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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: 16yearcycle who wrote (24780)	10/1/1998 1:29:00 PM
From: Jacob Snyder	Respond to of 70976

IMF Mulls Lending to Nations In Default; Stance to Help Russia By MICHAEL M. PHILLIPS Staff Reporter of THE WALL STREET JOURNAL October 1, 1998 WASHINGTON -- In a move that could force private investors to shoulder more of the cost of international bailouts, the International Monetary Fund is considering lending to countries that have defaulted on debts to banks and bondholders. Traditionally, the IMF has refused to lend to countries in arrears on their debt to private creditors, who routinely use that leverage to win favorable terms when negotiating debt restructurings. Under the new plan, a country that has adopted IMF-approved economic reforms and is making a good-faith effort to renegotiate its private debt could receive fresh IMF funds. The plan, expected to be considered in meetings over the next week, represents a major new approach to handling the string of financial disasters that are swamping the emerging markets, and could eventually be used to assist Russia if Moscow renews its economic-reform efforts. <Picture: [Worse Than Expected]> "The real significance is shifting the bargaining power away from the banks and other private lenders," said one U.S. official familiar with the debate. Repayment to private lenders would remain at a standstill until formally renegotiated; otherwise, the IMF money could go directly to private creditors. A provision would also have to be made to prevent private creditors from filing suit to attach IMF funds as they arrive. The proposal fits into a larger effort by the IMF, the U.S. and other official lenders to redesign the global financial system to prevent crises and to deal more effectively with those that do emerge. Since 1994, official lenders have assembled a series of rescue packages for countries -- from Mexico to South Korea -- whose currencies are under attack and whose debts appear unmanageable. Critics contend those deals simply amount to bailouts for private investors who rolled the dice and lost. The reform effort has taken on growing urgency in recent months, as more countries have succumbed to financial instability and global economic prospects have darkened. The IMF announced Wednesday that the world economy is now slowing so sharply that it makes even the pessimistic forecasts issued less than six months ago seem optimistic. In its latest edition of the World Economic Outlook, the IMF forecast just 2% growth this year and 2.5% next year. With the exception of a few notable bright spots, such as the U.S. and the European Union, the financial crisis that began last year in Thailand has now knocked the wind out of global growth. "Chances of any significant improvement in 1999 have also diminished and the risks of a deeper, wider and more prolonged downturn have escalated," the IMF said. In its previous report issued in May, the IMF predicted global output would rise 2.1% in 1998, and 3.7% in 1999. The slowdown from the usual growth rate of 3.75% to 4% is "the equivalent of a country the size of Canada taking a year off and not producing anything," said Flemming Larsen, deputy director of the IMF research department. Russia's economy will contract 6% in 1998 and by that much again in 1999, the IMF predicted. In August, Russia devalued the ruble, imposed a debt moratorium and unilaterally restructured government bonds. Now, its default makes Russia the country most likely to be considered under the new IMF approach to bailouts, should it be adopted. "The fund wants to be in a position to come to the assistance of the Russians if and when they deserve it," said Princeton University economist Peter Kenen, who has worked closely with the Treasury Department on international issues. So far Russia hasn't met any likely criteria for such a program; its policies are in disarray and its offers to its creditors apparently fall short of the good-faith threshold. "It's not a foregone conclusion there will be a package we can support," Jeffrey Frankel, a member of the president's Council of Economic Advisers, said in an interview. But Russia is clearly the country the IMF and U.S. officials have in mind, largely due to the hefty size of its debt. Russia has restructured $40 billion of debt, $11 billion of which was held by foreign investors. The IMF proposal will likely be discussed at two venues in the coming days: Sunday's meeting of the IMF's policy setting body, the Interim Committee, and Monday's gathering of the Group of 22 nations, formed a year ago to contemplate a redesign of the global financial system. In the run-up to those meetings, several other possible reforms have been floating around official circles: •Establishing a bankruptcy court of sorts within the IMF. Insolvent countries could get time to put economies in shape, similar to the way Chapter 11 protects a company from creditors while it reorganizes. •World Bank assistance to allow companies in developing countries to reorganize while in default. The bank could provide technical assistance to help countries improve their bankruptcy laws and perhaps even provide firms with financial aid. •Minor capital controls that perhaps would require banks to increase their reserves to cover short-term, foreign-currency borrowing. •Limit bondholder rights. When they issue bonds, emerging-market countries would specify that any restructuring would require the agreement of a specified percentage of bondholders, so that no single bondholder could block an accord.

To: 16yearcycle who wrote (24780)	10/1/1998 1:39:00 PM
From: Jacob Snyder	Read Replies (1) \| Respond to of 70976

does this sound smart? "the International Monetary Fund is considering lending to countries that have defaulted on debts to banks and bondholders." And Japan wants to set up a IMF-lite, that is, a bail-out fund for East Asia which doesn't force any restructuring on countries in trouble. Two good things about the plan: it won't use my tax dollars, and it only intends to waste 30 billion. Still, it demonstrates that they have learned nothing in the last 8 years. They are not going to increase transparency, or impose market discipline, or let insolvent countries/banks/companies fail. At least, not until a lot more money is wasted.