply to also include debt owed to the IMF itself under Paris Club restructuring agreements - a question which, so far, nobody has dared to raise.

Private creditors and bond-holders, as represented by Moody's and Standard & Poor's sovereign rating departments but also by the banks-owned, Washington-based Institute for International Finance (IIF), vehemently oppose this new policy (see the IIF's letter of complaint sent to the IMF's September 1999 Annual Meetings in this regard, while here is the latest update on this matter from the IIF, dated April 17, 2001. See also a NBER conference paper by William Cline, the IIF's Chief Economist, "The Role of the Private Sector in Resolving Financial Crises in Emerging Markets" , October 2000 (in PDF), for an excellent overview of the main issues from the private sector's point of view, but also an equally relevant summary, "Financial Crises in the Emerging Markets: The Roles of the Public and Private Sectors", by Terrence J.Checki and Ernest Stern, Federal Reserve Bank of New York, November 2000). They all argue bond claims should be treated as systemically distinct from bank claims, since the former are marked-to-market and, hence, already impose likely balance sheet losses on bond-holders in the run-up to a financial crisis (unlike bank loans). Also, emerging market liquidity crises of the recent past had all been triggered by the cumulation of short-term bank liabilities, never by the service of bond debt. In fact, the IMF, by forcing a bond default like in the case of Ecuador, argues implicitly that the likely rise of risk premiums on such bonds in the marketplace does not go far enough, and that any market-priced default risk must be deliberately heightened through IMF intervention - an unashamedly pro-cyclical policy. Private creditors rejecting this policy seem to enjoy growing support from emerging market borrowers themselves (e.g., from Mexico and Russia most recently), who are understandably concerned about likely adverse effects on their own, long-term access to creditor countries' private sector goodwill. Most market participants agree, the risk premium on emerging market bonds would probably rise further as a result of any ill-advised "equal treatment" (or "comparability") of bonds and bank loans. Also, the officially advocated incentive for emerging market borrowers to favor long-term bonds over short-term bank debt as a golden rule of sound debt management would be undermined. In 2000, JP Morgan managed to establish an alternative, superior "precedent" in Venezuela, centered in a private-creditors-led lengthening of debt maturities without IMF involvement, while private holders of Ecuadorian Bradies successfully assembled the 25 percent voting block needed to force Ecuador to immediately re-pay ("accelerate") some $ 1.4 billion in principal which would not have been due in the absence of an IMF-imposed default.

Most recently (Spring 2001), important institutional changes, themselves meant to be contributions to the called-for reform of the international financial architecture, have been unfolding inside the IMF. Following the arrival of a new pro-reform IMF Managing Director (Horst Köehler) one year ago, the strategic leadership of the IMF's bureaucracy is now being replaced in its entirety (Deputy Managing Director, Chief Economist and Head of the operational Policy and Development Review Department, PDR). Two of the replacements, Deputy Managing Director Anne Krueger of Stanford and Chief Economist Kenneth Rogoff of Harvard are pro-reform IMF critics, one - PDR Head Timothy Geithner of the Clinton Treasury, although the youngest by age - belongs politically to the "old guard", presumably to maintain some "balance". Also, a new IMF-internal International Capital Markets Department is being created to focus the IMF more closely and sympathetically on financial markets' perceptions of the on-going reform process. It will be headed by Gerd Häusler of Dresdner Bank. At the level of substance, a new strategic issue of IMF reform has also been successfully placed by the Managing Director ever since February 2001: conditionality, i.e. the important question how much "structural reform detail" (which often boils down to securing debt issue, privatization and oil pipeline construction mandates for American contractors) the IMF should be allowed to require from client countries. Some relevant background links on this still fresh "conditionality issue" you find at the very top of this page.

Other Reform Proposals

Other limited reform proposals to engage the private sector in resolving emerging markets debt and currency crises more pro-actively focus on "concerted roll-over operations" and on mechanisms which would allow both creditors and debtors to unilaterally alter the duration of cross-border credits, depending on a borrowing country's financial circumstances (call and put options on credit agreements). Private sector contingency credit lines as exemplified by the agreements which Argentine, Mexican and Indonesian authorities have already in place with a number of top-tier international commercial banks also fall in this category.

Looking beyond latest G7 policy declarations, recent academic proposals have advocated either newly to be created international credit insurance mechanisms (Catherine Mann of the Institute for International Economics, George Soros, Henry Kaufman) or internationally standardized bankruptcy procedures (Jeffrey Sachs). In our (and the G7's) view, these proposals, while conceptually sound, seem excessively ambitious on practical grounds.

One particular academic proposal often made in the past, had recently gained some ground in U.S. Treasury circles at least prior to the Presidential election: the IMF's direct funding access to international capital markets. While originally meant as a first step to "privatize" the IMF and to strip its finances of public sector guarantees, current supporters of this proposal (for instance, the semi-official, Washington-based "Bretton Woods Committee") seem to be thinking more of leveraging up these public guarantees even further and of circumventing the need for congressional approval of IMF lending policies in the U.S.. In fact, under this proposal even more of the financial decision-making power inside the IMF would be shifted from elected national to un-elected supranational civil servants. However, for the time being, this option remains controversial within the G7.