A Contribution to an Online Discussion on Sovereign Debt Restructuring 

Moderated by the European Network for Debt and Development
A Letter By Thomas C. Dawson, Director, External Relations Department International Monetary Fund, February 7, 2002

Short Reply by Kunibert Raffer on request by DAD

 I am fully agreed with Mr Dawson that in the end, unsustainable debts have to be restructured. The only question is how painfully. I believe that we both are agreed as well that unnecessary pain should be avoided. Argentina is indeed a good example how such unnecessary pins could have been avoided. I am also agreed with his point 4, which I had argued years ago, defending my Chapter 9 proposal. I am glad to get this helpful support from the IMF now.

 Where I have to disagree most strongly, though, is the highly problematic view on the Rule of Law and of the separation of powers that gives independent judges the power to make important decisions such as on the question of sustainability. The Fund‹s record, including enthusiastic praise of Argentina‹s or Indonesia‹s policies virtually until the crash, does not support any claim for a big role of the IMF’s in this respect. Nor does the record of structural adjustment measures since the mid-1970s(!).

 The principle of independent judges has been used by international law both by having international courts and arbitration procedures. I am appalled by the term “unaccountable judges”, in particular since it is used here to “argue” in favour of a decision making body dominated by creditor majority. This denies debtors their most fundamental right under any civilised legal system. Independent units have worked well, and no such unit could, of course, be established inside the IMF either. It should be noted that – for good reason – the model proposed by Mr Dawson is not the model used by civilised insolvency procedures, although it is logically possible. In a Chapter 9 insolvency the plan is finally adopted after fair and open bargaining between the parties - here I agree that they have to sort it out – but with a right to be heard by the population. The very essence of the Rule of Law demands that no one must be judge in their own cause, and the IMF – as  Mr Dawson rightly acknowledges – is a creditor in its own right, but also controlled (voting) by creditor majority. Deciding whether a country‹s debts are truly unsustainable and what policies are required to stop the problem recurring must not be done by any creditor.

 I do not see why a successful model for overindebtedness should only be applied to a group of debtors chosen by the IMF – it cam and must be used for all “like” cases. The meagre results of the two HIPC-Initiatives underline that this is a needed change to avoid unnecessary harm.
The argument that the IMF be treated with preference is flawed. The IMF‹s record, especially but not only during the Asian crisis, shows that it does not avoid disorderly adjustment, nor does it discourage countries from policies that »would do unnecessary harm to themselves« as Ms Krueger puts it, and Mr Dawson repeats in nearly the same words. This formulation implies that “Developing Countries” are unlikely to know what is good for them – they need a stern governess for their own good. The encouragement and support for Argentina‹s exchange rate policy is but one example leading one to ask whether the Fund qualifies.

 Multilateral institutions have (co)determined debtor policies. To increase their efficiency and to improve their role in capital markets, market incentives must be brought to bear. The international public sector must become financially accountable for their own errors in the same way consultants are liable to pay damage compensation if/when negligence on their part causes damage or OECD-governments are if they create damages by negligence or violating laws. By contrast, the IMF has been allowed to violate its own statutes with impunity by not allowing its members to exercise their membership right of controlling capital flows. Finally, the present privileged position of international public creditors discriminates unfairly against private creditors suffering avoidable losses because of IFI privileges when countries are unable to service their debts. Sufficiently large reductions by one class of creditors only are more difficult to get, which puts the debtor country at a disadvantage. A mechanism to correct present inefficiencies is urgently needed. Demanding exemption for the IMF is arguing against the fundament of market economies. It should be noted that the terms of lending are immaterial in this respect. I refer to my publications on IFI-accountability.

 Finally, as I have repeatedly shown, an international arbitration tribunal applying the principles of the US Chapter 9 could immediately be formed. Present cases such as Argentina could and should already benefit from this mecahnism – this follows logically from Ms Krueger’s and Mr Dawson’s convincing argument that delays cause unnecessary costs. Therefore I see reason to hope that there might be more common ground among Mr Dawson and myself than meets the eye so far.