The Role of the IMF in Sovereign Debt Restructuring

I. INTRODUCTION The growing importance of international economic transactions for economic activity as a whole has given rise to an increasing number of proposals for arrangements to govern those international transactions. Many, if not most, of these proposals raise important policy issues, on which there is frequent disagreement among and within countries. Quite apart from political or policy controversy, however, many proposals for international economic arrangements are analytically flawed in one of several common ways. They may draw false analogies from domestic to international circumstances. They may elide the possibility that the accommodation of many national political and legal systems in a single international arrangement will force compromises that create more problems than they solve. They may be offered without sufficient attention to the institutional features of international arrangements that can distort or otherwise modify the intended outcomes of the arrangement. In this article I elaborate the last of these points in the specific context of proposals to give the International Monetary Fund ("IMF" or "Fund") a greater role in sovereign debt restructuring. As has often been noted, the role of the IMF changed dramatically towards the end of its third decade in existence.1 Yet the fundamentally political nature of Fund operations has remained constant. The fact that the Fund has a highly professional and sizeable staff might have been expected to lend the organization a more technocratic character. Indeed, everything from the quality of its publications to the feel of its headquarters suggests just that. However, as Part II will show, both the history of its creation and the reality of its operations show that the IMF is, at its core, a political institution. In Part III, I show-by way of example rather than comprehensive analysis-how the political foundation of Fund governance affects a range of proposals to reform the process of sovereign debt restructuring. In many cases the IMF decision-making process may produce outcomes neither intended nor, in some instances, anticipated by reform proponents. The point here is not to endorse or reject any of these proposals but to underscore the perils of ignoring so critical an institutional characteristic. Concluding in Part IV, I suggest what the political foundation of IMF governance does, and does not, imply for reforming sovereign debt restructuring. II. THE POLITICAL FOUNDATION OF IMF GOVERNANCE At its inception in 1944, the Fund served two basic and related functions. First, it was to oversee the rules on international monetary relations that had been agreed during the Bretton Woods conference. These rules, set down in the original Articles of Agreement of the Fund, most significantly included the commitment of its members to maintain a par value exchange rate system.2 Changes in the par value of a member's currency were to be made only in the case of a fundamental disequilibrium, and any changes greater than 10 percent were to be made only after consultation with the Fund. Second, the Fund served as a source of assistance for members attempting to maintain the par value of their currencies in the face of downward market pressure. All members had paid in specified amounts of capital (their "quotas"), a quarter of which was generally required to be in gold. The size of member quotas (which have been adjusted numerous times since 1944) was not mechanically derived from some formula, although factors such as GDP and hard currency reserve levels were obviously important.3 A member could temporarily draw on the Fund's resources in amounts based upon its paid-in quota.4 Where a member wished to obtain an amount greater than the amount of gold it had paid in, it was subject to increasingly demanding requirements for economic policy changes that would relieve the stress on its currency. This is the origin of the famous or, to some, infamous IMF "conditionality" policies. …