Bankruptcy lite: has the Powell Doctrine as applied to international finance created more problems than it has solved?

• Author: Porzecanski, Arturo C.

In a thinly veiled effort to scale back country bailout programs, the IMF and the U.S. Treasury are floating proposals they hope will encourage governments and bondholders to undergo a debt-workout process. The idea, of course, is that if the road to default were paved rather than bumpy, troubled countries would increasingly choose to get their books in order rather than eke by on massive international Anne Krueger, first deputy managing director of the IMF, and John Taylor, under-secretary for international affairs at Treasury, have made this project their first and top priority--all the more so following Argentina's woes. Proposals they put forward were formally endorsed at the April meeting of G7 finance ministers and central bank governors in Washington.

But the absence of bankruptcy procedures has not impeded several landmark debt workouts. And in several cases where bankruptcy options were available to insolvent countries, they were avoided. What's more, even if the IMF and Treasury initiatives had been in place last year, the collapse in Argentina would not have been prevented. In fact, the only sure-fire way for the G7 and the IMF to give away less money is by--surprise!--giving away less money.

But commonsense hasn't been commonplace in this debate. Krueger's first proposal last November, for example, called for an amendment to relevant legislation in every country to permit qualified majorities of bondholders to restructure all new sovereign bond issues under the IMF's aegis. Whatever its merits, the need for universal acceptance made this a hopelessly impractical proposal. Her second initiative, in April, called for an amendment to the IMF's founding charter to empower it to play more of a mediating role. This was slightly more realistic--it would require passage by countries accounting for 85 percent of IMF votes, and the G7 alone commands more than half of that. But it still expands the IMF's ability to meddle.

Taylor's proposal, on the other hand, was less quixotic, eschewing statutory solutions in favor of a contractual, market-oriented approach. In April he called on emerging-market issuers, final investors and financial intermediaries to agree that future bonds should have new collective-action clauses in their contracts spelling out how a sovereign obligor would go about obtaining debt relief, and making it easier for a sizeable majority of bondholders to agree. The Taylor proposal has encountered less rejection and even some conditional acceptance among the private sector. However, most bondholders rightly worry that it will encourage nonpayment on the part of...