CIGI PAPERS

NO. 66 APRIL 2015

THE IMF AS JUST ONE CREDITOR

WHOS IN CHARGE WHEN A COUNTRY CANT PAY?
JAMES M. BOUGHTON

THE IMF AS JUST ONE CREDITOR:

WHOS IN CHARGE WHEN A COUNTRY CANT PAY?
James M. Boughton

Copyright 2015 by the Centre for International Governance Innovation

The opinions expressed in this publication are those of the author and do not
necessarily reflect the views of the Centre for International Governance Innovation
or its Board of Directors.

This work is licensed under a Creative Commons Attribution Non-commercial

No Derivatives License. To view this license, visit (www.creativecommons.org/
licenses/by-nc-nd/3.0/). For re-use or distribution, please include this copyright
notice.

67 Erb Street West

Waterloo, Ontario N2L 6C2
Canada
tel +1 519 885 2444 fax +1 519 885 5450
www.cigionline.org

TABLE OF CONTENTS
iv About the Author
iv Acronyms
1

Executive Summary

1 Introduction
2

Role of Derivatives in the Crisis

Reform Efforts after the Crisis

Continuing Gaps in Post-crisis Reforms: Non-financial Operators

Lessons from Canada

12 Conclusion
12 Acknowledgements
12 Appendix: The European Regulatory Framework
14 Works Cited
16 About CIGI
16 CIGI Masthead

CIGI Papers no. 66 April 2015

EXECUTIVE SUMMARY
ABOUT THE AUTHOR

James M. Boughton is a CIGI senior fellow. He

is a former historian of the IMF, a role he held
from 1992 to 2012. From 2001 to 2010, he also
served as assistant director in the Strategy, Policy,
and Review Department at the IMF. From 1981
until he was appointed historian, he held various
positions in the IMFs Research Department.
Before joining the IMF, James was an economist in
the Monetary Division at the OECD in Paris and
professor of economics at Indiana University.
James is the author of two volumes of IMF history:
Silent Revolution, covering 19791989; and Tearing
Down Walls, covering 19901999. His other
publications include a textbook on money and
banking, a book on the US Federal funds market,
threebooks on IMF topics that he co-edited, and
articles in professional journals on international
finance, monetary theory and policy, international
policy coordination and the history of economic
thought.

iv CENTRE FOR INTERNATIONAL GOVERNANCE INNOVATION

The international communitys management of the 2010

financial crisis in Greece revealed a major gap in the
international financial system. No single institution is any
longer unambiguously in charge. Consequently, the path
is open for narrow interests to predominate over global
interests. An examination of postwar history shows that
this problem has been growing gradually since the 1970s
and has become much greater since the mid-1990s. To
alleviate the problem, the International Monetary Fund
(IMF) needs to develop an effective strategy for reducing
the opportunities for creditor countries to intervene in
decisions on how crises should be resolved.

The IMF as Just One Creditor: Whos in Charge When a Country Cant Pay?

INTRODUCTION
In October 2009, the newly elected government in Greece
announced that the fiscal deficit was more than three times
what had been previously reported. That revelation made
it impossible for Greece to continue servicing its debt on
the contracted terms, and it set in motion a series of events
that culminated in the formation of an ad hoc committee of
official institutions known as the Troika. From the spring
of 2010, the Troika the European Commission (EC), the
European Central Bank (ECB) and the IMF assumed
responsibility for assembling official financing for Greece,
determining the policy changes that Greece would have to
make to qualify for that financing and setting guidelines for
negotiations between Greece and private sector creditors
aimed at restoring access to credit on normal market terms.
The Troika was unprecedented in form and scope, but
the responses to international financial crises had been
careening toward it for decades. At least since the debt
crisis that engulfed Latin America in 1982, containment
and resolution had been too complex a task for a single
country or multilateral institution to manage on its own.
Heavily indebted countries were increasingly likely to have
a large and diverse number of creditors, both in the private
sector (commercial banks, other financial institutions and
individual bondholders) and among official institutions
(central banks, other bilateral lenders and multilateral
institutions). The need for creditor coordination became
increasingly obvious, but the resulting processes exposed
a gap in the international financial system: no one is any
longer unambiguously in charge.
When a sovereign debtor cannot, or will not, honour its
contracts with creditors, who has control over the workout?
Who is, who should be and who can be in charge? And if
the IMF is to have control, how can it manage the roles of
other creditors?

BACKGROUND
A key element of the international financial system
devised at Bretton Woods, New Hampshire, in 1944, was
that the IMF (founded at that conference) would have
the responsibility and the resources to lend to member
countries when necessary to restore balance to the
borrowers international payments. Each member of the
IMF was assigned a quota linked to the size of its economy
and the size and variability of its international trade. That
quota determined how much the IMF could lend to the
member, and the overall scale was thought to be large
enough that a loan from, or a stand-by arrangement with,
the IMF could tide a country over until it could bring its
economic policies and conditions in line with its revenues.

This system, based on the IMF as the one residual creditor,

worked well for about 30 years. Until the mid-1970s, the
IMF never had to coordinate its lending with other official
or private sector creditors, and only rarely did creditor
countries interfere with IMF management decisions in
response to members requests for financial assistance. One
prominent exception arose as a result of the Suez crisis in
1956, in a highly political context. Because of uncertainty
about the outcome of the military campaign after British,
French and Israeli forces attacked Egypt, speculators
applied pressure against the fixed exchange rate of the
pound sterling. The British government requested a standby arrangement from the IMF, but the US government
refused to agree to it until the United Kingdom withdrew
from Egypt. When bilateral diplomacy failed to resolve the
political standoff, Britain withdrew its forces, and the IMF
approved the arrangement (Boughton 2001a).
The outsized influence of the United States in this
episode is explained by the fact that most of the IMFs
lendable resources at that time were in the form of US
dollars. Approval of the stand-by arrangement formally
required only a simple majority of votes cast in the IMFs
executive board, but no one wanted to force the issue over
US objections. Without US support, the IMF could not
function. Even today, when the US voting share is roughly
half what it was in the 1950s and the dollar is only one
of numerous currencies that the IMF pools in its lending
arrangements, the political influence of the United States
is strong enough that the executive board is seldom willing
to override it when a country that is seriously out of favour
in Washington requests financial assistance.1
On one level, the subservience of IMF lending to influence
from major creditor countries is perfectly appropriate.
Those countries provide the assets that the IMF lends.
They have a legitimate interest in ensuring that those assets
are used for purposes that their governments support.
It is possible, however, for those countries to cross a line
and weaken the effectiveness of the institutions work by
interfering excessively. That possibility is explored more
fully below.
In addition to multilateral institutions and creditor
countries, sovereign borrowers may have to deal with
1 The distinction implicit in the phrase seriously out of favour is
between cases when the US Congress wishes to express displeasure
at a countrys policies and those when the US administration wishes
to use its influence to try to force a country to change its policies.
For example, under US law, the US executive director must actively
oppose and vote against any proposal for the IMF to lend to a
country with a Communist dictatorship unless the secretary of the
Treasury makes an advance case to Congress for an affirmative vote
(22 U.S. Code 286aa). That provision has not prevented the IMF
from lending to Belarus (19932009), China (19811986), Romania
(19751982) and other countries with Communist governments. On
the other hand, for more than three years after Poland rejoined the
IMF in 1986, its requests for financial assistance were repeatedly
rebuffed owing to strong US opposition (Boughton 2001b, 993).

James M. Boughton 1

CIGI Papers no. 66 April 2015

private sector creditors: mainly commercial banks and
bondholders.2 During the Bretton Woods era (19461972),
private sector portfolio flows were small enough not to
be of systemic importance.3 That changed in the 1970s,
after the onset of generalized floating of exchange rates,
sharp increases in oil prices and weak aggregate demand
in advanced economies. Floating created opportunities
for speculative profits; high oil prices led to large dollardenominated deposits at major international banks that
had to be re-invested somewhere; and weak investment
demand in the north induced banks to look for prospects
in the developing world.
By the late 1970s, bank financing of development extended
even to such low-income countries as Somalia and Sudan.
When problems arose (domestic or external) and those
and other countries were unable to service the loans, they
turned to the IMF for help. Responding to those requests,
the Fund had to take into account the possible reactions
of bank creditors. Would they roll over their loans to a
troubled country once an IMF-supported adjustment
program was in effect, or would they take advantage of
the influx of official financing to demand repayment and
exit from the market? The answer to that question would
largely determine whether the official support would
bring the expected benefits to the indebted country.
Bank loans to developing countries dried up in the
1980s in the wake of the international debt crisis in Latin
America and other less developed economies. When
creditors renewed their interest in the early 1990s, private
sector development finance increasingly took the form of
negotiable securities rather than loans. The desire for a
more flexible instrument was buttressed by the 1989 Brady
Plan, under which banks could convert outstanding loans
into negotiable Brady bonds, the principal of which would
be guaranteed by the US Treasury.
For five years (19901994), bond financing soared, giving
rise to the emerging markets phenomenon. An everincreasing number of developing countries became active
issuers of foreign currency notes and bonds marketed
to international investors. These capital inflows were
commonly used to finance domestic-currency investments,
all too often fuelling unsustainable investment and
property-price surges. The inflows slowed after a new
crisis hit Mexico in December 1994, and they slowed much
more widely and dramatically after a series of crises in
East Asia in 1997. The vagaries of the international bond
market had become a major destabilizing force in itself.

2 Bondholders is used here as a shorthand for holders of negotiable

interest-bearing securities, not just bonds as technically defined.
3 Speculation against the pound sterling during the Suez crisis was
primarily through leads and lags in trade settlements, not portfolio
flows. The pound was not yet a fully convertible currency.

2 CENTRE FOR INTERNATIONAL GOVERNANCE INNOVATION

Michel Camdessus, then managing director of the IMF,

famously characterized the speculative attack on the
Mexican peso at the end of 1994 as the first financial
crisis of the twenty-first century because of its speed and
its disconnect from developments in the current account
(Boughton 2012, 456). Indeed, the two decades since that
event have been pockmarked by financial collapses that
have been more complex and more difficult to resolve
than their predecessors. The range of financial instruments
and the scale of the events have been much greater than
before; the speed with which crises have unfolded has
accelerated; and the number, diversity and geographic
range of creditors and other stakeholders has expanded. As
a result, coordination of creditors has become increasingly
difficult.
To illustrate: When the Mexican debt crisis erupted in
1982, most of its external sovereign debt was in the form
of commercial bank loans. The major international banks
formed a steering committee comprising 12 of the largest
creditors. More than 40 percent of the debt was held by
the 25 largest bank creditors. Holdings tapered off sharply
after that number, and the task of involving the 500 or so
smaller banks in the workout fell largely to a handful of
national central banks. Short-term official financing was
arranged within days after the crisis erupted in August.
The IMF negotiated an adjustment program with the
Mexican authorities during the 90-day reprieve granted by
the initial financing, contingent on an agreement by bank
creditors to increase their own exposure to co-finance the
workout. Securing a participation rate covering 86 percent
of the outstanding loans took less than six weeks. By May
1983, almost every creditor bank had agreed to increase its
loan exposure by the agreed amount, and the initial crisis
was resolved (Boughton 2001b, 30616).
The response to the 2009 Greek crisis took much longer
to assemble and activate. The Troika did not hold its first
meeting with the Greek authorities until six months after
the onset of the crisis. Another 20 months elapsed before
private sector creditors formed a committee composed
of 32 varied financial institutions headquartered in 10
different countries. It included commercial banks, but
also savings banks, insurance companies, asset managers,
diversified financial firms, and even state and regional
public institutions, both foreign and Greek (Zettelmeyer,
Trebesch and Gulati 2013, table 2). Once the creditor
committee which was estimated to hold between 30
and 40 percent of Greeces outstanding bonds agreed to
a restructuring plan, participation by most other creditors
was secured within a few weeks, but the crisis had now
extended well into 2012.

The IMF as Just One Creditor: Whos in Charge When a Country Cant Pay?
Many reasons help explain the long delays, including
some that are unique to the European Union or to Greece
in particular.4 The Greek crisis involved serious structural
economic problems in addition to the financial imbalances.
Nonetheless, the problem is endemic in the modern system
of globalized finance. Not only is a heavily indebted
country likely to have many international creditors; those
creditors are also likely to be highly diverse: commercial
banks, nonbank financial institutions, bilateral official
institutions and especially after the fact multilateral
institutions such as the IMF. These varied groups have
different interests and different perspectives on how to
respond to a crisis. Decisions on which one will be allowed
to dominate will alter the process and the outcome. If no
one dominates, as in the Greek case, crisis resolution may
prove elusive.

COPING WITH COMMERCIAL BANK

INTERESTS
Historically, the first pervasive issue to arise was the
existence of large outstanding debts to commercial bank
creditors. As this situation developed, the IMF and
other official creditors lacked a strategy for coping with
it. Instead, they responded to each case as if it were sui
generis. Gradually, a systemic strategy emerged.
One of the first instances arose in 1976, when the
Democratic Republic of Congo then known as Zare
requested a stand-by arrangement. The government had
borrowed heavily from international banks from 1972 to
1975, both with and without guarantees from creditor
governments, but had gone into arrears after the world
price of copper (the countrys principal export) collapsed.
Zare initially drew on the Funds small but lowconditionality Oil Facility. When that proved insufficient
to stabilize its finances in the face of the banks reluctance
to extend new loans, the government committed to
undertake an adjustment program supported by a oneyear IMF arrangement. That catalyzed some new officially
guaranteed bank loans, but prospects for normal access on
commercial terms still looked poor.5
Restoring normal relations between Zare and its creditors
was of critical importance to the Fund; otherwise, the
government would effectively become a ward of the
institution for years to come. In this case, it is unlikely that
commercial interests differed substantially from those of

Trebesch (2011) estimated that in the decade prior to the Greek crisis,
the average length of time from the beginning of negotiations (or from
a default) to the final implementation of a restructuring was about 17
months. Twelve of the 16 cases that he examined were completed in
less than two years.

5 See IMF (1983, 12729), de Vries (1985, 493-94) and Boughton (2001b,
804-05).

the country or the IMF. All parties wanted to restore good

economic performance and normal credit access.
The Fund and the Zarean authorities negotiated a stand-by
arrangement with standard terms aimed at strengthening
the balance of payments. The next step was for the
authorities to negotiate a rescheduling of debt service
terms, both with official creditors (who coordinated their
response through the informal grouping known as the Paris
Club) and with commercial banks (which had their own
coordinating group, the London Club). Standard practice
up to this time had been for IMF staff to participate in Paris
Club meetings, mainly to explain to bilateral creditors the
Funds outlook for the economy in light of the adjustment
program that had just been activated. In the case of Zare,
rescheduling commercial debts was important enough
for the success of the program that the executive board
authorized staff to participate in meetings with the banks
as well.
This new hand-holding exercise initially worked well.
It helped reassure the bankers, who agreed to continue
rolling over their loans while Zare successfully carried
out the adjustment program. After that first year, however,
Zare faced with internal strife and saddled with
pervasive corruption could not sustain the adjustment
effort. For a time, the government continued servicing its
bank loans while going into arrears on its bilateral official
debts. Under pressure from creditor countries, the IMF
continued to approve credits to Zare, and the Paris Club
continued to reschedule its own credits conditional on
the existence of the Funds support. Commercial banks,
though, delinked their decisions from those of the IMF and
pulled out. Never again did Zare regain normal access to
commercial credit markets.
A key feature of the 1976 episode in Zare was that
the dependency was unidirectional: bank lending was
conditional on the IMF, but the Funds approval of the
stand-by arrangement did not require a normalization of
relations with banks. That independence began to change
two years later, in conjunction with a stand-by arrangement
with Sudan.
The prospect of oil production in Sudan had induced
large-scale bank lending to the government starting in
1974, until arrears began to accumulate in 1976. New
bank lending essentially ceased in 1978, and that forced
Sudan to ask for help from the IMF. The Fund approved an
extended arrangement (a three-year stand-by agreement
with a longer repayment schedule, under the terms of the
Extended Fund Facility [EFF]) in May 1979. The Funds
provision of financial assistance, in combination with
Sudans promises to carry out policy reforms, prompted
the banks (in the London Club) as well as official
creditors (in the Paris Club) to begin negotiations with the
authorities to reschedule outstanding debts. Moreover, the
EFF arrangement required Sudan to eliminate its arrears
James M. Boughton 3

CIGI Papers no. 66 April 2015

on bank loans within the first year, as a condition for
subsequent drawings on the arrangement (IMF 1979, 12).
The Paris Club agreed, in November 1979, to reschedule
official debts, but the banks took a harder line. Knowing that
Sudan had to eliminate arrears by the following April, and
suspecting that Arab countries in the Middle East would
likely bail out Sudan if necessary, the bankers had little
incentive to soften their demands for timely repayment. In
the event, Sudan did not clear its arrears, but it did reach
understandings with creditors to continue negotiations
while at least stabilizing the amount of outstanding arrears.
Senior IMF staff met trilaterally with bank creditors and
the authorities throughout 1980, without success. In 1981,
a loan from Saudi Arabia provided some relief. After that,
however, Sudan could no longer properly service its debts
to the IMF, to other official creditors or to the banks. This
second attempt to develop a strategy for accommodating
commercial interest thus also failed. (As of 2015, Sudan
still has not settled much of its arrears.)
When Turkey applied for a three-year stand-by
arrangement in 1980, the IMF decided to go back to basics:
lend to the country and just hope that commercial bank
creditors would at least be impressed enough to maintain
their loan exposure. The requested commitment was
exceptionally large in relation to Turkeys quota (625
percent, at a time when the normal access limit for a threeyear arrangement was 165 percent), but the authorities
were already implementing a comprehensive economic
reform program (see Aricanli and Rodrik [1990]) that the
Fund and major bilateral creditors viewed as effective
enough to warrant strong official support.
Under these circumstances, it was easy to hope that the
official actions would induce commercial bank creditors
voluntarily to participate in the financing, a tactic that later
became known as private sector involvement (PSI). As
Jacques de Groote the executive director representing
Turkey at the IMF put it, commercial bank creditors
should respond in a positive way when the Fund
expresses its confidence in a countrys recovery program
and gives them a clear signal.6
Hopes were dashed. Turkey did successfully carry out its
reform program; it drew the total amount of the standby arrangement, and it repaid the loan and the interest
charges fully and on time. Bank creditors, however, were
unimpressed and mostly chose not to renew their own
loans to the government. As a result, much of the official
support served merely to replace expiring bank loans. The
net increase was sufficient to stabilize Turkeys external
payments position, but the longer-term benefit to the
countrys economic performance was less than it might

6 Minutes of Executive Board Meeting 80/92 (June 18, 1980), p. 8;

quoted in Boughton (2001b, 277n).

4 CENTRE FOR INTERNATIONAL GOVERNANCE INNOVATION

have been if the catalytic effect had worked as planned.7 It

appeared that the IMF needed a more direct way to engage
private actors if its program support was going to succeed
more broadly.8
Mexicos 1982 debt crisis provided the perfect opportunity
for the first real PSI and the beginning of a general strategy
for coping with the interests of commercial creditors.
The crisis itself was initiated by bank creditors. Despite a
spate of weaknesses in Mexicos economic policies, banks
continued rolling over loans through July, albeit with
widening spreads over the interbank rate. A presidential
election in early July produced a winner (Miguel de la
Madrid) who was viewed relatively favourably in the
banking community, but creditors seem to have then
begun worrying about the likelihood of a spending binge
during the months until the new administration would
assume office in December. In mid-August, the major
creditors suddenly demanded repayment of maturing
loans. Mexico did not have the money, and the authorities
turned to the United States and the IMF for help (Boughton
2001b, chapter 7).
The official response was complex, but the essence of it
for the present discussion was that the IMF negotiated a
three-year extended arrangement to begin in December
1982, conditional on formal commitments from bank
creditors to increase their own loan exposure to Mexico
by seven percent. For the first year, the IMF would
provide about US$1.3 billion in new financing, bilateral
official creditors would provide some US$2 billion in
export credits and bank loans would rise by US$5 billion.
To win over the banks, the Funds managing director,
Jacques deLarosire, convened a meeting with 17 leading
banks, held at the Federal Reserve Bank of New York on
November 16. He told them unequivocally that he would
not recommend approval of the program unless and until
the banks provided written assurances of their own and
other banks participation.
That the banks agreed to and followed through on this
ultimatum may seem surprising. The simple explanation
is that it was in their interests to do so. Without the IMF,
Mexico would have had to default on many, perhaps most,
of the outstanding loans. Moreover, because the prevailing
interest rate was higher than seven percent, Mexico
would be making net payments to the banks under this
agreement. The approach was often called new money

Carlo Cottarelli and Curzio Giannini (2003) provide a comprehensive

survey of the effect of IMF support on private sector capital inflows.
They note that evidence shows that catalytic effects, if any, are
small.

8 In 1982, reminiscing on the success of the strategy developed for

Mexico, the IMF managing director lamented that the Fund would
have been happy to act in the same way in a case like that of Turkey.
(Minutes of Executive Board Meeting 82/168 [December 23, 1982];
quoted in Boughton [2001b, 276n]).

The IMF as Just One Creditor: Whos in Charge When a Country Cant Pay?
when it was introduced, but this tag was a misnomer.
More appropriately, it eventually came to be known as
concerted lending.
The banks could have called the managing directors
bluff and hoped that the United States and other major
official creditors would force the institution to approve
the arrangement even without their involvement, but no
one was willing to take that chance. A default by Mexico
would have been large enough to bankrupt many of the
institutions present at the meeting. It also helped that the
lead bank, the chair of the creditor committee on Mexico,
was Citibank, which had a very substantial ongoing
business relationship in the form of branch offices and
other operations there. Restoring viability to the Mexican
economy was a sensible business goal, and it could not
be achieved without nearly full participation by Mexicos
500-plus bank creditors.
Concerted lending effectively created the modern IMF, as
the essential manager of every international financial crisis.
It demonstrated both the need for creditor coordination
and the possibility for the IMF to fill that need. As a
specific process for involving bank creditors, however,
it worked reasonably well, but only for a few years in a
limited number of cases.
The IMF applied concerted lending in four large emerging
markets: Mexico in 1982 and again in 1986; Argentina from
1982 through 1986; Brazil in 1983; and Chile in 1983 and
1985. It also tried it, with greater difficulty, in three smaller
countries: Uruguay and Ecuador in 1983, and Cte dIvoire
in 1984. Beyond that group and that time, the problem was
that the vulnerability of bank creditors to a default was
greatly diminished. Even in the early 1980s, the exposure
of large banks in small countries was generally not of a
magnitude sufficient to threaten the banks finances. After
the onset of the crisis across Latin America, creditors
gradually set aside provisions to cover potential losses.
As it began to take longer and longer to assemble a socalled critical mass of creditor acceptances to participate,
the implementation of policy reforms and the securing of
IMF and other official financing was increasingly delayed.
In May 1987, Citibank announced that it was setting
aside an additional US$3 billion to cover potential losses
on its sovereign loans. That amount seems small in
relation to the massive capital flows of the early twentyfirst century, but it was shockingly large at the time. As
a result, concerted lending was no longer viable because
the playing field had tilted in favour of the creditors. If the
IMF had continued to insist that it would approve large
stand-by arrangements only on the condition that banks
would agree to increase their exposure, the banks could

have responded by demanding onerous and unacceptable

terms from the indebted countries.9
The demise of concerted lending was accompanied by a
new round of experimental efforts to engage the banks
more flexibly. The IMF and major official creditors saw the
essence of the challenge as finding ways to give confidence
to commercial banks that heavily indebted countries were
on a path toward financial viability. With that confidence
would come a willingness to lend voluntarily on affordable
terms.
Starting in 1984, the Fund and the Paris Club
experimented with encouraging banks to negotiate Multiyear Rescheduling Agreements (MYRAs). The idea was
to identify countries with strong reform programs in
place, and then work with the banks to develop a plan
to reschedule outstanding debts over a long enough
multi-year period to bring the program to fruition. This
rather optimistic strategy had some success in just four
cases: Mexico, Venezuela, Ecuador (all three in 1984) and
Yugoslavia (1985-1986).
To buttress the MYRA process, the IMF also introduced
a new procedure that it called Enhanced Surveillance. At
that time, IMF staff reports were normally kept confidential
and were shared only with member countries. Under
Enhanced Surveillance, reports would be given directly
to bank creditors, still on a confidential basis, in the hope
that a positive assessment would encourage banks to
keep lending and agree to reschedule outstanding loans.
In the event, the IMFs assessments did not sufficiently
alter creditors own negative views on expected returns
to lending. After just three cases Venezuela (1984),
Yugoslavia (1985) and Uruguay (1986) the Fund
abandoned the program because it evidently was not
having the desired catalytic effect.
The next attempt to revive the strategy was the Baker
Plan, introduced by US Secretary of the Treasury James
A. Baker III in October 1985. The idea was to get the IMF,
the World Bank and regional development banks to work
together to devise growth-oriented adjustment programs
for the most heavily indebted emerging-market countries.
The implementation of such programs was supposed to
inspire commercial banks to increase their lending. Baker
specified an indicative target of a three percent increase
in loan exposure to the so-called Baker 15 countries,

Concerted lending was given one last, successful, ride at the end of 1997,
when the IMF-supported adjustment program in Korea was faltering.
Despite a large influx of financing from the IMF, other multilateral
institutions and bilateral creditors, international commercial banks
continued to pull out their own funds throughout December. After
three weeks of reserve losses that threatened to undermine the whole
effort, the Group of Seven and the IMF reluctantly agreed to set up
an informal network of official encouragement and persuasion to
reverse the declines. Within weeks, the program was on track. For
details, see Boughton (2012, 53970).

James M. Boughton 5

CIGI Papers no. 66 April 2015

mostly in Latin America. The IMF and the World Bank
both approved the plan, but it lacked any real substance.
Neither institution had a model, or even a general plan,
for reorienting policy reforms in a way that would reliably
restore economic growth in developing countries, nor had
anyone a plan for inducing commercial banks to take the
desired actions. Three years later, the IMF estimated that
net new lending to the 15 countries was essentially zero
during the life of the Baker Plan. Although the actual figure
was difficult to estimate with precision,10 most observers
agreed that the Baker Plan fell well short of its catalytic
objectives.
By 1986, the main focus in official circles shifted from
trying to get the banks to increase lending to trying to
get them to restructure the outstanding loans so as to
reduce the overall burden on indebted countries.11 For the
next three years, the IMF experimented case by case and
developed a menu of options for reducing countries debt
burdens. For Bolivia in 1986, the Fund set a precedent by
agreeing to finance a program despite the continuation of
arrears to commercial banks. As that program progressed
in 1987, the IMF and bilateral creditors supported a scheme
under which Bolivia used donated funds to buy back some
of its bank debt at a discounted price. Chile, Costa Rica
and Bolivia undertook conversion of debts into equities.
Mexico organized a deal in which it converted bank loans
into negotiable bonds that were partially guaranteed by
the US Treasury.
The Mexican scheme conversion of loans into bonds
proved to be the critical component of what became the
Brady Plan in 1989. The challenge was to develop a viable
process for determining the right price for the conversion.
The Mexican deal, reached in December 1987, called for an
auction of discounted negotiable zero-coupon bonds, with
the principal guaranteed by the US Treasury. Relatively
few banks showed an interest, but Mexico did manage to
convert close to 20 percent of its offered debt at a discount of
around 30 percent (Boughton 2001b, 490). As the secondary
market for sovereign debt contracts continued to grow, an
alternative strategy of directly negotiating a discount price
became viable. Although the market was still small and
volatile, IMF staff determined that the market prices were
reasonably representative of the underlying value of the
contracts. In the Brady Plan, therefore, country authorities
would agree on a price with a committee of bank creditors,

10 Other estimates ranged from negative to positive, and even to close to

the target figure. See Boughton (2001b, 42729).
11 Efforts to get banks to maintain exposure were not abandoned
altogether. As noted earlier (footnote 9), maintaining exposure was
a key part of the 1997 program in Korea. More recently (since 2009),
one component of the Vienna Initiative a joint effort of European
institutions, the IMF and the World Bank Group has been to
induce cross-border banks to maintain loan exposure to countries in
emerging Europe. See http://vienna-initiative.com/.

6 CENTRE FOR INTERNATIONAL GOVERNANCE INNOVATION

and the IMF would augment its own financial commitment

to help the country make the conversion.
The Brady Plan could have given great power to bank
creditors, because each debt conversion required their
agreement. What made it work was the existence of
an ex ante market price that all parties understood to be
representative. If creditors insisted on a higher price, or if
the country insisted on a lower price, the deal would likely
collapse and leave both sides worse off. Once the first
few Brady deals were completed Costa Rica and then
five other Latin American countries in 1989 alone the
debt crisis of the 1980s was resolved, and the longer-term
strategy for containing the interests of commercial bank
creditors was essentially in place.

COPING WITH BONDHOLDER INTERESTS

Once the Brady Plan was active, portfolio capital poured
into emerging market countries for the next five years.
In contrast to earlier bursts, much of these inflows were
through purchases of negotiable securities rather than bank
loans. As a result, when a new wave of financial crises hit
in the second half of the 1990s, creditor coordination was
an even more severe problem than before.
The first test came, as it often did, in Mexico. In the early
1990s, the Mexican federal government was able to finance
much of its borrowing needs by issuing treasury bills
denominated in pesos. It supplemented that activity by
issuing bills known as tesobonos, which were payable in
pesos but at a guaranteed exchange rate. Tesobonos thus
were effectively denominated in US dollars. In response
to a series of adverse events in 1994, the government
found that it had to sharply increase the share of tesobonos
in its borrowing in order to maintain investor interest.
By December, when speculation of an impending
peso devaluation threatened to overwhelm the central
banks ability to hold the rate, the government was in
an unsustainable position. Once it devalued, the cost of
redeeming the outstanding stock of tesobonos would be
unbearable.
Mexico turned first to the US Treasury and the Federal
Reserve System for help, and then to the IMF for further
help and coordination (Boughton 2012, chapter 10). US
officials were especially concerned because a default by
Mexico would not only destabilize an important neighbour
and trading partner just months after the adoption of the
North American Free Trade Area was hailed as a triumph
of open trade, it also would threaten the health of US
financial institutions that were major holders of tesobonos
and other Mexican securities. The result was a US$40
billion financial package comprising US$20 billion from
the US Exchange Stabilization Fund, an unprecedentedly
large US$17.8 billion IMF stand-by arrangement, and
US$2.2 billion in commitments from Canada, the World
Bank and the Inter-American Development Bank.

The IMF as Just One Creditor: Whos in Charge When a Country Cant Pay?
This package was the first in what became a series of ad hoc
multilateral financing arrangements for crisis-hit emerging
markets. The US$40 billion figure was set, primarily by US
Treasury officials, as an amount that presumably would
impress private creditors enough that they would cease
worrying about default risks and would keep investing in
Mexico. It also was large enough that Mexico could keep
servicing its existing stock of tesobonos on the contracted
terms.
Within several months, the Mexico package, buttressed by
strong policy implementation by the Mexican authorities,
succeeded in restoring economic growth, stabilizing the
exchange rate and resuming normal relations with private
creditors. As the economy rebounded, Mexico repaid all of
the official loans fully, with interest and ahead of schedule.
Bondholders, including holders of tesobonos, also were
repaid in full without any need to renegotiate terms.
Many analysts have worried that this outcome gave rise
to moral hazard for investors: a conviction that the risk
of lending to emerging markets was minimal because
the official sector would bail out any country in financial
trouble. How large or important this effect was is a matter
of conjecture. What is clear is that the official sector
eventually learned that rescuing the country did not
always have to mean and should not always mean
rescuing its creditors from their own mistakes.
The lesson would take a long time to learn, largely because
negotiating with bondholders is far more difficult than
negotiating with commercial banks. In each of the crises in
East Asia in 1997 and 1998, external debts were exclusively,
or nearly so, in foreign currencies and in diverse negotiable
securities. Domestic currencies were overvalued, but
by the time the crisis hit, the debt structure meant that
devaluation could not solve the problem. Wanting to avoid
default (and strongly encouraged by the IMF and other
official entities to do so), the affected countries undertook
painful adjustment programs intended to resolve the
underlying imbalances and structural deficiencies as
quickly as possible. An exceptional case was Malaysia,
which bought extra time in 1998 by imposing controls
on capital outflows for several years while it adjusted
its macroeconomic policies more gradually. The overall
international strategy, though, was to preserve normal
market access and focus on domestic policy adjustments
to resolve the crisis.
The strategy was tested in August 1998, when Russia
defaulted on much of its domestic and external debt.
For two years preceding this crisis, the IMF had gone to
desperate lengths to help the Russian government avoid
default. It had entered into an unusually large extended
arrangement with Russia in 1996, under which it lent
more than US$10 billion through July 1998. The Fund
had agreed with the Russian authorities to liberalize the
capital market by allowing foreign creditors to repatriate

both principal and interest on government securities. The

problem was that the government was unable to overcome
severe shortfalls in revenue collection and, therefore, was
dependent on ever-increasing inflows of foreign capital.
That situation became unsustainable in August, and the
government responded by simultaneously defaulting on
debts and devaluating the ruble.12
Russias default was a major trauma for the international
financial system. It ended the post-Mexico moral
hazard play, in which some investors would act on the
assumption that the official community would always bail
them out in case of trouble in an emerging market. More
specifically, the Russian default helped trigger crises in
Malaysia and Brazil over the next few months, along with
the near-bankruptcy of the hedge fund Long-Term Capital
Management. Nonetheless, the longer-term consequences
were smaller than one might have predicted at the time.
Financial globalization did not end, and Russia aided
serendipitously by a rebound in the world price of its oil
and gas exports recovered substantially over the next
few years.
More lasting consequences followed a few years later,
from a debt and political crisis in Argentina. As with
Russia, the IMF lent large sums in the years leading up to
the crisis, while the persistence of policy shortcomings led
gradually to a disillusioned creditor base and, thus, to the
governments gradual loss of access to international capital
on favourable market terms. As with Russia, the Fund
practically exhausted the scope for financial support before
the crisis climaxed. In this case, the Fund lost confidence in
the Argentine authorities ability to stabilize the economy
only after disbursing the equivalent of more than US$10
billion in 2001 alone, and only after capital markets had
already demonstrated a loss of confidence by sharply
driving up yields on Argentine debt. That December, the
Argentine government fell, and its successor defaulted on
much of the external sovereign debt.
Throughout the run-up to the default, the hope of the IMF
and the Argentine authorities was to buy time through a
combination of official financing packages and voluntary
debt reschedulings to avoid unilateral action while the
government got its fiscal position under control. In this case,
the size of external debt was not the problem. The problem
was the structure of the debt dollar-denominated
and increasingly of short maturities combined with
an exchange rate regime equivalent to a currency board
(Lischinsky 2003). The only way the regime could be
sustained was to convince investors in both domestic and
international capital markets that it could and would be
sustained. The circular and not very convincing logic of
the situation meant that private financial markets at least
loosely controlled the steering wheel unless and until

12 The Russian crisis is covered in Boughton (2012, 32442).

James M. Boughton 7

CIGI Papers no. 66 April 2015

the government wrested it away from them, as it did by
defaulting in December 2001, and then abandoning the
currency board arrangement.
After the Argentine debacle, the IMF adopted a policy
intended to ensure that it would lend large sums (i.e.,
grant exceptional access) only when the country had a
viable plan to put and keep its debt on a sustainable path.
Such a plan might require reaching agreement with private
sector creditors on a restructuring to reduce the net present
value of outstanding obligations. However, if the country
was judged to be negotiating in good faith, but creditors
were reluctant to reach an agreement, the IMF would be
prepared to lend notwithstanding the resulting arrears to
those creditors.13
IMF officials and others also advocated establishing
default-averting mechanisms akin to the bankruptcy
proceedings used in domestic markets. The most wellknown proposal was made by Anne O. Krueger, then
the first deputy managing director at the IMF, to create
a Sovereign Debt Restructuring Mechanism (Krueger
2001; 2002). That specific proposal did not gain traction,
but it did help spur the increased use of collective action
clauses (CACs) binding all holders of a debt issue to
accept a rescheduling supported by a qualified majority
in subsequent issues of sovereign debt. CACs had been
widely discussed as a partial solution to emerging-market
debt crises since the 1995 Mexican crisis, but without
much result.14 Consequently, offers by sovereign debtors
to restructure outstanding bonds had to contend with
holdout creditors through ad hoc arrangements. Since
2003, CACs have facilitated some debt restructurings, both
with (for example, Argentina) and without (for example,
Greece) a prior default, by effectively eliminating the
possibility of holdouts.15
In principle, even without a new statutory mechanism
such as that proposed by Krueger, the new IMF policies
and the increased use of CACs should have largely
resolved the issue of excessive control by bondholders and
effectively restored control to the IMF and other official
creditors. Unfortunately, when the Greek financial crisis
hit in 2009 the first instance where the IMF was called
upon to act according to these principles and procedures
the Fund punted under pressure and weakened the
requirement that the countrys debt profile would have
to be sustainable once the program was implemented.
Specifically, if the crisis posed a systemic threat, the Fund
would be prepared to lend even if it projected that the debt
13 See IMF (2002; 2003a; 203b). For an analysis, see Schadler (2013).
14 For an early influential analysis, see Eichengreen and Portes (1995).
For an overview of the argument, see Kletzer (2004).
15 For a survey, see IMF (2012). For a discussion of the limitations of
CACs and the increasing need for a statutory mechanism, see Brooks
et al. (2015).

8 CENTRE FOR INTERNATIONAL GOVERNANCE INNOVATION

profile might well be unsustainable (Schadler 2013). That

set the stage for the prolonged effort in which Greece was
forced to undergo a severe economic contraction in order
to satisfy the demands of international bondholders.
What this history shows is that the requirements for
containing bondholders are well understood, but
fulfilling those requirements is made difficult by excessive
interference from creditor countries. Going forward,
containing that interference becomes the major challenge.

COPING WITH OFFICIAL BILATERAL

INTERESTS
As noted in the first section of this paper, creditor countries
have a natural and legitimate interest in the amount,
direction and purpose of IMF lending. It is their money
that the IMF is lending. For that reason, every lending
arrangement that the IMF undertakes has to be discussed
and approved by the IMFs executive board, on which
creditor countries hold the majority of the voting power.
The question to consider, then, is whether it is beneficial
for creditor countries to intervene and attempt to dictate or
influence the policy conditions attached to Fund lending.
Creditor countries might intervene to influence IMF
conditionality for two reasons. First, officials might believe
that they have superior knowledge or ability to dictate
terms that are in the best interest of the indebted country
or the global economy. Second, they might have national
interests at stake. Even in the second category, the first is
more likely to be the publicly stated reason. In either case,
the wisdom and propriety of the intervention can and
should be subjected to the test of whether it benefits the
global interest.
Until the mid-1990s, creditors intervened in conditionality
only rarely and indirectly. As noted above, in 1956, the
US government demanded that the United Kingdom
withdraw its troops from Egypt as a precondition for
allowing the IMF to approve a stand-by arrangement.
In a later, unsuccessful case, in 1981, the US Congress
tried to prevent the IMF from lending to India at a time
when the Indian government was preparing to purchase
a number of Mirage fighter jets from France. In that case,
the US executive director abstained from the vote, the IMF
approved the lending arrangement and India proceeded to
purchase the airplanes.16
In the early 1990s, the IMF developed a plan for reviving
economic activity and restoring financial stability in the
CFA franc zone. The plan involved devaluing the CFA franc
and then entering into conditional lending arrangements
with most of the 13 African countries that used the currency.
16 The US executive director, Richard D. Erb, was subsequently called
up to explain his vote in a subcommittee hearing in the House of
Representatives. See Boughton (2001b, 71315).

The IMF as Just One Creditor: Whos in Charge When a Country Cant Pay?
The rub was that this plan required the approval of all
13 countries plus France, which was the guarantor of the
solvency of the system and had a strong national interest
in preserving it. For nearly three years, Camdessus met
separately with senior officials in France and throughout
the zone in Africa, until he was finally able to forge an
agreement in January 1994. Frances concurrence was the
sine qua non, and it hinged on the governments acceptance
of devaluation as a policy tool. Once the agreement was
reached, however, the French authorities did not intervene
overtly in the determination of further policy adjustments
as conditions for IMF financial support.17
Creditor involvement ratcheted up at the beginning of
1995, when Mexico requested financial support from both
the IMF and the United States in the wake of its decision
to devalue and then float the peso. Fund management
and the US authorities consulted closely to coordinate
their responses and to assemble a large enough financial
package to resolve the crisis. Neither had the resources
to manage the situation on its own, and each one had its
own views on what Mexico needed to do to reform the
economy and to qualify for external support.
The US authorities reportedly tried to insert a prohibition
on diplomatic recognition of Cuba, and they required
Mexico to commit future oil receipts as collateral. The
collateral requirement threatened to undermine the IMFs
status as a preferred creditor, but the Fund and the Treasury
eventually worked out satisfactory sharing arrangements.
In addition, the Treasury conditioned its own support on a
commitment by Mexico to be more open in reporting data
on its international reserve position. IMF officials did not
disagree with that objective, but they did not believe that it
was a necessary condition for its own lending.18
Although the US conditions did not directly impinge on
the IMF-supported program, they did affect it indirectly.
The IMFs own rules prohibit it from imposing crossconditionality. That is, the IMF cannot refuse to dispense
funds under a stand-by arrangement simply because the
country is failing to meet conditions imposed by another
creditor. However, the IMFs rules also require it to ensure
that each program is fully financed. Therefore, in this case,
if the United States were to refuse to dispense funds under
its own agreement with Mexico, the program would be
underfinanced, and the IMF would likely suspend its own
lending as well. The very existence of a jointly financed
package deal introduces effective cross-conditionality. To

17 The preparations and aftermath of the CFA franc devaluation are

covered in Boughton (2012, 698710).
18 Subsequently, the IMF conducted an internal review that concluded
that the lack of transparency in reporting reserves had been a major
contributing factor to the crisis. The Fund then gradually established
procedures to encourage countries to strengthen their reporting of
reserves and other financial data. See Boughton (2012, chapter 10).

be sure of continuing support from the IMF, Mexico also

had to meet the conditions set by the US Treasury.
In the Mexican workout, the insertion of additional policy
conditions by the US Treasury was fairly benign, and it did
not demonstrably delay resolution of the crisis. Success in
this case did, however, embolden US and other creditorcountry officials to get more involved in the management
of subsequent financial crises. The increasing need for
large-scale financing by multiple creditors in subsequent
cases also enabled them to do so.
An opportunity for further intervention arose in August
1997, when Thailand asked for help to recover from a
severe loss of foreign exchange reserves that resulted
when a commercial property boom collapsed. The central
bank was reporting that it held about US$23 billion in
foreign exchange reserves, but it was not reporting that all
of those reserves were committed to cover forward swaps.
In other words, net reserves were virtually zero. IMF
staff and management initially concluded that it would
be unwise for the Thai authorities to reveal this hole in
reserves until a recovery program was approved and
operational. The US authorities, in particular the chairman
of the Federal Reserve System, Alan Greenspan, believed
otherwise. Transparency, in their view, was always to be
desired. Until Thailand revealed the hole in reserves, they
would oppose the Funds involvement in the workout.
In this case, the IMF retreated and made its financing
contingent on the revelation of the true reserve position.
The result was not a happy one, as investors reacted
more to the exposure of the hole (US$23 billion) than to
the announcement of the official support package (US$17
billion). Because the net effect was negative, and because
the adjustment program did not appear to be adequate to
overcome it, the package did nothing to stem the outflow of
private capital from Thailand. Only after the government
fell and a strengthened reform program was put in place
did the financial position finally stabilize (Boughton 2012,
498514).
The next potential conflict arose a few months later, in
the response to a financial crisis in South Korea. The
US government took the position that Korea needed to
undertake major structural reforms, including by opening
its markets more fully to foreign direct investment.
Throughout December 1997, while the IMF was negotiating
and renegotiating terms for a stand-by arrangement aimed
at resolving the crisis, the most senior US officials
Robert E. Rubin (secretary of the Treasury), Lawrence H.
Summers (deputy secretary) and David A. Lipton (under
secretary for international affairs), as well as President Bill
Clinton were working behind the scenes to use the crisis
as a means of forcing Korea to liberalize its economy. IMF
officials did not necessarily disagree with the liberalization
message, but they were focused more on the financial
measures that were needed to stop the bleeding of foreign
James M. Boughton 9

CIGI Papers no. 66 April 2015

exchange reserves and resolve the immediate crisis. After
some hesitation, the newly elected president of Korea, Kim
Dae-Jung, endorsed the US demands, and the program
was adopted and implemented.
Although the Korea episode was resolved to general
satisfaction, it did undermine the IMFs authority and
credibility. The US interference in the policy conditions
on the stand-by arrangement was widely reported in
news accounts and in books and other academic and
polemical writings about the crisis. Despite the resulting
pervasive condemnation, US and other creditor-country
officials were no doubt emboldened by the success of the
endeavour to insert themselves further into subsequent
negotiating situations.
In 2008, Latvia requested financial assistance from the
IMF and the EC to help resolve a banking crisis that was
threatening the national economy. Latvia had joined the
European Union in 2004 and was struggling to adhere
to the requirements for maintaining fiscal discipline,
exchange rate stability and a viable path toward adoption
of the euro. These circumstances compelled the EC to be
involved in the planning, and they compelled the IMF to
accept Latvias commitment to the euro area as a constraint
on program design.19 With exchange rate adjustment ruled
out, Latvia had to undertake severe internal devaluation
through declining wages and a rise in unemployment
above 20 percent. In this case, the country did persevere
after a change of government. Despite persistently high
unemployment, Latvia completed the program and then
joined the euro area in 2014.
These and other episodes set the stage for the creation
of the Troika in 2010. That arrangement took the role of
bilateral creditors substantially further than the earlier, ad
hoc, developments. For the first time, a formal arrangement
was established in which all three parties had to reach a
consensus on the conditions to be imposed on Greece as a
condition for the joint financing package. The arrangement
also had some unique anomalies, notably that Greece is a
member of the EC and the ECB and, thus, formally is part
of the creditor group as well as being the debtor. But the
facet that is relevant for the present analysis is that the IMF
ceded its role as the primary arbiter of policy conditions to
a wider group of official creditors.

been achieved more slowly and less completely than IMF

officials would have preferred. As the IMF staff put it,
delicately, in a 2013 report, debt restructuring had been
considered by the parties to the negotiations but had been
ruled out by the euro area (IMF 2013a, 27).20 Another
related element is that the program was constructed so
as to ensure the preservation of the euro area, without
regard to whether the crisis might have been resolved with
less pain to the Greek economy through other means. As
collateral damage, the IMFs authority and credibility have
been further diminished, and the international financial
system has thereby been further fragmented.
An important source of the problems associated with
the Troika is that it included an understanding that the
participants would reach a consensus and not air any
internal disputes publicly (IMF Independent Evaluation
Office 2014, 7). If the IMF had had the opportunity and the
will to make a public case at the outset for a substantial
restructuring of Greek debt, it would have applied
pressure on the other Troika members to at least explain
more thoroughly their own arguments for not doing so. As
it was, once the Europeans ruled it out in private, the IMF
had no practical option other than going along.21
The more general problem was that the interests of the
Troika members did not fully coincide. If all parties truly
shared the same goals just achieving the best possible
outcome for the global economic welfare, and for that
of Greece then private discussions within the group
on how best to reach the goals would be normal and
appropriate. Instead, the dominant issue, implicitly, was
how to reconcile competing goals: improving economic
welfare for Greece, the global economy and the European
Union. Conducting those discussions sub rosa meant that
the IMF would inevitably be relegated to a junior role. The
European interest in preserving the euro area was bound
to prevail.

SUMMARY AND POSSIBLE SOLUTIONS

Starting in the mid-1970s, the IMF was confronted with
the conflicting interests of commercial bank creditors
when it tried to help countries resolve balance-ofpayments problems. Gradually, the institution developed
a strategy for coping with bank creditors, with three

Who makes the decisions in such a case does matter, as

the experience with the Troika arrangement for Greece
clearly demonstrates. One element that the arrangement
has affected is the restructuring of Greek debt, which has

20 Note that the problems with the Greek program do not necessarily
invalidate the Troika concept altogether. The Troikas handling of
other European cases, notably Ireland and Portugal, was broadly
more successful.

19 According to Anders slund and Valdis Dombrovskis (2011, 42), the

IMF mission chief accepted the Latvian argument for maintaining
the peg to the euro, but most of his mission was skeptical. The
IMFs own post-mortem (IMF 2013b, 9), noted that the staff had
been particularly skeptical of the authorities ability to deliver the
fiscal contraction that would be needed in the absence of exchange
adjustment, without losing public support.

21 Paul Blustein (2015, 1) offers a blistering critique of the Funds

participation in the Troika, arguing that the institution succumbed
to pressure from powerful European policy makers, who maintained
heavy influence over the Funds levers of control.despite grave
misgivings among many of its top officials, the Fund joined in
emergency loan packages that piled debt atop of existing debts,
extracted crushingly high interest charges and imposed inordinately
harsh conditions on the countries that were borrowing the money.

10 CENTRE FOR INTERNATIONAL GOVERNANCE INNOVATION

The IMF as Just One Creditor: Whos in Charge When a Country Cant Pay?
basic elements. First, whenever possible, organize or
at least encourage a rollover of existing credit lines, so
that the IMFs financing will be fully additional to what
the country had been obtaining from the private sector.
Second, if a rollover is not forthcoming, then try to find a
way to convert maturing bank loans into other assets, viz.
negotiable securities or equities, or arrange for the debtor
to buy them back at a discount. Third, if all market-based
solutions fail, let it be known that a unilateral standstill by
the sovereign debtor will be tolerated and will not prevent
official multilateral lending. Once these elements were in
place by the end of the 1980s, banks understood that they
would have to negotiate in good faith if they hoped to
retain as much value as possible from their assets.
Resolution of that issue led to a new problem. When
market financing for developing countries resumed in
the 1990s, it was mostly through negotiable securities
rather than bank loans. The challenge then became to
ensure that sovereign debtors would be able to service
those securities on the contracted terms without resorting
to overly restrictive economic policies. When it became
obvious that international credit markets were inherently
unstable and prone to sudden adverse shifts in sentiment,
debt sustainability became an elusive goal. Over time, the
IMF again developed a three-point coping strategy. First,
design and apply metrics for assessing a countrys debt
sustainability under a range of realistic scenarios. Second,
limit large-scale lending to cases where the IMFs support
will plausibly restore debt sustainability. Third, where
necessary, organize a debt reduction (haircut) as part of
the initial program.
Conflicts with the narrow interests of official bilateral
creditors have proved to be more intractable. Moreover,
such conflicts have made application of the aforementioned
strategies more difficult. To this point in time, as evidenced
by the conflicts inherent in the management of crisis cases
such as Mexico in 1995, Thailand and Korea in 1997 and
Greece since 2010, the IMF has not developed a general
strategy for containing bilateral interference. To the
contrary, the Troika experience demonstrates a serious risk
that the IMFs views on the best way to manage a financial
crisis can be overridden by creditor capture. This risk does
not depend on an assumption that the IMF always be right
in its assessment of what is needed to resolve a crisis. All
that it means is that when the underlying interests of official
creditors might differ, a means must be sought to reconcile
those interests openly and transparently so that narrow
interests will be less likely to trump global interests.

First, formally establish the principle that creditor countries

as a group have a legitimate interest in deciding whether the
IMF should lend to a country. This principle is implicit in
the structure of the IMF, because creditors hold a majority
of the voting power on the executive board, which must
discuss and sign off on every loan request.
Because the IMFs Articles of Agreement make no
distinction between creditor and debtor countries, and
because countries do still alternate between creditor and
debtor status, any such distinction is only implicit and,
thus, is subject to various interpretations. The second
step, therefore, would be to ring-fence creditor privilege
by establishing the principle that the determination of
specific policy conditions and other elements of crisis
management are best left to the institution. The executive
board would still define the general rules and guidelines,
and executive directors would still be expected to express
their authorities views and wishes in the context of the
boards consideration of a financing request. Independent
ex parte pressure on staff or management to modify or
add program conditions would, however, be deemed
unacceptable.
Third, because deeming a practice unacceptable would
not necessarily prevent it from happening, the IMF should
develop the practice of stating its own views publicly at
the earliest practical stage of deliberations. If, for example,
the Funds management were to state publicly at the
outset that a country applying for assistance could resolve
its predicament only through a substantial reduction in the
value of its outstanding debts, it would be much harder
for a creditor country or a group of countries to block
such an outcome. At the very least, such a stance would
provoke a more open debate while it was still possible to
influence the outcome. One would not have to wait for
a post-mortem report by an evaluation team trying to
explain why the program had not succeeded.

ACKNOWLEDGEMENTS
The author is grateful to participants in seminars at Oxford
University, Indiana University and CIGI, and to three
referees for this series, for many helpful suggestions.

The IMF could reassert a global preeminence in crisis

management by adopting a three-point strategy for
defining and accounting for the legitimate interests of
bilateral creditors within a broad framework.

James M. Boughton 11

CIGI Papers no. 66 April 2015

WORKS CITED
Aricanli, Tosun, and Dani Rodrik. 1990. The Political
Economy of Turkey: Debt, Adjustment and Stability.
Basingstoke, UK: Macmillan.
slund, Anders, and Valdis Dombrovskis. 2011. How
Latvia Came Through the Financial Crisis. Washington,
DC: Peterson Institute for International Finance.
Blustein, Paul. 2015. Over Their Heads: The IMF and the
Prelude to the Euro-zone Crisis. CIGI Papers No. 60.
March. www.cigionline.org/publications/over-theirheads-imf-and-prelude-euro-zone-crisis.
Boughton, James M. 2001a. Northwest of Suez: The 1956
Crisis and the IMF. IMF Staff Papers 48 (3): 42546.
. 2001b. Silent Revolution: The International Monetary
Fund 1979-1989. Washington, DC: IMF.
. 2012. Tearing Down Walls: The International Monetary
Fund 19901999. Washington, DC: IMF.
Brooks, Skylar, Martin Guzman, Domenico Lombardi and
Joseph E. Stiglitz. 2015. Identifying and Resolving InterCreditor and Debtor-Creditor Equity Issues in Sovereign
Debt Restructuring. CIGI Policy Brief No. 53. January.
Cottarelli, Carlo, and Curzio Giannini. 2003. Bedfellows,
Hostages, or Perfect Strangers? Global Capital Markets
and the Catalytic Effect of IMF Crisis Lending. Cahiers
dEconomie Politique / Papers in Political Economy 45:
21150 (previously issued as IMF Working Paper
WP/02/193).
De Vries, Margaret Garritsen. 1985. The International
Monetary Fund 1972-1978: Cooperation on Trial. Volume I:
Narrative and Analysis. Washington, DC: IMF.
Eichengreen, Barry, and Richard Portes. 1995. Crisis? What
Crisis? Orderly Workouts for Sovereign Debtors. London:
Centre for Economic Policy Research.
IMF. 1979. Sudan: Extended Arrangement. EBS/79/250,
Suppl. 1, May 7.
. 1983. Payments Difficulties Involving Debt to
Commercial Banks. Staff Memorandum SM/83/47.
March 9.
. 2002. Access Policy in Capital Account
Crises.
http://www.imf.org/external/np/tre/
access/2003/072902.htm.
. 2003a. A Better Framework for Crisis Resolution.
Chapter 3 of Annual Report of the Executive Board for the
Financial Year Ended April 30, 2003. http://www.imf.
org/external/pubs/ft/ar/2003/eng/.

12 CENTRE FOR INTERNATIONAL GOVERNANCE INNOVATION

. 2003b. Access Policy in Capital Account Crises:

Modifications to the Supplemental Reserve Facility
(SRF) and Follow-Up Issues Related to Exceptional
Access Policy. at http://www.imf.org/external/np/
tre/access/2003/011403.htm.
. 2012. A Survey of Experiences with Emerging
Market Sovereign Debt Restructurings. Policy
Paper. June 5. www.imf.org/external/pp/longres.
aspx?id=4664.
. 2013a. Greece: Ex Post Evaluation of Exceptional
Access under the 2010 Stand-By Arrangement. IMF
Country Report No. 13/156. June. www.imf.org/
external/pubs/cat/longres.aspx?sk=40639.0.
. 2013b. Republic of Latvia: Ex Post Evaluation
of Exceptional Access under the 2008 Stand-By
Arrangement. IMF Country Report No. 13/30.
January.
www.imf.org/external/pubs/cat/longres.
aspx?sk=40276.0.
IMF, Independent Evaluation Office. 2014. IMF
Response to the Financial and Economic Crisis.
Washington, DC: IMF. www.ieo-imf.org/ieo/pages/
CompletedEvaluation227.aspx.
Kletzer, Kenneth. 2004. Sovereign Bond Restructuring,
Collective Actions Clauses and Official Crisis
Intervention. In Fixing Financial Crises in the 21st
Century, edited by Andrew Haldane. London:
Routledge, 23053.
Krueger, Anne O. 2001. International Financial
Architecture for 2002: A New Approach to Sovereign
Debt Restructuring. Speech at the American Enterprise
Institute, November 26. www.imf.org/external/np/
speeches/2001/112601.htm.
. 2002. Sovereign Debt Restructuring Mechanism:
One Year Later. Speech at the Bank of Mexico, November
12. www.imf.org/external/np/speeches/2002/111202.
htm.
Lischinsky, Bernardo. 2003. The Puzzle of Argentinas
Debt Problem: Virtual Dollar Creation? In The Crisis
That Was Not Prevented: Lessons for Argentina, the IMF,
and Globalisation, edited by Jan Joost Teunissen and
Age Akkerman. The Hague: Forum on Debt and
Development, 81100.
Schadler, Susan. 2013. Unsustainable Debt and the Political
Economy of Lending: Constraining the IMFs Role in
Sovereign Debt Crises. CIGI Paper No. 19, October.
www.cigionline.org/publications/unsustainable-debtand-political-economy-of-lending-constraining-imfsrole-sovereign-de.

The IMF as Just One Creditor: Whos in Charge When a Country Cant Pay?
Trebesch, Christoph. 2011. Debt Restructuring Delays. In
Sovereign Debt: From Safety to Default, edited by Robert
W. Kolb, 16977. Hoboken, NJ: John Wiley & Sons, Inc.
Zettelmeyer, Jeromin, Christoph Trebesch and Mitu Gulati.
2013. The Greek Debt Restructuring: An Autopsy.
Peterson Institute for International Economics Working
Paper 13-8 (August).

James M. Boughton 13

CIGI PUBLICATIONS

ADVANCING POLICY IDEAS AND DEBATE

New Thinking and the New G20 Paper Series
These papers are an output of a project that aims to promote policy and institutional innovation in
global economic governance in two key areas: governance of international monetary and financial
relations and international collaboration in financial regulation. With authors from eight countries,
the 11 papers in this series will add to existing knowledge and offer original recommendations for
international policy cooperation and institutional innovation.
Changing Global Financial Governance:
International Financial Standards and Emerging
Economies since the Global Financial Crisis
Hyoung-kyu Chey

Financial Inclusion and Global Regulatory

Standards: An Empirical Study Across
Developing Economies
Mariana Magaldi de Sousa

Internationalization of the Renminbi:

Developments, Problems and Influences
Ming Zhang

International Regulatory Cooperation on the

Resolution of Financial Institutions:
Where Does India Stand?
Renuka Sane

Capital Flows and Capital Account

Management in Selected Asian Economies
Rajeswari Sengupta and Abhijit Sen Gupta

Capital Flows and Spillovers

Sebnem Kalemli-Ozcan

Emerging Countries and Implementation:

Brazils Experience with Basels Regulatory
Consistency Assessment Program
Fernanda Martins Bandeira

The Global Liquidity Safety Net: Institutional

Cooperation on Precautionary Facilities and
Central Bank Swaps
C. Randall Henning

The Shadow Banking System of China and

International Regulatory Cooperation
Zheng Liansheng

Capital Controls and Implications for

Surveillance and Coordination:
Brazil and Latin America
Marcio Garcia

Emerging Countries and Basel III:

Why Is Engagement Still Low?
Andrew Walter

CIGI Special Reports

Essays on International Finance: Volume 1
International Cooperation and Central Banks
Harold James
The inaugural volume in the series, written by Harold James, discusses the purposes and
functions of central banks, how they have changed dramatically over the years and the
importance of central bank cooperation in dealing with international crises.
Essays on International Finance: Volume 2
Stabilizing International Finance: Can the System Be Saved?
James M. Boughton
The world economy showed remarkably strong and widespread growth throughout most of
the second half of the twentieth century. The continuation of that success, however, has been
undercut by financial instability and crisis. Weak and uncoordinated macroeconomic policies,
inappropriate exchange rate policies, inherently volatile private markets for international capital
flows, and weak regulation and oversight of highly risky investments have all played a part. To
regain the financial stability that must underpin a renewal of global economic strength will require
improvements in both policy making and the structure of the international financial system.

CIGI Papers
Development of Sustainability and Green
Banking Regulations

Laid Low: The IMF, The Euro Zone and the

First Rescue of Greece

CIGI Papers No. 65

Adeboye Oyegunle and Olaf Weber

CIGI Papers No. 61

Paul Blustein

Interest in sustainable and green financial

regulations has grown in recent years due in
part to increasing climate-change risks for the
financial sector alongside a need to integrate
this sector into the green economy. This paper
recalls sustainabilitys course from fringe issue to
central concern, and examines seven countries,
all emerging and developing, where regulatory
approaches have been implemented successfully.

This paper tells the story of the first Greek rescue,

focusing on the role played by the International
Monetary Fund (IMF), and based on interviews with
dozens of key participants as well as both public
and private IMF documents. A detailed look back
at this drama elucidates significant concerns about
the Funds governance and its management of
future crises.

Sovereign Debt Restructuring: Issues Paper

Over Their Heads: The IMF and the Prelude to

the Euro-zone Crisis

CIGI Papers No. 64

Skylar Brooks and Domenico Lombardi
This paper outlines the issues at the heart of
sovereign debt restructuring and the main
proposals for improving crisis prevention and
management in this crucial area with the aim of
facilitating the global consultations. It frames the
broad parameters of the current debate over how
best to govern sovereign debt restructuring.

Debt Reprofiling, Debt Restructuring and the

Current Situation in Ukraine
CIGI Papers No. 63
Gregory Makoff
This paper discusses debt reprofiling a
relatively light form of sovereign debt restructuring
in which the tenor of a governments liabilities are
extended in maturity, but coupons and principal
are not cut and how to distinguish one from
deeper forms of debt restructuring. It argues that
a reprofiling could have been valuable during the
IMFs initial funding for Ukraine in 2014.

CIGI Papers No. 60

Paul Blustein
The years prior to the global financial crisis were
a peculiar period for the International Monetary
Fund (IMF). It was struggling to define its role
and justify its existence even as trouble was
brewing in countries it would later help to rescue.
To understand the Funds current strengths and
weaknesses, a look back at this era is highly
illuminating. Three major developments for the IMF,
spanning the years 20052009, are chronicled.

The China (Shanghai) Pilot Free Trade Zone:

Backgrounds, Developments and Preliminary
Assessment of Initial Impacts
CIGI Papers No. 59
John Whalley
The China (Shanghai) Pilot Free Trade Zone
(SPFTZ), founded in September 2013, has
promised liberalization on capital account and
trade facilitation as its main objectives. This
paper discusses reasons why China needs such
a pilot zone after three decades of economic
development, examines the differences between
the SPFTZ and other free trade zones and
highlights the developments of the SPFTZ since
its inception. The hope is that the success of the
SPFTZ will give rise to a more balanced Chinese
economy in the following decade.

Available as free downloads at www.cigionline.org

ABOUT CIGI
The Centre for International Governance Innovation is an independent, non-partisan think tank on international
governance. Led by experienced practitioners and distinguished academics, CIGI supports research, forms networks,
advances policy debate and generates ideas for multilateral governance improvements. Conducting an active agenda
of research, events and publications, CIGIs interdisciplinary work includes collaboration with policy, business and
academic communities around the world.
CIGIs current research programs focus on three themes: the global economy; global security & politics; and international
law.
CIGI was founded in 2001 by Jim Balsillie, then co-CEO of Research In Motion (BlackBerry), and collaborates with and
gratefully acknowledges support from a number of strategic partners, in particular the Government of Canada and the
Government of Ontario.
Le CIGI a t fond en 2001 par Jim Balsillie, qui tait alors co-chef de la direction de Research In Motion (BlackBerry). Il
collabore avec de nombreux partenaires stratgiques et exprime sa reconnaissance du soutien reu de ceux-ci, notamment
de lappui reu du gouvernement du Canada et de celui du gouvernement de lOntario.
For more information, please visit www.cigionline.org.

CIGI MASTHEAD
Managing Editor, Publications

Carol Bonnett

Publications Editor

Jennifer Goyder

Publications Editor

Vivian Moser

Publications Editor

Patricia Holmes

Publications Editor

Nicole Langlois

Graphic Designer

Melodie Wakefield

Graphic Designer

Sara Moore

Executive
President

Rohinton Medhora

Vice President of Programs

David Dewitt

Vice President of Public Affairs

Fred Kuntz

Vice President of Finance

Mark Menard

Communications
Communications Manager

Tammy Bender

tbender@cigionline.org (1 519 885 2444 x 7356)

67 Erb Street West

Waterloo, Ontario N2L 6C2, Canada
tel +1 519 885 2444 fax +1 519 885 5450
www.cigionline.org