International Monetary Fund (2014) “The Fund’s Lending Framework and Sovereign Debt—Preliminary Considerations“, IMF Staff Report, 13 June.
EXECUTIVE SUMMARY
Background:
As a follow-up to the Executive Board’s May 2013 discussion, this paper considers a possible direction for reform of the Fund’s lending framework in the context of sovereign debt vulnerabilities. The primary focus of this paper relates to the Fund’s exceptional access framework, since it is in this context that the Fund will most likely have to make the difficult judgment as to whether the member’s problems can be resolved with or without a debt restructuring. The objective of the preliminary approaches set forth in this paper is to reduce the costs of crisis resolution for both creditors and debtors—relative to the alternatives—thereby benefitting the overall system. These ideas are market-based and their eventual implementation would require meaningful consultation with creditors.
Nature of the problem:
The Exceptional Access Framework established in 2002 (“2002 framework”) limits the range of policy responses available to the Fund when a member seeks financing above normal access limits in the context of a sovereign debt crisis. Specifically, under the 2002 framework, if the Fund determines that the member’s debt is sustainable with high probability, it may provide large scale financing without the need for a debt restructuring. However, if such a determination cannot be made, exceptional access may only be provided if a debt restructuring is pursued that is sufficiently deep to restore sustainability with high probability. While the 2002 framework was designed to address concerns regarding both moral hazard and the cost of delaying the restructuring of unsustainable debt, this paper concludes that it also created scope for unnecessary costs for both the debtor and its creditors, since it requires a definitive debt restructuring even in circumstances where, in the end, it might not be needed.
Relevant posts:
- Schadler, S. (2014) “The IMF’s preferred creditor status: Questions after the Eurozone crisis“, VoxEU Organisation, 28 April.
- Blanchard, Ο., Jaumotte, F. and Loungani, P. (2013) “Unemployment, labour-market flexibility and IMF advice: Moving beyond mantras“, VoxEU Organisation, 18 October.
- Schadler, S. (2013) “The IMF and the legacy of the euro crisis“, VoxEU Organisation, 15 October.