Stay up to date with notifications from The Independent

Notifications can be managed in browser preferences.

'Sovereign bankruptcy' plan wins US backing

Rupert Cornwell
Monday 30 September 2002 00:00 BST
Comments

The world's top financial policy makers this weekend launched a drive for new rules for "sovereign bankruptcy" to head off national debt crises and to handle them more smoothly when they did occur.

In the most significant achievement of three days of discussions at the International Monetary Fund and World Bank annual meetings, IMF staff have been told to come up with detailed proposals by next spring. This time the scheme has the unequivocal support of the United States, which previously had been sceptical.

There had to be "a clear and predictable process for countries that reach a position in which they cannot sustain and service their debt burden", Paul O'Neill, the US Treasury Secretary, said in his speech to the IMF governing board yesterday. The aim was "not to make defaults easier or more likely, but simply to make a restructuring more orderly and predictable should it occur".

The plan under development is far from popular with private-sector bank creditors of indebted countries. It provides for new rules making it harder for one or a few creditors to block restructuring schemes approved by the majority. It is also proposed that countries hit by capital flight may declare "standstills" and temporarily halt debt repayments.

Other provisions are the establishment of strict limits on IMF lending, and improvements in the fund's surveillance and crisis prevention mechanisms.

"Don't throw stones at our best efforts to fix this system – throw ideas," Mr O'Neill told major private bankers in a speech on Saturday evening. "We owe that to the people who have suffered from the chaos of the current system."

On the streets of Washington, anti-globalisation demonstrators were fewer than expected, with under 10,000 people turning out for the set-piece rally on Saturday. There were only half a dozen arrests.

The growing consensus of policymakers on a concept for sovereign bankruptcy was the most hopeful part of talks otherwise dominated by worries over the faltering global economic recovery, debt turmoil in Argentina and Brazil, Japan's debilitating financial sector crisis and the prospect of a new war with Iraq.

IMF forecasters have scaled back their estimates of global growth this year and in 2003. With the recovery in the US losing steam, there is little sign that either Europe or Japan, the two other obvious locomotives, will be able to step in.

Indeed, confusion reigned over Japan's intentions for its sickly banking system, crippled with some $400bn (£256bn) of bad loans which have held the country in near recession for a decade. Within the space of 24 hours, Masajuro Shiokawa, Tokyo's Finance Minister, three times changed his version of how the topic had been addressed in his bilateral meeting with Mr O'Neill – hardly an indication that decisive action will be forthcoming in the near future.

Meanwhile, the world's richest countries agreed to make good the $1bn shortfall in the HIPC fund for debt relief for the poorest countries. But aid groups were unimpressed.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in