IMF Board debates SDRM design

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On December 19 and 20, the IMF's Executive Board-chaired by First Deputy Managing Director Anne Krueger-continued discussions of the possible features of a new sovereign debt restructuring mechanism (SDRM). The discussion was a step toward fulfilling the International Monetary and Financial Committee's request for a concrete SDRM proposal that could be considered at its next meeting in April. The Board's debate revolved around a staff paper that reflected extensive staff contacts with private market participants, debt restructuring practitioners and other workout specialists, academics, and members of the official community.

In her summary of the Board's discussions, Krueger noted that "most Directors reaffirmed their belief that a carefully designed debt restructuring mechanism can make an important contribution to improving the comprehensive framework for crisis resolution and the international financial architecture more generally.

The objective of the SDRM is to provide a framework that strengthens incentives for a sovereign and its creditors to reach a rapid and collaborative agreement on a restructuring of unsustainable debt in a manner that preserves the economic value of assets and facilitates a return to medium-term viability, and thereby reduces the cost of the restructuring process.

"To achieve this objective, the SDRM must not only address collective action problems amongPage 3 creditors, but also catalyze an early and effective dialogue and exchange of information between the debtor and its creditors. By creating greater predictability in the restructuring process, the SDRM should also be expected to improve the functioning of international capital markets-an objective that should remain a primary concern going forward."

While Executive Directors found much common ground for moving the discussion forward, a wealth of views were expressed on many aspects of a possible SDRM. For some important features of the mechanism, Directors insisted that all options under consideration remain on the table at this stage. Although a brief summary cannot do justice to the breadth of the debate, issues generating the most discussion included the following:

* Scope of claims to be covered. Directors generally agreed that, in cases where a sovereign's debt burden was unsustainable, a broad range of claims might need to be restructured-both to help ensure a return to debt sustainability and to achieve sufficient intercreditor equity to...