Home › Features › Essays › Chapter 11 for Countries?

Chapter 11 for Countries?

By Richard N. Cooper
July/August 2002
Article Summary and Author Biography

A debate is unfolding over a new IMF proposal to avert future Argentina-style financial meltdowns: an international "Chapter 11" that would let a country declare bankruptcy, just like a troubled firm. Such a plan would represent an improvement over the current approach -- but it will not eliminate financial crises altogether.

Richard N. Cooper is Maurits C. Boas Professor of International Economics at Harvard University and a regular book reviewer for Foreign Affairs.

Print Email
Login or Register to leave a comment.

Sign-up for free weekly updates from ForeignAffairs.com.

DISHONOR BEFORE DEBT

Late in 2001, the new first deputy managing director of the International Monetary Fund, Anne Krueger, made a bold suggestion. Under certain conditions, she proposed, a government's international debt repayments should be temporarily suspended while negotiations take place on restructuring that debt. With her statement, the IMF officially endorsed one of the more radical suggestions for improving the international financial architecture to have come forth since the Mexican and Asian crises in the 1990s. If implemented properly, the Krueger proposal would represent some improvement over the IMF's current prescriptions for states facing financial collapse. But given the domestic origins of most financial crises, her plan cannot eliminate them altogether.

The problem that Krueger addressed is straightforward. When any debtor nation develops economic difficulties, its creditors worry about being repaid, so they move as quickly as they can to protect their positions. For example, they can decline to roll over (that is, extend) loans that have matured. They may even sell the loans before maturity, although that move, of course, requires willing buyers. The difficulty that some governments faced in rolling over maturing debt played an important role in several recent debt crises: Mexico (1994-95), Russia (1998), Brazil (1998-99), and Argentina (2001-2). Even those creditors willing to roll over their loans at a satisfactory interest rate may hesitate for fear of being alone -- and thus caught in a payments crisis.

This is a premium article

You must be a logged in Foreign Affairs subscriber to continue reading. If you wish to continue reading this article please subscribe , or activate your online account to get full online access.

Buy PDF

Buy a premium PDF reprint of this article.

Related

Essay, Mar/Apr 1998
Refocusing the IMF
Martin Feldstein

Initially devised to maintain a system of fixed exchange rates, the IMF took on a new role during the Latin American debt crisis of the 1980s-providing moderate amounts of credit, facilitating debt renegotiations, and recommending responsible macroeconomic policies. But the IMF is also applying the lessons of Eastern Europe and the former Soviet Union, where a fundamental economic restructuring was necessary, to Asia. So in Korea, for example, the fund called for reform of inefficient conglomerates and inflexible labor laws. However beneficial in the long run, such changes are not needed to resolve the current crisis. By stepping in too far and too soon, the IMF discourages countries from seeking modest help. Even worse, it encourages bankers to undertake more risky loans, making another crisis more likely.

Read
Essay, Fall 1987
The Outlook for Latin American Debt
Pedro-Pablo Kuczynski

The debt containment policy conceived in 1982, under which repayments were financed by the creation of trade surpluses, has run its course. The question now is not only whether the big debtors will pay, but where the money will come from. There is an urgent need for innovative financial mechanisms. The new strategy should include economic reform in debtor countries, new capital in-flows and, if necessary, workable formulae for interest deferral.

Read
Essay, Summer 1984
Trade and Debt: The Vital Linkage
William E. Brook

The international financial community can assess its management of the international debt "crisis" of 1982-83 with a certain sense of satisfaction. Creative ad hoc solutions to individual countries' problems kept adequate credit flowing. Unpredecented cooperation among the International Monetary Fund (IMF), central banks, and private lenders restored confidence and prevented the "crisis" from playing out to a tragic conclusion--massive defaults, the freezing of new credit, bank failures, and perhaps ultimately a worldwide depression.

Read