The staff paper follows up on the Executive Board's guidance to Fund staff in
The latest staff paper focuses on the first of the identified issues: the relationship between the Fund's lending framework and sovereign debt vulnerabilities and, in that context, provides preliminary views regarding a possible direction for reform. The primary focus of the paper relates to the design of the Fund's exceptional access policy (governing access above the normal financing limits). The preliminary considerations in the paper maintain a market-based approach and would envisage amending the Fund's lending framework to make it more flexible and calibrated to members' debt situations. A complementary paper will be issued to the Executive Board later this year on considerations regarding contractual provisions to address collective action problems in the context of debt restructuring.
Executive Board Assessment1
Executive Directors welcomed the opportunity to discuss a possible direction for reform of the Fund's lending framework in the context of sovereign debt vulnerabilities. They emphasized the preliminary nature of the discussion and welcomed staff plans to consult further with key stakeholders, including market participants. Directors appreciated staff efforts to find the right balance among different goals, including ensuring pragmatism and case-by-case flexibility, addressing moral hazard, safeguarding Fund resources, and preserving the catalytic role of the Fund.
Directors noted that the exceptional access framework established in 2002 sought to ensure that Fund lending contributed to the satisfactory resolution of a member's debt problems, thereby addressing concerns that had arisen regarding the cost of delaying the restructuring of unsustainable debt and moral hazard in sovereign debt markets. They stressed that these objectives should remain central to the Fund's lending framework. Most Directors recognized, however, that the 2002 framework had posed some undue constraints on the Fund's ability to respond to a member's debt problems in the least costly manner.
Most Directors welcomed efforts to further explore the possible direction of reforms that would broaden the range of policy responses under the exceptional access framework to deal with a member's sovereign debt distress. These Directors saw merit in an approach whereby the Fund would be able to provide exceptional access to a member on the basis of a debt reprofiling that would involve a limited extension of maturities, normally without any reduction of principal or interest, in circumstances where (a) the member has lost market access and (b) debt is assessed to be sustainable but not with high probability. While further analysis would still be needed on the operational implications and market impact, these Directors noted that a debt reprofiling would generally be less costly to the debtor and creditors, relative to an upfront debt reduction. They also considered that such an approach would allow for credible, yet less constrained, economic adjustments that accordingly have a greater chance of securing debt sustainability for the benefit of not only the debtor but also its creditors. A few Directors, noting the operational difficulty in judging if both conditions for reprofiling have been met and the risk that the reprofiling expectation could trigger market volatility, preferred to maintain the current framework, which they considered more pragmatic and flexible.
Most Directors stressed that there should be no presumption that a reprofiling of debt would be required simply because a member seeks Fund support, and that staff would need to exercise judgment in determining cases where a reprofiling would be called for, taking account of members' specific circumstances. Directors underscored that, as required by exceptional access procedures, it would be important that staff seek guidance from the Executive Board regarding these judgments prior to initiating discussions on an exceptional access arrangement.
Directors shared the view that a debt reprofiling would be inappropriate in circumstances where a member's debt is unsustainable, in which case an upfront debt reduction should be pursued, as under current policy. Most Directors also considered it inappropriate to repeat reprofilings where subsequent developments warrant more definitive action involving debt reduction, although a few would not rule out circumstances where repeat reprofilings might be justified.
With the introduction of reprofiling as an additional tool, if the Board so decides, many Directors favored removing the systemic exemption to the exceptional access framework, which had raised concerns about inequity and moral hazard associated with a large scale bail-out. A number of Directors were open to further discussion on this issue following more in-depth analysis and further consultations. Some others preferred to retain the systemic exemption, which in their view is a pragmatic way to safeguard financial stability in an increasingly integrated world and to avoid the perception of lack of evenhandedness. Directors underscored that for the Fund to remain in a position to address a member's balance of payments crisis in the presence of contagion risks, credible, effective alternatives must be put in place to address debt sustainability concerns, possibly including assurances of concessional support by other official creditors. Directors asked staff to consult further with relevant stakeholders on possible approaches to managing contagion before making concrete proposals.
Directors underlined the importance of adequate creditor support for a market-based reprofiling, if pursued. This could be facilitated through meaningful engagement with creditors, including an explanation of the assumptions that underpin the member's debt sustainability analysis while respecting the confidentiality of sensitive information. Directors noted that official creditors would be expected to maintain their exposure during the reprofiling period.
Directors also offered preliminary views on the length of the reprofiling period, the scope of debt, and implications of reprofiling for existing programs and for normal access programs. These issues will be considered in more detail in a follow-up paper.
In concluding the discussion, Directors asked staff to undertake further work along the lines of the preliminary considerations in this paper, analyze market impacts of different options, and examine in more detail design and implementation issues pertaining to a debt reprofiling, reflecting on the lessons from recent cases and the issues raised by Directors today. They looked forward to a follow-up paper further elaborating on these issues, as well as forthcoming work on addressing collective action problems, official sector involvement, and the lending-into-arrears policy, as identified in the
1 An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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