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IMF Discusses Lending Alterations

The IMF is discussing changing the rules for borrowing countries facing problems, which will provide for the extension of the maturity of the bonds held by private investors.

The International Monetary Fund is discussing the change in the rules for borrowing countries facing problems, which will provide for the extension of the maturity of the bonds held by private investors as a condition for assistance of a country, according to the Financial Times.

The potential of the Fund is currently restricted either to a bailout of a country facing problems or to an advanced restructuring of its debt, depending on whether the IMF believes that the debt is sustainable or not. The proposal under discussion offers a third way, enabling creditors to agree to an extension (reprofiling) of held bonds. The maturities will be extended in time to cover the duration of the IMF program, without any change to the coupon or capital securities.

The proposal was discussed, as the Fund seeks to draw lessons from the approach taken in terms of debt restructuring during the difficult rescue of Greece in 2010. Last Friday, the IMF Executive Board discussed a new study, based on bankers surveyed as part of this process and sources close to the Council. The study raises the prospect of major changes in the treatment of private bondholders to major IMF rescue programs. Sources that participated in the discussion said that the work is still at a preliminary stage, there are differences of opinion within the Executive Council and that it is not possible to draw a conclusion before the end of the year.

In the case of Greece, the institutions of the Eurozone and the IMF were unwilling to impose upfront damage to private creditors, partly because of fear of infection of other Eurozone countries, but eventually restructuring became necessary in 2012. Alternatively, the new proposal would apply only in situations where there is serious doubt about the sustainability of the debt. One standard is the voluntary debt exchange as part of the IMF program for Uruguay in 2003.

The Fund shall consult with markets, to ensure that any change will not lead to investors avoiding government debt and will not increase the cost of borrowing. These consultations are likely to continue for the remainder of the year. According to persons who participated in the debate, the study was favorably accepted by the Executive Board of the Fund-represented member countries-but there was considerable discussion about the need to maintain a "system exception" that would allow the IMF to bypass debt sustainability analysis, where it is feared that not giving the loan will lead to a systemic crisis, as in the case of the Eurozone.