More DSA transparency, please Financial Times

Sean Hagan is a former general adviser to the IMF. He is currently Professor of Practice in Georgetown Law and Counsel to Rothschild & Co.

The most important feature of corporate insolvency law is the “trigger”—when is the litigation supposed to start? Unfortunately there is no sovereign insolvency lawso, for better or worse, it is the IMF that actually acts as the trigger.

Why? Because when the country unable to service their debts, he usually asks for money from the IMF. This is not an easy decision for any finance minister. While they know that IMF support will come with painful consequences, a default and debt restructuring could lead to a loss of hard-earned creditworthiness, disrupt the economy and could well cost the minister his job.

But IMF also a difficult decision to be made. He also prefers to avoid restructuring given the economic and financial risks. However, if the IMF concludes that a country’s debt burden is so high that it cannot fully repay its creditors under any possible scenario, it will make restructuring a condition of its bailout.

That’s why the IMFDebt sustainability analysis” is a de facto trigger for government restructuring.

To say that DSAs are difficult is an understatement. A company is insolvent when its liabilities exceed its assets. Trying to estimate the value of a country’s “assets” is difficult when its tax options are, at least in theory, inexhaustible. As a result, the IMF estimate includes number of projections around things like economic growth and the highest achievable budget surplus.

This is especially difficult. There comes a point when tax increases become counterproductive because they stifle growth. Cutting spending can hit the economy instantly. Moreover, not all governments have the same political capacity to sustain budget surpluses over the long term. Argentina is not Latvia. Finally, the IMF estimates the country’s overall financing needs and the projected cost of future borrowing.

If this all seems a bit judgmental, it’s because it is. Despite the complexity of the Fund’s DSA methodologythe resulting estimates of debt sustainability are, as economists say, “probabilistic”.

The IMF definition that debt No stability is quite important. Restructuring is no longer a question of “if” – it is now a question of “when” and “how”.

In addition to launching the debt restructuring process, it defines the key characteristics of the IMF program, including the pace of “fiscal adjustmentMoreover, since the program’s vital goal is to restore debt sustainability, it effectively determines the size of the “restructuring package”, i.e. the total amount of debt relief needed.

At the moment, delays are costly. While it may seem obvious to a country—a bounce-back government in desperation will inflict unnecessary pain on the economy in a futile attempt to service an unserviceable level of debt—this is true for creditors as well.

Why? If the debts are unsustainable and the IMF continues to provide financing to meet maturing obligations, it will effectively replace those creditors. Because of IMF preferred creditor status, the remaining creditors will have to contribute more to provide needed debt relief.

Not surprisingly, lenders often argue loudly over DSAs, which basically determine how much money they can repay. And it must be admitted that the accuracy of the IMF’s macroeconomic forecasts is hardly flawless. Indeed, some argue that the DSA should therefore be the subject of “negotiation” between the IMF and the country’s creditors.

It would be . . problematic While DSAs are adopted in the context of IMF lending decisions, they must be the result of the independent judgment of the IMF. DSA is the most important anchor of the whole process. Despite their shortcomings, discussing DSAs could compromise their legitimacy. An already uncertain process can become chaotic. As noted about the role that Supreme Courts play: they are not final because they are right; rather, they are right because they are final.

But the IMF can and should take steps to increase the transparency of the process.

Private lenders typically only see a DSA after the IMF’s executive board approves the program and the full documents are released. This is different from other government lenders, who usually receive at least some of the important elements of the DSA on a confidential basis at an earlier stage.

This backlog creates delays. Private lenders cannot start negotiations if they are not clear about what constitutes a restructuring package. As with corporate bankruptcies, once the sovereign debt restructuring process is launched, everyone just wants to get it done quickly. The government is seeking to restore market access. Private creditors are looking forward to a recovery in the market value of their claims, which will occur after the restructuring is completed and debts become sustainable again.

Therefore, the IMF should expedite the process by publishing the key elements of the DSA after agreement on staff levels is reached so that official and private creditors receive this information at the same time.

It’s a trifle, but considering mess the sovereign debt restructuring process is underway right now, every little thing helps.