Post-eurozone crisis: IMF rethinking bailouts

This will give govts better options to stabilise finances.

WASHINGTON:

The International Monetary Fund is rethinking bailouts following the eurozone crisis, to give governments better options to stabilise their finances.

Earlier on, the world’s crisis lender either offered funds to keep a country afloat while it adjusted policies, or asked the creditors to write off some of the debt. But the eurozone crisis showed that it was inflexible, and its difficult to assess what is needed to ensure debt sustainability.

“The harsh approach of writeoffs risks not only the country losing access to capital markets, but also contagion, causing damage to the broader financial system. No matter how orderly a debt reconstructing operation is, it will impose costs, including spillover effects to other sovereign bonds or asset classes”, said the IMF study.

The IMF has suggested a third option that if the country can still pay its debts but faces the possibility of default, the IMF will push the bondholders to stretch out the payment terms of their bonds, rather than taking writeoffs. They would then provide funds to the government, with a required programme of reforms to help restore access to capital markets.  Such “reprofiling” will be less costly to the debtor and creditor.

Financing provided through reprofiling could allow for more gradual adjustment paths, which would help growth, reduce economic dislocation and facilitate successful programme implementation.

This third way still hinges on the challenge of knowing how sustainable or near-sustainable a country’s debt is. The new approach was cautiously welcomed by the IMF executive board. ”The idea remains a proposal “neither final nor approved,” said IMF Managing Director Christine Lagarde. 

Published in The Express Tribune, June 22^nd, 2014.

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