A Critique of Sovereign Bankruptcy Initiatives
The IMF and G7 should curb financial assistance to countries in trouble
Arturo
Porzecanski is Managing Director and Global Head of Emerging Markets Sovereign
Research at ABN AMRO in New York. He has worked extensively on research
on emerging markets since starting his post-doctoral career as a business
economist at J.P. Morgan in 1977. The opinions expressed here are solely
his own.
Top International Monetary Fund (IMF) and U.S. Treasury officials have put forth proposals designed to make it eventually easier for governments and bondholders to go through a debt-workout process. Their intent is to enable the G7 governments to scale back their multi-billion-dollar bailout programs for countries in financial difficulty on the theory that, if the road to default was paved rather than bumpy, more of them would choose to take it rather than seek large-scale financial support. Experience strongly suggests, however, that the absence of better bankruptcy procedures has not impeded several debt workouts; that in cases when the bankruptcy option was available, it was nevertheless avoided; and that even if the IMF and Treasury initiatives had been in place in 2001, the tragedy in Argentina would not have been prevented. The best way for the G7 and the IMF to extricate themselves from the current morass is by curbing sharply the financial help that they offer to countries in trouble.