US forces IMF to shelve debt default scheme

In the face of strong resistance from the US, the International Monetary Fund has shelved its ambitious plan to ensure orderly default procedures for countries overwhelmed by the burden of their foreign debts.

At a press conference kicking off the IMF and World Bank spring meetings in Washington, Horst Köhler, the Fund's managing director, conceded that "there is not the required support" to change the IMF's articles to launch the scheme, known as the Sovereign Debt Restructuring Mechanism (SDRM).

Though he did not name specific countries, the greatest opposition has come from the US Treasury, reflecting hostility on Wall Street to parts of the SDRM. These would have prevented individual creditors blocking a restructuring deal agreed by a so-called "super majority" of creditors, and lessened the risk of disruptive legal action while rescheduling negotiations were under way.

Had the SDRM gone through, it would have been a sovereign debt equivalent to corporate bankruptcy Chapter 11 proceedings in the US allowing a company to continue doing business while it puts its finances back into order. Many US officials argue that the very existence of such a scheme would make defaults seem less painful to countries in financial difficulty – and therefore more likely.

The demise – at least for now – of the scheme is a blow to the IMF, anxious to avoid repeats of the 2001-02 fiasco in Argentina, which led to severe criticism of the Fund. It is also another sign of US scepticism about multilateral institutions, so much in evidence over the United Nations' role over Iraq.

Mr Köhler was moderately upbeat about the economic fall-out of the conflict, saying that the war was likely to be short."The overriding priority of our spring meeting must be to help restore confidence to consumers and investors worldwide," he said.