IMF directors have approved plans to allow distressed sovereigns seeking IMF assistance to re-profile debt maturities without changing other contract terms, after Greece's experience.
It was something Greek economists, pundits and financial analysts have been saying all along. It took the IMF a four year term of dealing with a non viable lending plan, to reach the same conclusion.
The lending reform plan was hatched after the debacle in Greece, which got 110 billion euros in IMF money in May 2010, only to turn around and launch a savage 206 billion euro debt restructuring less than two years later. Much of that initial package paid off bondholders, while at the same time making taxpayers more exposed.
The Fund would prefer to see debt restructuring, if required, done earlier to avoid such mistakes. The re-profiling, to be carried out voluntarily with creditor consent, is seen as an intermediate measure to reduce both the need for more extensive IMF assistance and deeper restructuring.
When the plan was first aired a year ago, however, the maturity extension of all debts by three to five years was an automatic measure for all countries tapping the Fund. In the version put to the IMF's board, though, the extension is no longer automatic.
"Most directors stressed that there should be no presumption that a re-profiling 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 re-profiling would be called for, taking account of members' specific circumstances," the IMF said in a statement.
There was opposition to the initial plan from certain influential members, including the US, who wanted to maintain more flexible market-based plans rather than proscriptive measures that would take effect automatically. This flexibility was also preferred by creditors.
"A few directors, noting the operational difficulty in judging if both conditions for re-profiling have been met and the risk that the re-profiling expectation could trigger market volatility, preferred to maintain the current framework, which they considered more pragmatic and flexible," the IMF said.
An IMF official said it wanted to reach a consensus among both official sector and private sector parties, and would consult further with market representatives. Many of the fund's directors also wanted the exemption, which allowed the IMF to grant Greece such exceptional funds in 2010, to be dropped. A minority, however, said they wanted this systemic risk category to be maintained.
The IMF will continue consultations before putting final conclusions on re-profiling and related matters to its board. It will also produce a related paper in the next few months on adopting reforms to sovereign debt contracts, such as aggregated collective action clauses and overhauled pari passu language, that would ease future restructurings as well.
An IMF official said this would be more vital now that Argentina had failed to persuade the US Supreme Court to overturn a lower court ruling that it must pay holdout creditors in full when it next pays exchange bondholders.