Finding Real Solutions to Unsustainable Debt (February 2003)

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International debt management since the 1980’s has been characterized by fragmented and inadequate efforts on the part of creditors to restructure or reduce debt, resulting in increasingly unpayable debt burdens in developing countries. A renewed sense of urgency amongst creditors has resulted in calls for new measures, driven by factors including: recurrent financial crises resulting in sovereign default or near default, increasingly large and ineffective official sector “bail outs” of private creditors and the rise in influence of minority creditor and their claims against sovereigns.

The International Monetary Fund’s Sovereign Debt Restructuring Mechanism (SDRM) proposal aims to internationalize insolvency proceedings by creating a mechanism to allow private creditors to negotiate a restructuring arrangement with a debtor government that is insolvent or approaching insolvency. By establishing a framework for debt workout, the proposal is designed “to facilitate the orderly, predictable and rapid restructuring of unsustainable sovereign debt while protecting asset values and creditors rights.” With the SDRM proposal, the IMF is attempting to both “safeguard its resource” and regain international credibility by re-positioning itself in international debt management.

The response to the SDRM proposal has been largely critical. The private sector strongly opposes the “radical plan promoted by the IMF” and is particularly resentful of the IMF exempting its debt from any restructuring negotiation. France has offered an alternative “Trichet” proposal, which responds to the shortcomings in private sector proposals and the political barriers associated with the SDRM. The response of civil society has become uniformly negative as the SDRM proposal has evolved.