70. When a country defaults on its loans, there has
occasionally been difficulty in organising the debt restructuring,
because the bonds and loans of the defaulting country may be held
by many different investors in different jurisdictions. Given
the IMF's role in crisis resolution, it has put forward some ideas
in this area. However, as the Bretton Woods Project pointed out
in its written evidence to the Committee, there is a danger in
placing "the IMF in a hypocritical position as both creditor
and arbiter of debt work-outs".
Professor Miller, however, pointed out that the IMF should be
involved in generating "promoting efficient ex poste
[debt restructuring] negotiations
. I think the Argentine
ones were quite successful at the end but it took about four years."
71. The Governor of the Bank of England confirmed
that a Chapter 11-style system, where day-to-day business continues
while a restructuring of ownership occurs under a bankruptcy court,
may be better for working out sovereign debt restructuring cases,
and that the Bank of England and the Bank of Canada had done joint
work that "proposed that it was necessary to take seriously
the development of mechanisms in which the Fund would sanction
However, the Governor also made the important point that, using
the example of Argentina, it is sometimes necessary to admit to
the overall scale of the problem and arrange a restructuring,
rather than keep lending money, as "In the end, as in Argentina,
it was inevitable that default occurred, and it did".
The Governor went on to explain that continued lending meant that
while the residents of the country would have to repay the IMF
from any bail out, the IMF would essentially have bailed out the
"large western financial institutions".
The Chancellor of the Exchequer told us that this was going to
have to involve both the private sector and the international
institutions. While the UK government was supportive of the potential
reforms, including those akin to Chapter 11 procedures in the
US, he also warned that "this is a long-running issue and
progress is going to be gradual rather than dramatic".
As evidence of this, in its supplementary evidence to us, HM Treasury
noted that at the 2003 Spring meetings, the "IMFC decided
not to pursue a statutory framework [for sovereign debt restructuring]
72. The Governor of the Bank of England also felt
that, as in the case of Korea, sometimes a standstill arrangement
might be necessary because the repayment problems were an issue
of liquidity rather than long-term ability to repay. He felt the
best way to allow for such measures was "to go right back
to when the contracts were signed, and that is the purpose of
the Collective Action Clause in bond issues, and it is something
which bond issues in London have recognised for a long time and
the ones in Wall Street now have come more into line with that".
Mr Cunliffe told us that "The IMF is supporting collecting
collective action clauses, particularly in the US markets. It
is also supporting the private sector and emerging market governments'
voluntary code on debt restructuring."
In its written evidence to us, HM Treasury stated that "market
practice has converged toward broad acceptance of the use of Collective
Action Clauses in international sovereign bonds".
73. While the
Fund has a desire to move towards a greater focus on crisis prevention,
there will always remain a need for crisis resolution. Debt restructuring
will sometimes be an integral part of this. The Fund, as a potential
creditor in these situations, seems inappropriate as the organisation
to oversee such restructuring. However, this does not preclude
the IMF from taking an active part in the discussions over the
design of the framework. We acknowledge the political difficulties
of creating a final consensus, but we recommend that the UK Government
continue to promote collective action clauses. We further recommend
that the UK Government consider what role the IMF should play
in any future debt restructuring mechanism. Though previously
not followed up by the Fund, a statutory system may be appropriate,
and may be similar to a Chapter 11-style system where the day-to-day
business continues while a restructuring of ownership occurs under
a bankruptcy court.