[A-List] Germany & the imperialist chain: Deutsche Bank

["Keaney Michael" <Michael.Keaney@xxxxxx>]

There is a better way to manage debt crises
By Josef Ackermann
Financial Times: September 26 2002

The world has got better at preventing financial crises. Governments
have improved data transparency, emerging market countries have
strengthened their debt management and the International Monetary Fund
and World Bank are now better equipped to assess financial sector
stability. But crisis prevention is not enough, as the financial
collapse in Argentina makes clear. Better crisis management is also
needed. Deciding on the best way forward should be a priority at this
weekend's IMF annual meeting.

The private sector plays its part in crisis resolution. Of course,
private investors must bear the consequences of their own investment
decisions. But to resolve debt crises effectively, we need procedures
for intensive dialogue between debtor countries and creditors. Although
the IMF is usually involved, debt restructuring must ultimately be
agreed between those two parties. For the borrower to impose conditions
is unacceptable.

Debt restructuring must be orderly and quick. This is in the interests
of both borrowers and creditors. However, the right tools are required,
in particular collective action clauses in bond contracts. This is
central to the contractual approach to debt restructuring and has the
support of the Institute of International Finance and the Group of Seven
leading industrial nations.

Collective action clauses, which under English law have been
incorporated into bonds since the end of the 19th century, are a
market-based instrument for overcoming obstacles to debt rescheduling.

There is now a consensus that such clauses should become the global
market standard. This responds to a fundamental shift away from
syndicated loans towards bonds in emerging market debt. As the use of
bonds has grown, the number, diversity and anonymity of creditors have
grown. As a result, it has become much more difficult to co-ordinate
divergent interests, making delays to debt restructuring more likely.
The shift to bonds also increases the risk that individual creditors,
such as "vulture funds", will hold up debt restructuring by taking legal
action. A delay will hit a debtor country's credit rating and depress
bond prices further.

In practice, these problems have proved surmountable; recent debt
restructuring exercises had participation rates of more than 90 per cent
of creditors. Still, the multiplicity of investors and the potential for
litigation create too much uncertainty. Collective action clauses would
help tackle this problem by making possible a majority debt rescheduling
agreement that was binding on all bondholders. They provide certainty in
cases where debt restructuring is unavoidable. Creditors benefit from an
orderly procedure, while borrowers can prevent the crisis from
deteriorating further - and for everyone the whole process is shorter.

Governments and international financial institutions generally agree
that collective action clauses have advantages. And yet they are also
working on a kind of international bankruptcy law for governments, the
so-called sovereign debt restructuring mechanism. The IMF and some G7
governments are devoting considerable effort to developing proposals
outlined recently by Anne Krueger, the IMF's deputy managing director.
However, collective action clauses would be just as effective.

It is now up to the private sector to flesh out precisely how collective
action clauses could work in practice. We also need to ensure that they
are quickly adopted around the world. The faster this happens, the
sooner the majority of debt outstanding will include collective action
clauses.

Academic studies suggest that governments with a good credit rating
would not see the terms on which they borrow deteriorate as a result of
collective action clauses. Still, borrowers appear reluctant to accept
the use of such clauses as a binding market standard. All advanced
countries should agree to include collective action clauses in future
bond contracts, following the example of the members of the European
Union. That would help turn them into a market standard.

There is widespread agreement on the usefulness of collective action
clauses. Governments and international financial institutions cannot
afford to waste any more time.

The writer is chairman of the group executive committee of Deutsche Bank