Major financial institutions on Tuesday harshly criticized an IMF proposal for sovereign debt crises to be resolved through a bankruptcy-style system.
The IMF has proposed a treaty providing countries in debt crises with protection from creditors, supposedly much like existing bankruptcy courts for companies.
The proposed sovereign-debt restructuring mechanism (SDRM) drew fire from the private sector.
"Market participants from emerging markets and financial centers alike agree that the SDRM is both unnecessary and counterproductive," said a report by seven leading associations of financial-services firms.
The report, sent this month to finance ministers and central-bank governors of ten industrialized nations, was the most detailed rebuttal yet of the proposal touted by IMF deputy-managing director Anne Krueger.
The IMF proposal rested on the false belief that creditors had a problem coming up with a joint resolution when indebted countries had trouble repaying their debt, it said.
"In fact, not one restructuring has been prevented from moving ahead by the actions of hold-out creditors," the report said.
"Moreover, creditors have been willing to act early and constructively as evidenced by the spontaneous formation of bondholder committees in the cases of Argentina, Ecuador, Ivory Coast and Russia."
Financiers instead backed a market-based system.
Under such a system, "collective action clauses" would be inserted into new bond contracts, allowing a majority of bond holders to agree to a debt restructuring, rather than the 100 percent currently required.
Bondholders also would appoint a committee to represent their interests after a default.
But the SDRM would render a collective-action clause meaningless by overriding its operation with a statutory mechanism, the report said. "Moreover, its very pursuit has made implementation of clauses more difficult; the shadow of the SDRM may already have had an adverse effect on private-sector flows."
If the IMF's proposed system was set up, creditors would be more likely to act defensively at the first sign of a problem, forcing indebted countries to speed up repayments of short-term and even longer-term debt, the report argued. "As a result, this would increase the risk of a crisis occurring, as well as intensifying it."
The analogy between the SDRM and a private bankruptcy was flawed, the report said, because the SDRM would not be subject to the same checks and balances as provided by a bankruptcy court.
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