The International Monetary Fund (IMF) has taken a radical new approach in debt restructuring to lessen the pain of austerity and is developing plans that impose initial losses on bondholders of European country bailouts. The general thesis behind the new plan is that the IMF made a mistake in causing some of the debtor countries (namely Greece and Portugal) to shoulder all of the pain in their recovery.
In the new proposals, the IMF is urging European governments to write down the loans to bailout countries in an effort to reduce the German induced austerity. The plan has received significant push back at the fund and from the United States Government–the largest financial contributor to the IMF. Many economists and financial market participants have scoffed at the idea and tagged it as a potential harbinger of doom for the feeble European credit markets.
As expected, Germany took the lead in opposing the new restructuring plans. There has also been a fair amount of dissenting views from within the organization by some of the organization’s lawyers and economists. Due to the lack of agreement, don’t expect a formal presentation until June of 2014.
The subject was a particular source of consternation at the 2013 IMF Fall meetings in D.C. The underlying reason being that the European countries have approximately $460 billion in loans to the bailed out countries versus the roughly $107 billion that the IMF has at stake. Further vexing other countries is that the IMF is a preferred creditor–so it’s loans are paid back first, giving it the least risk. This has made some assert that the IMF doesn’t want to pay private creditors such as hedge funds. This position harkens back to the former days of glory when the IMF was the lead and not a junior member of the bailout team, some have viewed it as a way for the IMF to assert dominance in the next bailout.
The proposal might have chilling affects in the future as the idea of countries not paying their creditors is very likely to spook the markets and it participants. The notion of attempting to stymie bondholder’s rights is likely to reduce potential investors and decrease the likelihood of countries approaching the IMF because of potential stigma. Fixed income market participants should to pay rapt attention to these developments as private investors most definitely will.
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