Letter to Canadian IMF Director on Proposed New Debt Restructuring Mechanism
Mr. Ian Bennett
IMF Executive Director for Canada
Re.: IMF board meeting on SDRM on December 18, 2002
Dear Mr. Bennett,
On December 18, the Board will discuss the IMF’s most recent version of an insolvency procedure for states, labelled the “Sovereign Debt Restructuring Mechanism” (SDRM).
Halifax Initiative supports the need to develop a comprehensive solution for insolvent middle-income countries modelled after the US Chapter 9 insolvency proceedings. We do not believe, however, that the SDRM provides an effective procedure for insolvency management. We note absence of a number of decisive elements required for an effective reform of sovereign debtor/creditor relationships. We therefore, urge you advocate for a different approach than that reflected in the SDRM at this meeting, and should it not be incorporated, reject the SDRM altogether.
To create sustainable creditor/debtor relationships and stabilise the international financial architecture the following elements are essential in an insolvency proceeding:
* Private, bilateral and multilateral creditors must be treated equally to ensure an equitable and lasting solution to insolvency. The IMF and other multilateral creditors must not protect their balance sheets while claiming to promote the concept of “creditor equity”. The SDRM’s defining concept that creditor coordination and collective action ensures that all creditors will take their share of the responsibility for insolvency is undermined when all creditors fail to participate in a lasting solution.
* The procedure must be unambiguously guided institutionally by a neutral third party through a process of arbitration. It is the defining concept of the rule of law that one must not be judge in one's own case. Ms. Krueger’s attempts to distance the IMF from the SDRM process are insufficient to guarantee independence and therefore the credibility of the proposed process.
* Only a ruling by neutral arbiter can reflect equitably the interests of both creditors and debtors. A super-majority of the creditors is not a neutral decision-making body nor is a negotiation between a concerted group of creditors and a vulnerable debtor equitable.
* The level of the debtor states’ debt services after insolvency must not affect its continued capacity to realize the Millennium Development Goals. Only a balance struck between debtor and creditor needs will result in a sustainable solution to insolvency that protects the poor and most vulnerable. Thus, “debtor protection”, a legally binding commitment to secure the capacity to meet the basic needs of citizens before creditor claims is essential in any insolvency mechanism.
* The level of debt sustainability to be identified is to provide for a “fresh start” to the debtor state’s economy. Theses objectives need to be codified and based on neutral assessments independent of either creditor or debtor. The HIPC process is widely criticised for its inability to provide a `lasting exit' to unsustainable debt burdens for the world's poorest countries, in part, because of the flawed model upon which debt sustainability calculations are based.
* All types of loans-outstanding must be part of the procedure. As a first step of the proceedings, all claims are to be verified judges by parties independent of either debtor or creditors. The verification of claims must include a determination of their legitimacy.
* An insolvency process must not provide opportunities for creditors, particularly the IMF, to intrude upon domestic sovereignty through the use of fiscal, monetary, exchange rate and other conditions as are envisioned in current SDRM proposals. Appropriate terms for restructuring will be determined by the neutral body as part of the arbitration process.
* The right to be heard by all parties affected in the context of recovery or non-recovery of the loans must be included in the procedure, as is codified in the Chapter 9 provisions of the US insolvency laws.
* The full transparency of the procedure to all stakeholders is a must. The participation of citizens on whose behalf a sovereign contracted debt must not be denied.
We appreciate the commitment of Canada to find innovative solutions to the insolvency on the part of middle-income countries. We hope our suggestions contribute to an equitable and fair process that meets our mutual goals of economic stability and poverty eradication. Please keep us informed of your reaction to these proposals, your contributions to the development of a Chapter 9 based ad- hoc sovereign insolvency proceedings and the results of the Board deliberations.
Thanking you with kind regards,
Chair, Halifax Initiative
On behalf of Halifax Initiative member groups:
* Canadian Conference of Catholic Bishops, Social Affairs Office
* Canadian Council for International Cooperation
* Canadian Labour Congress
* CoDevelopment Canada
* KAIROS – Canadian Ecumenical Justice Initiative
* MiningWatch Canada
* North-South Institute
* Oxfam Canada
* RESULTS Canada
* Rights & Democracy
* The Social Justice Committee
* Toronto Environment Alliance
* World Interaction Mondiale
* Honourable John Manley, Minister of Finance
* Honourable Bill Graham, Minister of Foreign Affairs
* Honourable Susan Whelan, Minister for International Cooperation