Chapter 11 for Countries?

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.