Learning From the Greeks—and Their Debt – Wall Street Journal – debt – Google News

Bruised by the traumatic experience of Greece’s two bailouts, International Monetary Fund officials floated a proposal in April that insisted distressed countries’ excessive debts be restructured before a bailout is granted, putting more of the burden on private-sector creditors.

In a riposte published this week, a group of leading authorities on sovereign debt claimed the idea goes too far.

The experts—including lawyer

Lee Buchheit,

academic

Mitu Gulati

and former IMF Deputy Managing Director

Anne Krueger

—advocate gentler treatment of private-sector creditors.

They argue that existing debtholders should be compelled to extend debt maturities by three to five years, to buy time for the country receiving a bailout.

Government debt has tied the fates of countries and banks in the euro zone since the onset of the bloc’s debt crisis. Greece’s debt restructuring, the largest ever for a sovereign state, was delayed for two years to the spring of 2012 because euro-zone banks weren’t ready to absorb the losses it involved any earlier—as the IMF admitted in a postmortem it published in June on the first Greek bailout.

Throughout that delay, the bailout, funded by the IMF and the euro zone, was directed at fully repaying private-sector creditors—which in retrospect, the report said, was a bad way to spend public money.

The IMF says its experts will continue looking into the April proposal but it doesn’t plan to make a final plan until June 2014 at the earliest.

A look at the IMF’s history reveals a perennial clash between experts who think it is better to cut debt in distressed countries sooner and others who believe restructurings should be avoided at all costs.

The IMF and the authors of this week’s paper agree on the need to have a framework in place to handle a government’s unsustainable debts before market panic sets in. But the expert group’s paper argues that the IMF’s proposed pre-emptive bailout approach “may force the sovereign debtor into an unnecessary debt restructuring.”

Debt re-profiling—pushing debt-repayment schedules out into the future—doesn’t reduce the size of the debt burden, but it immediately improves the sovereign’s ability to repay as less revenue has to be spent on interest payments.

Sure, the country’s bonds and stocks will be punished by the market because even the mildest tweak of a bond contract translates into some kind of loss for lenders. But, the expert group claims, this should be manageable and the country’s return to the bond market could be swift. Uruguay, following its 2003 debt re-profiling, was banished from capital markets for just 31 days.

The extension allowed by a debt re-profiling would also give the IMF and the government time to determine whether it is facing a liquidity or a solvency crisis, and whether a deeper cut in its debt is really needed.

While euro-zone countries crawling out of the rubble of the crisis don’t appear to be heading into a new financial meltdown, concerns over their heavy debts—and the IMF’s stance toward them—are unlikely to go away.

“The debate is directly a product of what happened in the euro zone and in particular what happened with Greece,” said Mr. Gulati of Duke University in an interview. “The IMF was drawn into providing part of the Greek bailout even though it seemed fairly clear that the debt was unsustainable. They’ve decided it’s just not in their interest to do that again.”

Mr. Gulati reads the IMF’s April paper as largely political. “It’s telling the Europeans that the IMF staff will not as easily acquiesce to providing funding to bail out private creditors in the future,” he said.

Euro-zone governments, on the other hand, want nothing to do with that approach, having declared Greece’s debt restructuring “unique and exceptional.”

Despite recurring sovereign-debt crises, and periodic efforts to standardize the official response, the bloc appears wedded to ad hoc tactics.

In any case, it is still likely that euro-zone governments’ continuing opposition to a more structured sovereign bankruptcy regime will kill plans to turn the IMF’s April proposal into a lasting legal framework.

But that doesn’t mean the euro zone will avoid the specter of more sovereign-debt crises, Mr. Gulati said.

In a number of countries, he said, “they’ll have to make the decision to somehow reduce the debt and impose cuts on private creditors.”

Write to Matina Stevis at matina.stevis@wsj.com