Rules, discretion, and authority in international financial reform

Journal of International Economic Law

Volumn 4, Issue 4, 2001, Pages 613-682

  Tarullo, Daniel K ^a  

^a NONE

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EID: 0035734978     PISSN: 13693034     EISSN: None     Source Type: Journal    
DOI: 10.1093/jiel/4.4.613     Document Type: Article

References (280)

1. See Michael Bordo and Hugh Rockoff, 'The Gold Standard as a "Good Housekeeping Seal of Approval"',56 J of Econ History 389 (1996) (suggesting that sovereign debt in pre-1914 period of substantial international capital flows without international institution such as IMF had higher risk premiums attached to it than did sovereign debt of developing countries in period preceding Asia financial crisis).
2. The Commission was created in November 1998 by legislation authorizing an increased quota contribution by the United States to the International Monetary Fund. US Pub L 105-277, Div A, §101(d) [Title VI, §603], 21 October 1998, 112 Stat 2681-220. The Commission issued its report in March 2000. Report of the International Financial Institution Advisory Commission (2000) (hereinafter 'IFIAC Report'). Members of the Commission were severally appointed by the leadership of the Senate and the House. The existence of Republican majorities in both Houses gave Republicans power to appoint a majority of the commissioners. The IFIAC proposals thus represent what was, so long as President Clinton was in office, a kind of counter-official position, in opposition to the Clinton Treasury Department and the IMF.
3. See Walter Bagehot, Lombard Street: A Description of the Money Market (New York: Scribner, Armstrong 1873) 196-98.
4. IFIAC Report, above n 2, at 46-47.
5. Ibid. The maturities are to be 120-240 days. The amounts are not definitively proposed, though a limit of a year's worth of tax revenues is suggested.
6. Ibid at 41.
7. Ibid at 44-45.
8. As discussed in the next sub-part, the Report contemplates an exception 'where the crisis poses a threat to the global economy'. Ibid at 43. Depending on the breadth of this phrase and, significantly, who is authorized to interpret it, the exception could very easily operate to negate the intended effects of the IFIAC rules proposal.
9. See Thomas Kampffmeyer, Towards a Solution of the Debt Crisis: Applying the Concept of Corporate Composition with Creditors (Berlin: German Development Institute 1987); Kunibert Raffer, 'Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face', 18 World Dev 301 (1990); Jeffrey Sachs, 'Do We Need an International Lender of Last Resort?' (1995) http://www2.cid.harvard.edu/cidpapers/intllr.pdf (visited 7 October 2001); Arjun Sengupta, 'A Proposal for a Debt-Adjusted Facility in the IMF', 11 World Economy 165 (1988).
10. See Thomas Kampffmeyer, Towards a Solution of the Debt Crisis: Applying the Concept of Corporate Composition with Creditors (Berlin: German Development Institute 1987); Kunibert Raffer, 'Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face', 18 World Dev 301 (1990); Jeffrey Sachs, 'Do We Need an International Lender of Last Resort?' (1995) http://www2.cid.harvard.edu/cidpapers/intllr.pdf (visited 7 October 2001); Arjun Sengupta, 'A Proposal for a Debt-Adjusted Facility in the IMF', 11 World Economy 165 (1988).
11. See Thomas Kampffmeyer, Towards a Solution of the Debt Crisis: Applying the Concept of Corporate Composition with Creditors (Berlin: German Development Institute 1987); Kunibert Raffer, 'Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face', 18 World Dev 301 (1990); Jeffrey Sachs, 'Do We Need an International Lender of Last Resort?' (1995) http://www2.cid.harvard.edu/cidpapers/intllr.pdf (visited 7 October 2001); Arjun Sengupta, 'A Proposal for a Debt-Adjusted Facility in the IMF', 11 World Economy 165 (1988).
12. See Thomas Kampffmeyer, Towards a Solution of the Debt Crisis: Applying the Concept of Corporate Composition with Creditors (Berlin: German Development Institute 1987); Kunibert Raffer, 'Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face', 18 World Dev 301 (1990); Jeffrey Sachs, 'Do We Need an International Lender of Last Resort?' (1995) http://www2.cid.harvard.edu/cidpapers/intllr.pdf (visited 7 October 2001); Arjun Sengupta, 'A Proposal for a Debt-Adjusted Facility in the IMF', 11 World Economy 165 (1988).
13. See Sachs, above n 9.
14. See Michel Camdessus, Managing Director, International Monetary Fund, 'Capital Flows, Crises, and the Private Sector', Remarks to the Institute of International Bankers (1 March 1999) http:// www.imf.org/external/np/speeches/1999/030199.HTM (visited 20 August 2001).
15. See Steven L. Schwarcz, 'Solving Debt Restructuring: A Bankruptcy Reorganization Approach', 85 Corn L Rev 956 (2000).
16. Frederick Schauer, Playing by the Rules: A Philosophical Examination of Rule-based Decision-making in Law and Life (Oxford, New York: Oxford University Press 1991) 143.
17. Distinguishing between economic and legal rationales for rules is obviously a bit simplistic. The focus of 'economic' rationales on optimal resource allocation and the creation of incentives for market actors to promote that outcome has long since been incorporated by many judges and legal academics into their own reasoning. Still, I hope the ensuing discussion will bear out my intuition that this distinction is useful for heuristic purposes.
18. See IFIAC Report, above n 2, at 33 ('The importance of the moral hazard problems cannot be overstated'). There is, in fact, considerable disagreement on the relative degree of the moral hazard problem created by IMF lending in the past. See discussion in Part II.A., below. Even the Meltzer Commission hedged a bit on the issue. The paragraph following the unequivocal statement just quoted begins 'Whether or not the IMF contributed to moral hazard in Asia . . .', ibid (emphasis added). Its proposals however, seem to rest on that earlier, unqualified assertion. In a paper prepared for a conference sponsored by the Federal Reserve Bank of Chicago, Professor Meltzer stated that moral hazard 'was clearly the case, ex ante and ex post in Mexico and in Asia'. Allan H. Meltzer, 'What's Wrong with the IMF? What Would be Better?' (unpublished paper 1998) at 14. It may be that Professor Meltzer's views evolved during his chairmanship of the Commission. Alternatively, as is frequently the case in documents with collective authorship, the qualification in the IFIAC Report may reflect some differences among Commission members.
19. See IFIAC Report, above n 2, at 33; V. V. Chari and Patrick J. Kehoe, 'Asking the Right Questions About the IMF', in Federal Reserve Bank of Minneapolis, 1998 Annual Report Special Issue (1998). A contrary view has been expressed by some official observers. See 'Learning the Lessons of Financial Crises: The Roles of the Public and Private Sectors', Remarks of Stanley Fischer, First Deputy Managing Director, International Monetary Fund, 9 December 1999 http://www.imf.org/external/ np/speeches/1999/120999.htm (visited 20 August 2001).
20. See IFIAC Report, above n 2, at 33; V. V. Chari and Patrick J. Kehoe, 'Asking the Right Questions About the IMF', in Federal Reserve Bank of Minneapolis, 1998 Annual Report Special Issue (1998). A contrary view has been expressed by some official observers. See 'Learning the Lessons of Financial Crises: The Roles of the Public and Private Sectors', Remarks of Stanley Fischer, First Deputy Managing Director, International Monetary Fund, 9 December 1999 http://www.imf.org/external/ np/speeches/1999/120999.htm (visited 20 August 2001).
21. The combined US and IMF assistance package for Mexico was about $50 billion.
22. The IFIAC Report, for example, takes little account of this development. See IFIAC Report, above n 2 at 34-35.
23. IFIAC is somewhat vague as to the legal source and status of the rules it proposes. For purposes of discussion, I have assumed that the proposed rules will be binding upon the IMF through some combination of amendments to the IMF Articles of Agreement and national law binding Executive Directors to vote in accordance with the rules.
24. The argument in the text based on rational expectations assumes that IMF officials are trying to act in the public interest, rather than that they are craven or incompetent.
25. The IFIAC proposal would add specific policy requirements to the lender-of-last resort approach that proponents believe would reduce financial instability. The banking requirements would mitigate another moral hazard - that which arises when a country explicitly or implicitly guarantees foreign currency borrowing by its banks.
26. In the context of emerging markets, contagion is 'best defined as a significant increase in cross-market linkages after a shock to an individual country (or group of countries), as measured by the degree to which asset prices or financial flows move together across markets relative to this comovement in tranquil times'. Rudiger Dornbusch, Yung Chul Park, and Stijn Claessens, 'Contagion: Understanding How It Spreads', 15 World Bank Research Observer 177 (2000) at 178. Economists conventionally distinguish two types of contagion - that arising from interdependence in the real economies of emerging markets (e.g. reduced exports to a crisis-ridden country) and that arising from investor behavior (e.g. risk-averse withdrawal of investments from other emerging markets because of insufficient information as to whether these markets share vulnerabilities of a crisis-afflicted market). Ibid at 179.
27. In the context of emerging markets, contagion is 'best defined as a significant increase in cross- market linkages after a shock to an individual country (or group of countries), as measured by the degree to which asset prices or financial flows move together across markets relative to this comovement in tranquil times'. Rudiger Dornbusch, Yung Chul Park, and Stijn Claessens, 'Contagion: Understanding How It Spreads', 15 World Bank Research Observer 177 (2000) at 178. Economists conventionally distinguish two types of contagion - that arising from interdependence in the real economies of emerging markets (e.g. reduced exports to a crisis-ridden country) and that arising from investor behavior (e.g. risk-averse withdrawal of investments from other emerging markets because of insufficient information as to whether these markets share vulnerabilities of a crisis- afflicted market). Ibid at 179.
28. For a description of collective action and clauses, see the discussion in Part III. C, below.
29. During the 1990s, net flows of capital to developing countries from bond financing exceeded net bank lending to developing countries by a margin of over 50 percent, approximately $300 billion in net bond flows compared to approximately 8190 billion in net bank lending. Perhaps most notably, while there was a net outflow of bank lending from developing countries of 811.4 billion in 1999 in the wake of the Asian crisis, net capital flows from bond financing increased by 825 billion. See World Bank, Global Development Finance 2000 (2000) at 36.
30. See Lee C. Buchheit, 'A Lawyer's Perspective on the New International Financial Architecture', [1999] J Int'l Bank L 225; Barry Eichengreen and Richard Portes, 'Debt Restructuring With and Without the IMF', in International Financial Institutions Advisory Commission, Expert Papers (2000) at 15; Andrew Yianni, 'Resolution of Sovereign Financial Crises - Evolution of the Private Sector Restructuring Process', (6) Financial Stability Rev 78-84 (June 1999).
31. See Lee C. Buchheit, 'A Lawyer's Perspective on the New International Financial Architecture', [1999] J Int'l Bank L 225; Barry Eichengreen and Richard Portes, 'Debt Restructuring With and Without the IMF', in International Financial Institutions Advisory Commission, Expert Papers (2000) at 15; Andrew Yianni, 'Resolution of Sovereign Financial Crises - Evolution of the Private Sector Restructuring Process', (6) Financial Stability Rev 78-84 (June 1999).
32. See Lee C. Buchheit, 'A Lawyer's Perspective on the New International Financial Architecture', [1999] J Int'l Bank L 225; Barry Eichengreen and Richard Portes, 'Debt Restructuring With and Without the IMF', in International Financial Institutions Advisory Commission, Expert Papers (2000) at 15; Andrew Yianni, 'Resolution of Sovereign Financial Crises - Evolution of the Private Sector Restructuring Process', (6) Financial Stability Rev 78-84 (June 1999).
33. See Samuel E. Goldman, 'Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt Restructuring', 5 UCLA J Int'l & Foreign Aff 159 (2000). In Elliott Associates, L.P. v Banco de la Nacion, 194 F3d 363 (US 2d Cir 1999), the court upheld the right of a fund that purchased sovereign debt at distressed levels to sue for the full face value of the debt, against a claim that New York champerty law forbade the fund's action because it was a purchase with an intent to sue. For a discussion of this case and its implications, see Ruddick C. Lawrence, 'Champerty a "New" Issue for Lenders', 224 New York L J (25 September 2000), at sl.
34. See Samuel E. Goldman, 'Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt Restructuring', 5 UCLA J Int'l & Foreign Aff 159 (2000). In Elliott Associates, L.P. v Banco de la Nacion, 194 F3d 363 (US 2d Cir 1999), the court upheld the right of a fund that purchased sovereign debt at distressed levels to sue for the full face value of the debt, against a claim that New York champerty law forbade the fund's action because it was a purchase with an intent to sue. For a discussion of this case and its implications, see Ruddick C. Lawrence, 'Champerty a "New" Issue for Lenders', 224 New York L J (25 September 2000), at sl.
35. There were fewer legal problems for sovereigns under the nineteenth- and early twentieth-century rule in most countries that granted sovereigns absolute immunity from suit. Under those legal circumstances, the fear of foreclosure from private capital markets and pressure from the US State Department or the UK Foreign Office were the principal disincentives for sovereigns to declare repayments moratoria. The creation of 'commercial' or other exceptions in the Foreign Sovereign Immunities Act and parallel doctrines in other countries has added legal concerns to reputational and political ones. See 28 United States Code (USC) §1605(a)(2).
36. Schauer, above n 13, at 232.
37. Ironically, international bankruptcy proponents also urge that the IMF be granted the discretion to impose a stay on the debts of emerging market countries.
38. One example is the proposal by Meltzer and fellow Commission member Charles Calomiris to abolish the Exchange Stabilization Fund. Charles W. Calomiris and Allan H. Meltzer, Reforming the IMF (unpublished paper) http://www.gsia.cmu.edu/afs/andrew/gsia/meltzer/reforming_the_imf.pdf. This US Treasury account of approximately 830 billion was historically used for exchange rate interventions, but was then used to support Mexico during the 1994-95 peso crisis and as a source of contingent financing for Korea and Indonesia during the 1997-98 crisis. Use of the Exchange Stabilization Fund is governed by 31 United States Code (USC) §5302.
39. IFIAC Report, above n 2, at 48.
40. Ibid.
41. The concept of 'variance' is taken from Schauer, above, n 13, at 143-44.
42. See Richard B. Stewart, 'The Reformation of American Administrative Law', 88 Harv L Rev 1669 (1975).
43. Even if all money center countries cooperated, offshore financial centers that did not recognize, for example, a stay promulgated by the IMF could complicate matters significantly.
44. As discussed in Part III, some of the elements of the rules-proposals may - when detached from a full rules-system - be useful stabilizing devices.
45. The adjective 'governmental' in the text should be read to include officials of international organizations such as the IMF or private individuals to whom dispute settlement functions have been committed under applicable arbitration clauses.
46. 12 United States Code (USC) §1842 (1994).
47. Of course, it is considerably easier to conclude that a certain level of borrowing was 'excessive' after a financial crisis has shown the repayment of the borrowings to be problematic.
48. Rational expectations theory may prescribe similarly indirect rules in other areas in which time inconsistency problems are significant. Thus monetary policy 'rules' - whether self-imposed by a central bank or imposed from without - are intended to affect market actors' expectations of future monetary policy moves by the central bank and thereby to affect the pricing behavior of those actors. See Finn Kylund and Edmund Prescott, 'Rules Rather than Discretion: The Inconsistency of Optimal Plans', 85 J Pol Economy 473 (1977). One academic with experience as Vice Chairman of the Federal Reserve Board has suggested that the interplay between central bank credibility and private market actors is best understood as an example of adaptive, rather than rational, expectations. See Alan S. Blinder, Central Banking in Theory and Practice (Cambridge, MA: MIT Press 1998) 44. As discussed below, Ben Bernanke, Blinder's Princeton colleague and sometime co-author, has reached a similar conclusion.
49. Rational expectations theory may prescribe similarly indirect rules in other areas in which time inconsistency problems are significant. Thus monetary policy 'rules' - whether self-imposed by a central bank or imposed from without - are intended to affect market actors' expectations of future monetary policy moves by the central bank and thereby to affect the pricing behavior of those actors. See Finn Kylund and Edmund Prescott, 'Rules Rather than Discretion: The Inconsistency of Optimal Plans', 85 J Pol Economy 473 (1977). One academic with experience as Vice Chairman of the Federal Reserve Board has suggested that the interplay between central bank credibility and private market actors is best understood as an example of adaptive, rather than rational, expectations. See Alan S. Blinder, Central Banking in Theory and Practice (Cambridge, MA: MIT Press 1998) 44. As discussed below, Ben Bernanke, Blinder's Princeton colleague and sometime co-author, has reached a similar conclusion.
50. The rule cannot be intended to deter IMF lending as such, since such lending would pose no moral hazard concerns were lending practices in international financial markets to fully internalize the risks associated with that lending. While the tenor of the IFIAC Report leads one to believe that the Meltzer Commission majority would favor restraints on IMF lending in any case, the rationale for the restraints would have to be different.
51. A parallel argument against the use of rules in monetary policy may be found in a rather unexpected source. See F. A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press 1960) 336.
52. See IFIAC Report, above n 2, at 122 (Dissenting Statement) (hereinafter 'IFIAC dissent'); Barry Eichengreen and Richard Portes, above n 25, at 3.
53. See Steven B. Kamin and Karsten von Kleist, 'The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s' (Board of Governors of the Federal Reserve System International Finance Discussion Paper No 653, November 1999) http://www.federalreserve.gov/pubs/ifdp/1999/ 653/ifdp653.pdf (visited 20 August 2001). One paper unequivocally rejects the hypothesis of moral hazard effect following the Mexican bail-out and suggests instead that 'buoyant international liquidity conditions' accounted for the decline in emerging market bond spreads. 'Testing for "Moral Hazard" in Emerging Markets Lending' (Institute of International Finance Research Paper No. 99-1, 1999). The source of this paper is an association of large financial institutions which has consistently argued against imposition of additional costs upon creditors of sovereigns and in favor of continued IMF packages for troubled sovereigns. Two articles in refereed journals lean in different directions on the role or moral hazard. See Ha-Joon Chang, 'The Hazard of Moral Hazard: Untangling the Asia Crisis', 28 World Development 775 (2000) (moral hazard explanation empirically weak); Lucio Sarno and Mark P. Taylor, 'Moral Hazard, Asset Price Bubbles, Capital Flows, and the East Asian Crisis: The First Tests', 18 J Int'l Money and Finance 637 (1999) (evidence of stock market bubbles in pre-crisis East Asian countries consistent with hypothesis of moral hazard problem in financial intermediation).
54. See Steven B. Kamin and Karsten von Kleist, 'The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s' (Board of Governors of the Federal Reserve System International Finance Discussion Paper No 653, November 1999) http://www.federalreserve.gov/pubs/ifdp/1999/ 653/ifdp653.pdf (visited 20 August 2001). One paper unequivocally rejects the hypothesis of moral hazard effect following the Mexican bail-out and suggests instead that 'buoyant international liquidity conditions' accounted for the decline in emerging market bond spreads. 'Testing for "Moral Hazard" in Emerging Markets Lending' (Institute of International Finance Research Paper No. 99-1, 1999). The source of this paper is an association of large financial institutions which has consistently argued against imposition of additional costs upon creditors of sovereigns and in favor of continued IMF packages for troubled sovereigns. Two articles in refereed journals lean in different directions on the role or moral hazard. See Ha-Joon Chang, 'The Hazard of Moral Hazard: Untangling the Asia Crisis', 28 World Development 775 (2000) (moral hazard explanation empirically weak); Lucio Sarno and Mark P. Taylor, 'Moral Hazard, Asset Price Bubbles, Capital Flows, and the East Asian Crisis: The First Tests', 18 J Int'l Money and Finance 637 (1999) (evidence of stock market bubbles in pre-crisis East Asian countries consistent with hypothesis of moral hazard problem in financial intermediation).
55. See Steven B. Kamin and Karsten von Kleist, 'The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s' (Board of Governors of the Federal Reserve System International Finance Discussion Paper No 653, November 1999) http://www.federalreserve.gov/pubs/ifdp/1999/ 653/ifdp653.pdf (visited 20 August 2001). One paper unequivocally rejects the hypothesis of moral hazard effect following the Mexican bail-out and suggests instead that 'buoyant international liquidity conditions' accounted for the decline in emerging market bond spreads. 'Testing for "Moral Hazard" in Emerging Markets Lending' (Institute of International Finance Research Paper No. 99-1, 1999). The source of this paper is an association of large financial institutions which has consistently argued against imposition of additional costs upon creditors of sovereigns and in favor of continued IMF packages for troubled sovereigns. Two articles in refereed journals lean in different directions on the role or moral hazard. See Ha-Joon Chang, 'The Hazard of Moral Hazard: Untangling the Asia Crisis', 28 World Development 775 (2000) (moral hazard explanation empirically weak); Lucio Sarno and Mark P. Taylor, 'Moral Hazard, Asset Price Bubbles, Capital Flows, and the East Asian Crisis: The First Tests', 18 J Int'l Money and Finance 637 (1999) (evidence of stock market bubbles in pre-crisis East Asian countries consistent with hypothesis of moral hazard problem in financial intermediation).
56. See Steven B. Kamin and Karsten von Kleist, 'The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s' (Board of Governors of the Federal Reserve System International Finance Discussion Paper No 653, November 1999) http://www.federalreserve.gov/pubs/ifdp/1999/ 653/ifdp653.pdf (visited 20 August 2001). One paper unequivocally rejects the hypothesis of moral hazard effect following the Mexican bail-out and suggests instead that 'buoyant international liquidity conditions' accounted for the decline in emerging market bond spreads. 'Testing for "Moral Hazard" in Emerging Markets Lending' (Institute of International Finance Research Paper No. 99-1, 1999). The source of this paper is an association of large financial institutions which has consistently argued against imposition of additional costs upon creditors of sovereigns and in favor of continued IMF packages for troubled sovereigns. Two articles in refereed journals lean in different directions on the role or moral hazard. See Ha-Joon Chang, 'The Hazard of Moral Hazard: Untangling the Asia Crisis', 28 World Development 775 (2000) (moral hazard explanation empirically weak); Lucio Sarno and Mark P. Taylor, 'Moral Hazard, Asset Price Bubbles, Capital Flows, and the East Asian Crisis: The First Tests', 18 J Int'l Money and Finance 637 (1999) (evidence of stock market bubbles in pre-crisis East Asian countries consistent with hypothesis of moral hazard problem in financial intermediation).
57. See IFIAC dissent, above n 43, at 122 (skeptical of relative importance of moral hazard); Morris Goldstein, The Asian Financial Crisis: Causes, Cures, and System Implementation (Washington: Institute for International Economics 1998) (moral hazard one among many causes). The official position seems to be that moral hazard was not an important contributing factor to the Asia crisis, but it is a problem to be addressed in the future. See Stanley Fischer, 'On the Need for an International Lender of Last Resort', 13 J Econ Perspectives 85 (1999) at 92-94. The one country about which there is apparent consensus that moral hazard played a key role is Russia. There, however, the circumstance may have been less a borrower too big to fail than a borrower too nuclear to fail (at least for a time), as the IFIAC dissenters have cleverly put it. See IFIAC dissent, above n 43, at 122.
58. See IFIAC dissent, above n 43, at 122 (skeptical of relative importance of moral hazard); Morris Goldstein, The Asian Financial Crisis: Causes, Cures, and System Implementation (Washington: Institute for International Economics 1998) (moral hazard one among many causes). The official position seems to be that moral hazard was not an important contributing factor to the Asia crisis, but it is a problem to be addressed in the future. See Stanley Fischer, 'On the Need for an International Lender of Last Resort', 13 J Econ Perspectives 85 (1999) at 92-94. The one country about which there is apparent consensus that moral hazard played a key role is Russia. There, however, the circumstance may have been less a borrower too big to fail than a borrower too nuclear to fail (at least for a time), as the IFIAC dissenters have cleverly put it. See IFIAC dissent, above n 43, at 122.
59. The IFIAC proposal has problems even if one accepts moral hazard as a key determinant of national liquidity crises. The omission of a requirement that countries borrowing from the IMF adopt prudent and sustainable macroeconomic policies seems particularly odd.
60. A succinct statement of the characteristics of financial markets which makes them prone to instability, especially internationally, is provided in Sahoko Kaji, 'What Can Countries Do to Avoid a Financial Crisis?', 24 World Economy 567, 573-74 (2001).
61. Not everyone agrees that the rush to the exits would be accelerated if a bankruptcy-type system were in place. Some observers have argued that the very existence of a rules system will inhibit a rush to the exits because creditors would know that officials had the capacity to impose a stay. See Marcus Miller and Joseph Stiglitz, 'Bankruptcy Protection Against Macroeconomic Shocks: The Case for a "Super Chapter 11"' (unpublished paper presented at the World Bank Conference on Capital Flows, Financial Crises, and Policies, 15-16 April 1999). As Barry Eichengreen has pointed out, however, this optimistic conclusion rests on some very demanding assumptions, and thus the concern expressed in the text is 'not easily dismissed'.
62. Barry Eichengreen, Can the Moral Hazard Caused by IMF Bailouts be Reduced? (Geneva: International Center for Monetary and Banking Studies, 2001) 24.
63. See IFIAC dissent, above n 43, at 122 ('limiting Fund activity to any set of prequalifying criteria would almost certainly preclude its supporting countries of great systemic importance and thereby substantially increase the risk of global economic disorder').
64. See Curzio Giannini, 'Enemy of None but a Common Friend of All?': An International Perspective on the Lender-of-Last-Resort Function 12-13 (IMF Working Paper WP/99/10, 1999) http:// www.imf.org/external/pubs/ft/wp/1999/wp9910.pdf (visited 20 August 2001).
65. The conflict between the policy aims of lenders of last resort (and 'quasi' lenders of last resort such as the IMF) is nicely illustrated in Deputy Managing Director Stanley Fischer's presentation to the Meltzer Commission. Fischer noted that the Fund's Supplemental Reserve Facility was intended for use 'when a country's outflows are large enough to create a risk of contagion that could threaten the international monetary system'. Stanley Fischer, Presentation to the International Financial Advisory Commission, 2 February 2000, at 7 http://www.imf.org/external/np/speeches/2000/020200.htm (visited 20 August 2001). However '[t]o minimize moral hazard, a member using the SRF is encouraged to maintain the participation of both official and private creditors' and a substantial surcharge is added to the regular rate of charge on IMF loans. Ibid. But if private creditors have good reason to believe that the Fund regards a financially troubled sovereign as posing a risk of contagion, they may continue to roll over loans to that sovereign on the assumption that the Fund will take necessary steps to forestall the feared contagion. In these circumstances, it is hard to see how moral hazard is minimized.
66. See Hali J. Edison, 'Do Indicators of Financial Crises Work? An Evaluation of an Early Warning System' (Board of Governors of the Federal Reserve System International Finance Discussion Paper No 675, 2000) http://www.federalreserve.gov/pubs/ifdp/2000/675/ifdp675.pdf (visited 20 August 2001).
67. The first explicit, public statement of the constructive ambiguity policy was presented in Congressional testimony by Gerald Corrigan, then President of the Federal Reserve Bank of New York. Testimony of Gerald Corrigan before the Committee on Banking, Housing and Urban Affairs, United States Senate, 101st Cong, 2d Sess, 3 May 1990.
68. Goodhart and Schoenmaker challenge, on both positive and normative grounds, the assumption that only illiquid but solvent banks customarily receive lender-of-last-resort assistance. Charles Goodhart and Dirk Schoenmaker, 'Should the Functions of Monetary Policy and Banking Supervision Be Separated?', 47 Oxford Economic Papers 539 (1995) at 548-49.
69. Charles Enoch, Peter Stella, and May Khamis, 'Transparency and Ambiguity in Central Bank Safety Net Operations' (IMF Working Paper WP/97/138, 1997) at 13. http://www.imf.org/external/pubs/ ft/wp/wp97138.pdf (visited 20 August 2001).
70. See Eichengreen, above n 48, at 17; Fischer, above n 51('[i]t is doubtful that the international community would be indifferent to the fate of countries that do not meet the prequalification requirements').
71. See Kenneth Rogoff, 'International Institutions for Reducing Global Financial Instability', 13 J Econ Perspectives 21 (1999) at 33 (arguing that various proposals limiting IMF assistance are flawed because they do 'nothing to change the fundamental incentives that draw [the IMF and G-7] into crises now'). The Treasury Department has turned the IFIAC's arguments against itself, asserting that the IFIAC proposals will increase moral hazard by leading market actors to expect lending to prequalified countries regardless of their economic policies. United States Department of the Treasury, Response to the Report of the International Financial Institutions Advisory Commission, 8 June 2000, at 7-http://www.treas.gov/press/releases/docs/response.pdf (visited 20 August 2001). Treasury may have been too clever by half, though, insofar as its debater-like rejoinder supports the fundamental proposition that moral hazard is an important factor in lending to emerging markets, a proposition generally deemphasized in official comments on international financial reform.
72. See Kenneth Rogoff, 'International Institutions for Reducing Global Financial Instability', 13 J Econ Perspectives 21 (1999) at 33 (arguing that various proposals limiting IMF assistance are flawed because they do 'nothing to change the fundamental incentives that draw [the IMF and G-7] into crises now'). The Treasury Department has turned the IFIAC's arguments against itself, asserting that the IFIAC proposals will increase moral hazard by leading market actors to expect lending to prequalified countries regardless of their economic policies. United States Department of the Treasury, Response to the Report of the International Financial Institutions Advisory Commission, 8 June 2000, at 7-http://www.treas.gov/press/releases/docs/response.pdf (visited 20 August 2001). Treasury may have been too clever by half, though, insofar as its debater-like rejoinder supports the fundamental proposition that moral hazard is an important factor in lending to emerging markets, a proposition generally deemphasized in official comments on international financial reform.
73. IFIAC Report, above n 2 at 7.
74. See Barry Eichengreen and Richard Portes, Crisis? What Crisis? Orderly Workouts for Sovereign Debtors (London: Centre for Economic Policy Research 1995) 11-14. Professor Schwarcz disagrees with this point. See Schwarcz, above n 12, at 974.
75. See Marcus Miller and Joseph Stiglitz, above, n 48; Schwarcz, above, n 12, at 971.
76. 11 United States Code (USC §1129(a)(7) (1994).
77. Gordon Bermant and Ed Flynn, 'Outcomes of Chapter 11 Cases: U.S. Trustee Database Sheds New Light on Old Questions', 17 Am Bankr Inst J 8 (1998). Other studies suggest that the 'failure' rate for companies entering Chapter 11 is even higher. See Report of the National Bankruptcy Review Commission, Vol 1 (1997) 308. Moreover, data compiled by the Administrative Office of United States Courts shows that between seventy-five and eighty percent of all business bankruptcy filings are Chapter 7 filings from the outset. See United States Trustee Program, Total Bankruptcy Filings http://www.usdoj.gov/ust/statistics/stats-new/national/06national.htm (visited 20 August 2001).
78. Gordon Bermant and Ed Flynn, 'Outcomes of Chapter 11 Cases: U.S. Trustee Database Sheds New Light on Old Questions', 17 Am Bankr Inst J 8 (1998). Other studies suggest that the 'failure' rate for companies entering Chapter 11 is even higher. See Report of the National Bankruptcy Review Commission, Vol 1 (1997) 308. Moreover, data compiled by the Administrative Office of United States Courts shows that between seventy-five and eighty percent of all business bankruptcy filings are Chapter 7 filings from the outset. See United States Trustee Program, Total Bankruptcy Filings http://www.usdoj.gov/ust/statistics/stats-new/national/06national.htm (visited 20 August 2001).
79. Gordon Bermant and Ed Flynn, 'Outcomes of Chapter 11 Cases: U.S. Trustee Database Sheds New Light on Old Questions', 17 Am Bankr Inst J 8 (1998). Other studies suggest that the 'failure' rate for companies entering Chapter 11 is even higher. See Report of the National Bankruptcy Review Commission, Vol 1 (1997) 308. Moreover, data compiled by the Administrative Office of United States Courts shows that between seventy-five and eighty percent of all business bankruptcy filings are Chapter 7 filings from the outset. See United States Trustee Program, Total Bankruptcy Filings http://www.usdoj.gov/ust/statistics/stats-new/national/06national.htm (visited 20 August 2001).
80. 11 United States Code (USC) §1129 (1994).
81. US House of Representatives Report No 95-595, 95th Cong., 1st Sess 224 (1977).
82. See Peter Pantaleo and Barry Ridings, 'Reorganization Value', 51 Bus Law 419 (1996).
83. 11 United States Code (USC) §364(a) (1994).
84. 11 United States Code (USC) §503(b) (1994).
85. 11 United States Code (USC) §364(c) (1994).
86. Michael A. Gerber, Business Reorganizations (rev ed., New York: Matthew Bender 2000) 358.
87. See In re Defender Drug Stores, Inc., 145 BR 312 (US 9th Cir BAP 1992); In re Ames Department Stores, Inc 115 BR 34 (US Bank SDNY 1990).
88. See 11 United States Code (USC) §1129(b) (1994).
89. See In re Marvel Entertainment Group, 140 F3d 463 (US 3d Cir BAP 1998) (acrimonious relationship between management and creditors made movement towards confirmable plan unlikely); In re Ionosphere Club, Inc, 113 BR 164 (US Bankr SDNY 1990) (incompetence); In re La Sherene, Inc, 3 BR 169, 6 BCD 153 (US Bankr ND Ga 1980) (incompetence and deception).
90. Academics have waged a vigorous debate over whether US bankruptcy law does and should protect anyone other than the shareholders of the bankrupt firm. Compare Thomas H. Jackson, The Logic and Limits of Bankruptcy Law (1986) (bankruptcy law best understood as implementing contract creditors would have reached had they negotiated prior to the insolvency of debtor) with Elizabeth Warren, 'Bankruptcy Policy', 54 U Chi L Rev 775 (1987) (modern bankruptcy policy has distributional objectives requiring consideration of stakeholders hurt by business failures). However, those favoring recognition of stakeholder interests in bankruptcy acknowledge that creditors remain atop the hierarchy of interests, particularly when it comes to the choice of liquidation or reorganization. See Nathalie Martin, 'Noneconomic Interests in Bankruptcy: Standing on the Outside Looking In', 59 Ohio St L J 429 (1998).
91. Academics have waged a vigorous debate over whether US bankruptcy law does and should protect anyone other than the shareholders of the bankrupt firm. Compare Thomas H. Jackson, The Logic and Limits of Bankruptcy Law (1986) (bankruptcy law best understood as implementing contract creditors would have reached had they negotiated prior to the insolvency of debtor) with Elizabeth Warren, 'Bankruptcy Policy', 54 U Chi L Rev 775 (1987) (modern bankruptcy policy has distributional objectives requiring consideration of stakeholders hurt by business failures). However, those favoring recognition of stakeholder interests in bankruptcy acknowledge that creditors remain atop the hierarchy of interests, particularly when it comes to the choice of liquidation or reorganization. See Nathalie Martin, 'Noneconomic Interests in Bankruptcy: Standing on the Outside Looking In', 59 Ohio St L J 429 (1998).
92. See Refter, above n 9; Sachs, ibid. 11 United States Code (USC) §904 (1994) states that a bankruptcy court may not 'interfere with (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor's use or enjoyment of any income-producing property'.
93. See Michael W. McConnell and Randal C. Picker, 'When Cities Go Broke: A Conceptual Introduction to Municipal Bankruptcy', in Municipal Bankruptcies: How to Handle a Chapter 9 from Start to Finish (PLI Comm. Law and Practice Course, Handbook Series No 713, 1995) at 35.
94. In re Cottonwood Water and Sanitation District, Douglas County, Colorado, 138 BR 973, 979 (US Bankr D Col 1992).
95. 11 United States Code (USC) §109(c)(3) (1994).
96. 11 United States Code (USC) §101(32)(c) (1994).
97. In Re City of Bridgeport, 129 BR 332 (US Bankr D Conn 1991).
98. The Bridgeport decision has been criticized on the grounds that the court disregarded certain machinations of the State of Connecticut, which are alleged to have been motivated by partisan considerations - namely, to lead to the electoral defeat of the incumbent mayor of Bridgeport. See Dorothy A. Brown, 'Fiscal Distress and Politics: The Bankruptcy Filing of Bridgeport as a Case Study in Reclaiming Local Sovereignty', 11 Bankr Devl L J 625 (1994-1995). Other commentators have placed the blame on the Congressional scheme, rather than the Bankruptcy Court. See McConnell and Picker, above n 75, at 83.
99. 11 United States Code (USC) §109(c)(5) (1994).
100. See In Re Sullivan County Regional Refuse Disposal District, 165 BR 60 (US Bankr D NH 1994).
101. 11 United States Code (USC) §943(b)(7) (1994). This concept is explained in US House of Representatives Report. 95-595, 95th Cong, 1st Sess. 400 (1979).
102. See In Re County of Orange, 179 BR 177 (US Bankr CD Cal 1995).
103. Ironically, one pair of commentators has concluded that Chapter 9 fails precisely because it dances too gingerly around the shortcomings of municipal governments that led to financial problems. They propose granting courts power to break up and reorganize municipal corporations to 'force politically unpopular, but sensible, decisions such as elimination of municipal functions, privatization, and changes in tax law'. See McConnell and Picker, above n 75, at 84. Whatever the merits of this proposal, which bears an eerie resemblance to IMF conditionality, it obviously requires a very different role for a decision-maker than that contemplated in the current Chapter 9 and in proposals for an international bankruptcy process.
104. See Michael D. Bordo and Harold James, 'The International Monetary Fund: Its Present Role in Historical Perspective' 39, in International Financial Institution Advisory Commission, Expert Papers (2000) (no consecutive pagination).
105. Mervyn King, 'Reforming the International Financial System: The Middle Way', (9) Financial Stability Review (Nov 1999) at 203.
106. Ibid.
107. For purposes of this discussion, 'official' plans and proposals include those of the IMF, the G-7, and the individual nations which comprise it (including the United States).
108. It is understandable that official responses would tend to downplay the role of moral hazard, insofar as that explanation casts culpability largely in the direction of the IMF and the G-7 for pursuing policies that raised moral hazard risks so high. Officialdom rarely admits mistakes, at least publicly. However, as noted earlier, some commentators who were not involved in formulating IMF or Treasury policies prior to the crisis have reached similar conclusions. Thus, while a self-protective instinct may animate the official diagnoses to some degree, it is by no means the only possible explanation for that diagnosis.
109. Thus, in its formal response to the IFIAC Report, the Treasury Department distinguished the official approach from that of IFIAC largely on the grounds that the latter was insufficiently flexible and excessively narrow. Treasury Response, above n 57, at 17-18.
110. 'The Right Kind of IMF for a Stable Global Financial System,' Remarks of Treasury Secretary Lawrence H. Summers to the London School of Business, London, England, 14 December 1999 (hereinafter 'S̄ummers speech').
111. Following the Mexican peso crisis, the IMF instituted the Special Data Dissemination Standard (SDDS), a template on the Fund's Web site for the disclosure in standardized form of the amount and composition of reserve assets, short-term foreign liabilities, and additional information relevant to international financial markets. See IMF Public Information Notice 99/25 (26 March 1999) http:// www.imf.org/external/np/sec/pn/1999/pn9925.htm (visited 20 August 2001) . As of August 2001, 49 countries were providing SDDS information, of which 43 were judged by the Fund to meet its standards for comprehensiveness and timeliness, a considerable improvement from the 19 of 47 of just a year earlier. International Monetary Fund, Quarterly Update on the Special Data Dissemination Standard, Second Quarter 2001 (14 August 2001). http://www.imf.org/external/pubs/ft/sdds/q/ 2001/eng/02/index.htm (visited 20 August 2001). Following the Asian crisis, the Fund instituted a number of new transparency policies, such as the release of IMF surveillance reports and staff reports on the use of fund resources. See Report of the Managing Director to the International Monetary and Financial Committee on Progress in Strengthening the Architecture of the International Financial System and Reform of the IMF, 19 September 2000, at ¶51 http://www.imf.org/external/np/ omd/2000/02/report.htm (visited 20 August 2001) (hereinafter 'Managing Director Report').
112. Following the Mexican peso crisis, the IMF instituted the Special Data Dissemination Standard (SDDS), a template on the Fund's Web site for the disclosure in standardized form of the amount and composition of reserve assets, short-term foreign liabilities, and additional information relevant to international financial markets. See IMF Public Information Notice 99/25 (26 March 1999) http:// www.imf.org/external/np/sec/pn/1999/pn9925.htm (visited 20 August 2001) . As of August 2001, 49 countries were providing SDDS information, of which 43 were judged by the Fund to meet its standards for comprehensiveness and timeliness, a considerable improvement from the 19 of 47 of just a year earlier. International Monetary Fund, Quarterly Update on the Special Data Dissemination Standard, Second Quarter 2001 (14 August 2001). http://www.imf.org/external/pubs/ft/sdds/q/ 2001/eng/02/index.htm (visited 20 August 2001). Following the Asian crisis, the Fund instituted a number of new transparency policies, such as the release of IMF surveillance reports and staff reports on the use of fund resources. See Report of the Managing Director to the International Monetary and Financial Committee on Progress in Strengthening the Architecture of the International Financial System and Reform of the IMF, 19 September 2000, at ¶51 http://www.imf.org/external/np/ omd/2000/02/report.htm (visited 20 August 2001) (hereinafter 'Managing Director Report').
113. Following the Mexican peso crisis, the IMF instituted the Special Data Dissemination Standard (SDDS), a template on the Fund's Web site for the disclosure in standardized form of the amount and composition of reserve assets, short-term foreign liabilities, and additional information relevant to international financial markets. See IMF Public Information Notice 99/25 (26 March 1999) http:// www.imf.org/external/np/sec/pn/1999/pn9925.htm (visited 20 August 2001) . As of August 2001, 49 countries were providing SDDS information, of which 43 were judged by the Fund to meet its standards for comprehensiveness and timeliness, a considerable improvement from the 19 of 47 of just a year earlier. International Monetary Fund, Quarterly Update on the Special Data Dissemination Standard, Second Quarter 2001 (14 August 2001). http://www.imf.org/external/pubs/ft/sdds/q/ 2001/eng/02/index.htm (visited 20 August 2001). Following the Asian crisis, the Fund instituted a number of new transparency policies, such as the release of IMF surveillance reports and staff reports on the use of fund resources. See Report of the Managing Director to the International Monetary and Financial Committee on Progress in Strengthening the Architecture of the International Financial System and Reform of the IMF, 19 September 2000, at ¶51 http://www.imf.org/external/np/ omd/2000/02/report.htm (visited 20 August 2001) (hereinafter 'Managing Director Report').
114. These policies include transparency in monetary and fiscal affairs. A 'Code of Good Practices on Transparency in Monetary and Financial Policies' was adopted by the Interim Committee of the Fund in 1999. See Communique of the Interim Committee of the Board of Governors of the International Monetary Fund, 26 September 1999, at ¶9 http://www.imf.org/external/np/cm/1999/ 092699a.htm (visited 20 August 2001).
115. For a review of the range of standards being promoted internationally, see Financial Stability Forum, International Standards and Codes to Strengthen Financial Systems (April 2001) http:// www.fsforum.org/Standards/Repiscsfs.pdf (visited 20 August 2001).
116. For example the Fund uses the 'Core Principles for Effective Banking Supervision', issued by the Basle Committee on Banking Supervision in September 1997. See Managing Director Report, above n 93 at ¶34.
117. See Managing Director Report, above n 93 at 1133 and Appendix II.
118. See Report of the Acting Managing Director to the International Monetary and Financial Committee on Progress in Reforming the IMF and Strengthening the Architecture of the International Financial System, 12 April 2000, at ¶¶41-42 (hereinafter 'Acting Managing Director Report') http:// www.imf/org/external/np/omd/2000/report.htm (visited 20 August 2001).
119. Ibid at Box 4 (following ¶42).
120. Ibid.
121. In one statement, the G-7 finance ministers hinted that access to Fund resources might be conditioned on implementation of these standards. 'Strengthening the International Financial Architecture', Report of G7 Finance Ministers to the Köln Economic Summit, Cologne, 18-20 June 1999, at ¶21c (hereinafter 'Köln Report') http://www.g7.utoronto.ca/g7/finance/fm061999.htm (visited 20 August 2001). This possibility does not seem to have been elaborated since.
122. Article IV (3) provides authority for this surveillance. The Fund and the World Bank also provide technical assistance to developing countries for the implementation of economic policies favored by the international financial institutions.
123. The most important of these changes were (1) a reduction in the surcharge over normal credit tranche rates for use of the CCL (originally, the surcharge was the same as for the Supplemental Reserve Facility), and (2) a 'move in the direction of greater automaticity in the release' of at least some of the line of credit (originally, the program contemplated something close to a de novo review of a country's situation when it sought to draw on the line of credit). 'Strengthening Crisis Prevention: The Role of Contingent Credit Lines', Address by Stanley Fischer, First Deputy Managing Director, International Monetary Fund, 15 November 2000 http://www.imf.org/external/np/ speeches/2000/111500.htm (visited 20 August 2001).
124. For example, changing capital adequacy standards to require a greater percentage of capital to be held against loans to developing countries will obviously affect incentives for bank lending to those countries. One proposed revision to international capital adequacy standards included a requirement for higher risk weightings for countries that fail to adopt IMF disclosure or policy recommendations. However, this requirement has been dropped from subsequent Basle Committee proposals to overhaul capital adequacy standards.
125. The Financial Stability Forum is described at its web site http://www.fsforum.org/, (visited 20 August 2001).
126. Ibid.
127. IMF Press Release No 97/59 (17 December 1997) http://www.imf.org/external/np/sec/pr/1997/ pr9759.htm (visited 20 August 2001).
128. The rate for the first year is 300 basis points above normal IMF rates, escalating 50 basis points every six months thereafter until the premium reaches 500 basis points on outstanding balances of drawings under the SRF.
129. Strengthening the International Financial Architecture, Report from G7 Finance Ministers to the Heads of State and Government, Fukuoka, 8 July 2000, at ¶11(a) http://www.g7.utoronto.ca/g7/ finance/fm20000708-st.html (visited 20 August 2001). Official attention to this set of issues was not evident in the 1998 and 1999 reports of G-7 Finance Ministers, but featured prominently in US and G-7 statements beginning in late 1999, perhaps in response to the IFIAC Report and similar criticisms of Fund policies.
130. See International Monetary Fund, Public Information Notice No 00/79 (18 September 2000) http:// www.imf.org/external/np/sec/pn/2000/pn0079.htm (visited 20 August 2001). The expectations are that repurchases (technically, the member country repurchases its own currency by repaying the Fund in hard currency) under normal credit tranches will begin within 21/4 years and be completed within 4 years. For Extended Fund Facility, drawings, the periods are 4 and 7 years, respectively.
131. Drawings above 200 percent of member's quota are now subject to a 100 basis point surcharge, which will rise to 200 basis points for drawings about 300 percent of quota.
132. See Summers speech, above n 92.
133. See Managing Director Report, above n 93, at ¶61.
134. Ibid.
135. Ibid at ¶62. This section of the Managing Director Report notes that 'some' (presumably Executive Directors) favor a 'rules-based' approach in order to 'give more predictability to the suggested framework . . . while limiting the risk that large-scale financing could be used to allow the private sector to exit'.
136. Resolving Financial Crises in Emerging Market Economies, Remarks of Treasury Undersecretary for International Affairs Timothy F. Geithner before the Securities Industry Association and Emerging Markets Trading Association, 23 October 2000 http://www.treas.gov/press/releases/ps966.htm (visited 20 August 2001).
137. See International Monetary Fund, 'IMF Policy on Lending into Arrears to Private Creditors (1999)' http://www.imf.org/external/pubs/ft/privcred/lending.pdf (visited 20 August 2001). This document reports on an easing of the Fund's policy on lending into arrears to private creditors and reflects the concern that its previous policy had allowed private creditors a 'de facto veto' over Fund lending. The Executive Directors concluded, as they have with most other Fund policies, that detailed policies could not be specified, and thus that decisions on lending into arrears would have to be made on a case-by-case basis.
138. See Barry Eichengreen and Richard Portes, above n 25 at 23; Council on Foreign Relations, Safeguarding Prosperity in a Global Financial System (Washington: Institute for International Economics 1999) 83-86 (hereinafter 'CFR Report'); Overseas Development Council, The Future Role of the IMF in Development (Washington: Overseas Development Council, 2000) 9.
139. See Barry Eichengreen and Richard Portes, above n 25 at 23; Council on Foreign Relations, Safeguarding Prosperity in a Global Financial System (Washington: Institute for International Economics 1999) 83-86 (hereinafter 'CFR Report'); Overseas Development Council, The Future Role of the IMF in Development (Washington: Overseas Development Council, 2000) 9.
140. Barry Eichengreen, Toward a New International Financial Architecture (Washington: Institute for International Economics 1999) 80.
141. It is widely accepted, for example, that efforts to predict crises on the basis of specific data indicators have been imperfect at best. Ibid, at 84-86.
142. Executive Directors of the Fund themselves differ on both of these questions. See International Monetary Fund, Public Information Notice No 00/81 (20 September 2000) http://www.imf.org/ external/np/sec/pn/2000/pn0081.htm (visited 20 August 2001).
143. See Kenneth Rogoff, above n 57, at 21. There have also been questions raised as to the wisdom of certain standards in the IMF battery. For example, the now-official preference for either floating exchange rates or 'very hard pegs' such as currency board arrangements has been questioned by two very distinguished international economists: Jeffrey A. Frankel, 'No Single Currency Regime Is Right for All Countries or at All Times' (Princeton Essays in International Finance No 215, 1999); Richard Cooper, 'Exchange Rate Choices', in Jane Sneddon Little and Giovanni P. Olivei, Rethinking the International Monetary System (Boston: Federal Reserve Bank of Boston 1999) 99- 123.
144. See Kenneth Rogoff, above n 57, at 21. There have also been questions raised as to the wisdom of certain standards in the IMF battery. For example, the now-official preference for either floating exchange rates or 'very hard pegs' such as currency board arrangements has been questioned by two very distinguished international economists: Jeffrey A. Frankel, 'No Single Currency Regime Is Right for All Countries or at All Times' (Princeton Essays in International Finance No 215, 1999); Richard Cooper, 'Exchange Rate Choices', in Jane Sneddon Little and Giovanni P. Olivei, Rethinking the International Monetary System (Boston: Federal Reserve Bank of Boston 1999) 99-123.
145. Köln Report, above n 101, at ¶33.
146. Ibid at ¶33.
147. See Remarks of Treasury Secretary Robert E. Rubin on Reform of the International Financial Architecture, School of Advanced International Studies, Washington, DC, 21 April 1999 ('the international community should not provide exceptional large scale official finance to countries intervening heavily to defend an exchange rate peg, except . . . when an immediate shift away from a fixed exchange rate is judged to pose systemic risks') (emphasis added).
148. See Pamela Druckerman, 'Argentine Bailout of Almost 840 Billion Unveiled', Wall St J, (12 December 2000), A17; Michael M. Phillips, 'IMF Acts to Contain an Investor Exodus', Wall St J (7 December 2000), A21.
149. See Pamela Druckerman, 'Argentine Bailout of Almost 840 Billion Unveiled', Wall St J, (12 December 2000), A17; Michael M. Phillips, 'IMF Acts to Contain an Investor Exodus', Wall St J (7 December 2000), A21.
150. See Rebecca Bream, 'Lebanon Makes a Comeback', Financial Times (8 December 2000) (reporting that Lebanese bond issue possible in light of improvement in investor attitudes towards emerging market debt following Argentine and Turkish IMF programs).
151. See Report of the Acting Managing Director, above n 98, at ¶44. This report did not identify Ecuador and Ukraine explicitly, but referred elliptically to 'the two recent cases of efforts to secure private sector involvement with members that had lost spontaneous access to capital markets'.
152. Similar observations have been made about constructive ambiguity in a domestic context. See Xavier Freixas and Jean-Charles Rochet, Microeconomics of Banking (Cambridge, Mass, London: MIT Press) 208 (1997): In fact, the effect of ambiguity is a transfer of wealth from small to large banks, because there is no ambiguity regarding the fact that large institutions are 'too big to fail'. Thus, ambiguity is to some extent illusory and is equivalent to repaying all large banks' liabilities and rescuing only the solvent ones among the small (if they are able to prove that they are solvent).
153. JMF Press Release No. 00/80, 21 December 2000 http://www.imf.org/external/np/sec/pr/2000/ pr0080.htm (visited 20 August 2001).
154. IMF Press Release No 01/3, 12 January 2001 http://www.imf.org/external/np/sec/pr/2001/ pr0103.htm (visited 20 August 2001).
155. IMF New Brief, No. 01/81, 21 August 2001 http://www.imf.org/external/np/sec/nb/2001/ nb0181.htm (visited 20 August 2001).
156. The G-7 Finance Ministers had, in their annual report to heads of state and government, declared that exceptional financing required 'extensive justification', specifically 'evidence that the country has experienced a sudden, disruptive loss of confidence; that an early correction of difficulties is expected; and that there is a risk of contagion that could pose a wider threat to the stability of the international financial system'. 'Strengthening the International Financial System and the Multilateral Development Banks', Report Transmitted by G7 Finance Ministers to the Heads of State and Government, 7 July 2001 at ¶13 http://www.g7.utoronto.ca/g7/finance/fm010707.htm (visited 20 August 2001). The loss of confidence in Argentina had occurred over a prolonged period. The country's large debt overhang assured that its problems would continue at least through 2002. And, while some market observers feared contagion, both Undersecretary of Treasury Taylor and Chairman Greenspan had discounted risks of contagion from Argentina. Michael Phillips, 'Volatility Isn't Infectious, Say Bush Advisers', Wall St J (10 July 2001), A2; Cassell Bryan-Low, 'Anxiety Over Problems in Argentina Abates with Help of Comments from Greenspan', Wall St J (19 July 2001), C14. As this article went to press in November 2001, a de facto Argentine default appeared imminent, and it seemed that the IMF was this time prepared to stand aside. However, the precedential value of such a development will likely be limited, insofar as the aforementioned duration of Argentina's travails has resulted in heavy discounting of the value of its debt and a near consensus that contagion will be limited.
157. The G-7 Finance Ministers had, in their annual report to heads of state and government, declared that exceptional financing required 'extensive justification', specifically 'evidence that the country has experienced a sudden, disruptive loss of confidence; that an early correction of difficulties is expected; and that there is a risk of contagion that could pose a wider threat to the stability of the international financial system'. 'Strengthening the International Financial System and the Multilateral Development Banks', Report Transmitted by G7 Finance Ministers to the Heads of State and Government, 7 July 2001 at ¶13 http://www.g7.utoronto.ca/g7/finance/fm010707.htm (visited 20 August 2001). The loss of confidence in Argentina had occurred over a prolonged period. The country's large debt overhang assured that its problems would continue at least through 2002. And, while some market observers feared contagion, both Undersecretary of Treasury Taylor and Chairman Greenspan had discounted risks of contagion from Argentina. Michael Phillips, 'Volatility Isn't Infectious, Say Bush Advisers', Wall St J (10 July 2001), A2; Cassell Bryan-Low, 'Anxiety Over Problems in Argentina Abates with Help of Comments from Greenspan', Wall St J (19 July 2001), C14. As this article went to press in November 2001, a de facto Argentine default appeared imminent, and it seemed that the IMF was this time prepared to stand aside. However, the precedential value of such a development will likely be limited, insofar as the aforementioned duration of Argentina's travails has resulted in heavy discounting of the value of its debt and a near consensus that contagion will be limited.
158. The G-7 Finance Ministers had, in their annual report to heads of state and government, declared that exceptional financing required 'extensive justification', specifically 'evidence that the country has experienced a sudden, disruptive loss of confidence; that an early correction of difficulties is expected; and that there is a risk of contagion that could pose a wider threat to the stability of the international financial system'. 'Strengthening the International Financial System and the Multilateral Development Banks', Report Transmitted by G7 Finance Ministers to the Heads of State and Government, 7 July 2001 at ¶13 http://www.g7.utoronto.ca/g7/finance/fm010707.htm (visited 20 August 2001). The loss of confidence in Argentina had occurred over a prolonged period. The country's large debt overhang assured that its problems would continue at least through 2002. And, while some market observers feared contagion, both Undersecretary of Treasury Taylor and Chairman Greenspan had discounted risks of contagion from Argentina. Michael Phillips, 'Volatility Isn't Infectious, Say Bush Advisers', Wall St J (10 July 2001), A2; Cassell Bryan-Low, 'Anxiety Over Problems in Argentina Abates with Help of Comments from Greenspan', Wall St J (19 July 2001), C14. As this article went to press in November 2001, a de facto Argentine default appeared imminent, and it seemed that the IMF was this time prepared to stand aside. However, the precedential value of such a development will likely be limited, insofar as the aforementioned duration of Argentina's travails has resulted in heavy discounting of the value of its debt and a near consensus that contagion will be limited.
159. Although I have seen no more systematic evidence for this concern than for the assertion that IMF officials excessively identify with emerging market officials, it accords more closely with my own experiences and observation during both the Mexican and Asian crises.
160. See Ben S. Bernanke, Thomas Laubauch, Frederic S. Mishkin, and Adam S. Posen, Inflation Targeting: Lessons From International Experience (Princeton: Princeton University Press 1999) 5-6 [hereinafter Bernanke].
161. Ibid, at 22.
162. Ibid, at 22.
163. Ibid, at 38.
164. The reason is that, faced with public expectations of high inflation, the central bank can adopt a relatively restrictive monetary policy, leading to a recession, or accommodate those expectations, adopt a relatively loose monetary policy and suffer inflationary consequences at higher levels of employment. See Steven M. Sheffrin, Rational Expectations (2nd edn, Cambridge, New York: Cambridge University Press 1996) 83-85.
165. Bernanke, above n 135, at 300.
166. Ibid, at 24.
167. Ibid, at 300.
168. The analogy is of course far from perfect. One important difference is that central bankers can discuss publicly the implications of a supply shock in fairly straightforward terms (or at least as straightforwardly as central bankers ever speak). The mere act of discussing systemic risk may make it more likely to occur.
169. See Managing Director Report, above n 93, at ¶54. Note, however, that the Executive Board did not, in its announcement of a large stand-by package for Turkey in late 2000, explain why it had provided such assistance for a country with a pegged exchange rate. See IMF Press Release 00/ 80 (21 December 2000) http://www.imf.org/external/np/sec/pr/2000/pr0080.htm (visited 20 August 2001).
170. Bernanke, above n 135, at 308. See also Alan S. Blinder, 'Central Bank Credibility: Why Do We Care? How Do We Build It?', 90 Am Econ Rev 1421 (2000) (survey of central bankers and economists reveals that central bank's track record of honesty and inflation-aversion is much more important in achieving credibility than precommitments).
171. For a recent explanation of the importance of regulation in countering various forms of moral hazard within financial markets see Frederic S. Mishkin, 'Prudential Supervision: Why Is It Important and What Are the Issues?', in Frederic S. Mishkin, Prudential Supervision: What Works and What Doesn't? (Chicago: University of Chicago Press 2001).
172. See Allen N. Berger, Sally M. Davies, and Mark J. Flannery, 'Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?' (Federal Reserve Board Finance and Economics Discussion Paper No 1998-32, 1998) http://www.federalreserve.gov/pubs/feds/1998/ 199832/199832pap.pdf (visited 20 August 2001).
173. See generally David A. Skeel, Jr, 'The Law and Finance of Bank and Insurance Insolvency Regulation', 76 Tex L Rev 723 (1998); Peter P. Swire, 'Bank Insolvency Law Now That It Matters Again', 42 Duke L J 469 (1992).
174. See generally David A. Skeel, Jr, 'The Law and Finance of Bank and Insurance Insolvency Regulation', 76 Tex L Rev 723 (1998); Peter P. Swire, 'Bank Insolvency Law Now That It Matters Again', 42 Duke L J 469 (1992).
175. The 'widely regarded' view among financial experts is that '"punishing" the managers and shareholders of imprudently managed intermediaries' is crucial for alleviating moral hazard in the context of official capital injection. See Xavier Freixas, Curzio Giannini, Glenn Hoggarth, and Farouk Soussa, 'Lender of Last Resort: A Review of the Literature', Financial Stability Review, Issue 7 (November 1999) at 151, 161.
176. See 12 United States Code (USC) §§1821-1823 (1994).
177. The IMF can create liquidity in the form of Special Drawing Rights (SDRs). Articles of Agreement of the International Monetary Fund, Art XV(1). However, any allocation must be approved by an 85 percent weighted majority of total fund voting power. Ibid, at Art. XVIII(4)(d). SDRs must then be allocated to all members voting in favor of the SDR creation. Ibid, at Art XVIII(2)(e). These features seriously limit the utility of SDRs in a crisis. Stanley Fischer, Deputy Managing Director of the IMF has advanced what he acknowledges to be the controversial argument that a lender of last resort need not have the ability to create money in a crisis. Stanley Fischer, above n 45, at 85, 89-90 (1999). Fischer notes that such a concept of a lender of last resort requires that the entity be able to provide sufficient credit to troubled institutions or countries.
178. The structure of emerging market economies arguably remains vulnerable to a kind of vicious circle. As Professor Mishkin has argued, an unanticipated depreciation of a currency leads to deterioration in the balance sheets of the many nonfinancial firms in developing countries which find it easier to issue debt denominated in foreign currencies. The weaker balance sheets increase adverse selection and moral hazard problems, which in turn contribute to further financial instability. See Frederic S. Mishkin, 'Global Financial Instability: Framework, Events, Issues', 13 J Econ Perspectives 3 (1999) at 9.
179. Of course, a government agency must derive its power from some constitutionally legitimate source. But in modern industrial democracies, legislatures often grant economic regulators broad powers to address a perceived problem (banking instability, anti-competitive conduct, securities fraud, etc.) and then, contemporaneously or subsequently, enact specific rules to limit regulatory discretion on some matters. In the US context, constitutional objections have been lodged against the broad grants of discretion noted in the text as a characteristic of the contemporary administrative state. The Supreme Court has recently rejected once again efforts to revivify the non-delegation doctrine. See Whitman v American Trucking Associations, Inc, 531 US 457 (US Sup Ct 2001).
180. Another economic rationale is that rules promote the efficient allocation of resources by removing the uncertainty attendant to business decisions and thereby reducing transactions costs, including the expected return necessary to compensate for uncertainty risks. But, as has been frequently noted, the economic desideratum of enhancing certainty does not compel the use of rigid rules.
181. Schauer, above n 13, at 232.
182. At some places in his book, Schauer seems to emphasize technical competence or the impact of bias upon a potential decision-maker seeking to apply the purpose of a rule, rather than the rule itself. Ibid, at 150-51. Even some commentators sympathetic to Schauer's overall view have questioned how determinate these considerations are in practice. See Mark V. Tushnet, 'Playing with the Rules', 90 Mich L Rev 1560 (1992).
183. Note, for example, that the United States and Germany have consistently opposed the expansion of the IMF's authority to create liquidity through the discretionary issuance of Special Drawing Rights. While a grant of this authority would give the IMF the key tool of massive liquidity creation which central banks can use in a financial crisis, national economic authorities are unwilling to cede to the IMF what would, in effect, be the authority to make monetary policy.
184. There is also reason to believe that the resources made available to the IMF for meeting international liquidity needs, even under fairly circumscribed rules, are likely to be inadequate. The major industrialized countries themselves are, in a world of floating exchange rates, highly unlikely to draw on IMF resources. Thus funding the IMF is in some respects more akin to foreign assistance than to an insurance policy. There is of course an indirect, self-interested reason for industrialized countries to contribute to the IMF. Still, the IMF disproportionately benefits emerging market countries, a fact that places a downward bias on developed country contributions.
185. 'Existing authority' of the IMF obviously includes authority already literally granted to the Managing Director by the Articles of Agreement and Executive Board decisions. For present purposes, it should also be read to include authority which could be granted by the finance ministries of influential finance ministries without need for changes in the domestic law of those finance ministries. This additional authority could be formally granted through a vote in the Executive Board or, in appropriate cases, informally ceded by the finance ministers of the G-7 and other key governments.
186. CFR Report, above n 118, at 122-23. The seven areas were: (1) .a 'tougher line' on lender moral hazard and private-sector burden-sharing, including a return to normal lending limits for non-systemic crises; (2) a sharper refocusing and distinction of the mandates of the IMF and World Bank; (3) a 'firmer position' on limiting IMF support for adjustable peg exchange rate regimes; (4) more explicit public identification of countries implementing or failing to implement international financial standards; (5) a 'more activist' position on capital controls by emerging economies with fragile financial sectors; (6) a proposal that G-7 countries include collective action clauses in their own sovereign bond contracts; and (7) a significantly different design of a 'contagion facility' such as the CCL.
187. See Tricky Moves for the Bank and the Fund, The Economist (15 February 2001). A skeptical attitude was conveyed in 'Excellence and the International Financial Institutions', Address by Secretary of the Treasury Paul H. O'Neill to the Economic Club of Detroit, 27 June 2001, http:// www.treas.gov/press/releases/po449.htm (visited 7 October 2001).
188. See Tricky Moves for the Bank and the Fund, The Economist (15 February 2001). A skeptical attitude was conveyed in 'Excellence and the International Financial Institutions', Address by Secretary of the Treasury Paul H. O'Neill to the Economic Club of Detroit, 27 June 2001, http:// www.treas.gov/press/releases/po449.htm (visited 7 October 2001).
189. The possibility developed in the text recalls theorizing over the possible advantages that may exist for individuals with a reputation for irrationality. See D. M. Kreps and R. Wilson, 'Reputation and Imperfect Information', 27 J Econ Theory 253 (1982). When actors cannot count on the rationality of other individuals, they in turn may be dissuaded from certain courses of action. Thus, if market participants truly believed that an Administration would suffer the consequences of a major nation's financial collapse, they might adjust their lending habits, because they could no longer count on the Administration departing from its policy once a crisis hit.
190. In fact, Fred Bergsten - a long-time advocate for a system of exchange rate bands among the major currencies - has embraced many of the elements of the official reform agenda even as he argues that stabilizing the exchange rates of major currencies is part of the solution to emerging market financial crises. See C. Fred Bergsten, Reforming the International Monetary Fund, Testimony Before the Subcommittee on International Trade and Finance, United States Committee on Banking, Housing and Urban Affairs, 27 April 2000.
191. An exposition advocating a system of exchange rate bands for the major currencies that best combines comprehensiveness and accessibility is John Williamson, The Exchange Rate System (rev edn, Washington: Institute for International Economics 1985). An equally accessible criticism of such proposals may be found in Barry Eichengreen, International Monetary Arrangements for the 21st Century (Washington: Brookings Institution 1994).
192. An exposition advocating a system of exchange rate bands for the major currencies that best combines comprehensiveness and accessibility is John Williamson, The Exchange Rate System (rev edn, Washington: Institute for International Economics 1985). An equally accessible criticism of such proposals may be found in Barry Eichengreen, International Monetary Arrangements for the 21st Century (Washington: Brookings Institution 1994).
193. Following the demise of the par value system the currencies of major European currencies were linked in an exchange rate mechanism that attempted to moderate fluctuations in their relative values, not always successfully. Since 1 January 1999, of course, major European currencies other than the British pound and the Swiss franc have been fixed in value against the euro. Throughout this period, though, the values of major European currencies - including the euro - have floated against the dollar and yen.
194. See United Nations Conference on Trade and Development, Trade and Development Report (New York, Geneva: United Nations 1998) 61. The same report concludes that 'the most important factor in precipitating the [Asian] crisis seems to have been the sudden reversal of the dollar relative to the yen in early May 1997 and the widespread expectation of a rise in Japanese interest rates that it engendered.' Ibid, at 66. The rise in Japanese interest rates reversed the direction of short-term arbitrage funds that had been flowing from Japan to Southeast Asia.
195. As a legal matter, Congressional authorization is probably required to fix the value of the dollar with respect to other currencies. 22 United States Code (USC) §286c (1994) requires such authorization in the case of a change in the 'par value' of the dollar. This statute refers to the par value system of exchange rates which prevailed under the IMF Articles of Agreement between the establishment of the Fund and the early 1970s. An agreement to fix exchange rates, or to maintain the value of the dollar within a specified range, arguably falls within the terms of this statute, notwithstanding its use of the now anachronistic term 'par value'. Even if 22 USC §286c would not foreclose such a change or - what may amount to the same thing - if no one has standing to enforce the provision, there would be an enormous outcry were the Federal Reserve Board explicitly to broaden its monetary policy aims to include exchange rate stability without Congressional approval.
196. David Lipton, 'Refocusing the Role of the International Monetary Fund', in Peter B. Kenen and Alexander K. Swoboda, Reforming the International Monetary and Financial System 345-65 (Washington: International Monetary Fund 2000).
197. Lipton's paper includes proposals on normal access to Fund resources, exchange rate regimes, and workouts that are broadly consistent with an approach of discretionary eclecticism.
198. Articles of Agreement of the International Monetary Fund, Art XVIII, Section 4(d).
199. See International Monetary Fund, Users' Guide to the SDR (Washington: International Monetary Fund 1995).
200. Former IMF Deputy Managing Director Stanley Fischer has argued that, although it is 'advantageous' to be able to create liquidity, it is not an 'essential attribute' of a lender of last resort. Fischer, above n 45, at 89-90. By Fischer's own admission, this is a controversial proposition and one central to his argument that the IMF can serve as an effective international lender of last resort through its functions as crisis manager and as lender which can leverage liquidity from other sources.
201. Articles of Agreement of the International Monetary Fund, Art XVIII, Section 2(b).
202. Fischer, above n 45, at 97.
203. Lipton, above n 168, at 363.
204. Following a quota increase in January 1999, total quotas are now approximately 212 billion SDRs. See International Monetary Fund, IMF Survey Supplement (September 2000) at 4. This was equivalent to about $271 billion based on the SDR valuation as of 15 August 2001.
205. The pending proposal would itself double outstanding allocations from current levels of 21.4 million SDRs (approximately $27 billion based on the SDR valuation as of 15 August 2001). Ibid, at 24.
206. Lipton, above n 168, at 363.
207. Ibid.
208. Ibid, at 364. Along the same lines, the countries participating in the trust fund would be direct creditors of the borrowing countries, rather than creditors of the IMF, as is the case under current back-up financing mechanisms such as the General Arrangement to Borrow and the New Arrangement to Borrow. Ibid, at 363.
209. Ibid, at 364. Along the same lines, the countries participating in the trust fund would be direct creditors of the borrowing countries, rather than creditors of the IMF, as is the case under current back-up financing mechanisms such as the General Arrangement to Borrow and the New Arrangement to Borrow. Ibid, at 363.
210. 22 United States Code (USC) §286q(b)(1) (1994).
211. 22 United States Code (USC) §286q(a) (1994).
212. Eichengreen, Moral Hazard, above n 48, at 33.
213. See Liz Dixon and David Wall, 'Collective Action Problems and Collective Action Clauses', Financial Stability Review, Issue 8 (June 2000) at 142. Lee Buchheit, an attorney who has represented many sovereign debtors, has addressed each of the clauses in a series of short articles. Lee C. Buchheit, 'A Lawyer's Perspective on the New International Financial Architecture', J Int'l Banking L Issue 7 (1999) at 225; Lee C. Buchheit, 'The Collective Representation Clause', Int'l Fin L Rev (September 1998), at 9; Lee C. Buchheit, 'Majority Action Clauses May Help Resolve Debt Crises', Int'l Fin L Rev (August 1998), at 13; Lee C. Buchheit, 'Changing Bond Documentation: The Sharing Clause', Int'l Fin L Rev (July 1998), at 17.
214. See Liz Dixon and David Wall, 'Collective Action Problems and Collective Action Clauses', Financial Stability Review, Issue 8 (June 2000) at 142. Lee Buchheit, an attorney who has represented many sovereign debtors, has addressed each of the clauses in a series of short articles. Lee C. Buchheit, 'A Lawyer's Perspective on the New International Financial Architecture', J Int'l Banking L Issue 7 (1999) at 225; Lee C. Buchheit, 'The Collective Representation Clause', Int'l Fin L Rev (September 1998), at 9; Lee C. Buchheit, 'Majority Action Clauses May Help Resolve Debt Crises', Int'l Fin L Rev (August 1998), at 13; Lee C. Buchheit, 'Changing Bond Documentation: The Sharing Clause', Int'l Fin L Rev (July 1998), at 17.
215. See Liz Dixon and David Wall, 'Collective Action Problems and Collective Action Clauses', Financial Stability Review, Issue 8 (June 2000) at 142. Lee Buchheit, an attorney who has represented many sovereign debtors, has addressed each of the clauses in a series of short articles. Lee C. Buchheit, 'A Lawyer's Perspective on the New International Financial Architecture', J Int'l Banking L Issue 7 (1999) at 225; Lee C. Buchheit, 'The Collective Representation Clause', Int'l Fin L Rev (September 1998), at 9; Lee C. Buchheit, 'Majority Action Clauses May Help Resolve Debt Crises', Int'l Fin L Rev (August 1998), at 13; Lee C. Buchheit, 'Changing Bond Documentation: The Sharing Clause', Int'l Fin L Rev (July 1998), at 17.
216. See Liz Dixon and David Wall, 'Collective Action Problems and Collective Action Clauses', Financial Stability Review, Issue 8 (June 2000) at 142. Lee Buchheit, an attorney who has represented many sovereign debtors, has addressed each of the clauses in a series of short articles. Lee C. Buchheit, 'A Lawyer's Perspective on the New International Financial Architecture', J Int'l Banking L Issue 7 (1999) at 225; Lee C. Buchheit, 'The Collective Representation Clause', Int'l Fin L Rev (September 1998), at 9; Lee C. Buchheit, 'Majority Action Clauses May Help Resolve Debt Crises', Int'l Fin L Rev (August 1998), at 13; Lee C. Buchheit, 'Changing Bond Documentation: The Sharing Clause', Int'l Fin L Rev (July 1998), at 17.
217. See Liz Dixon and David Wall, 'Collective Action Problems and Collective Action Clauses', Financial Stability Review, Issue 8 (June 2000) at 142. Lee Buchheit, an attorney who has represented many sovereign debtors, has addressed each of the clauses in a series of short articles. Lee C. Buchheit, 'A Lawyer's Perspective on the New International Financial Architecture', J Int'l Banking L Issue 7 (1999) at 225; Lee C. Buchheit, 'The Collective Representation Clause', Int'l Fin L Rev (September 1998), at 9; Lee C. Buchheit, 'Majority Action Clauses May Help Resolve Debt Crises', Int'l Fin L Rev (August 1998), at 13; Lee C. Buchheit, 'Changing Bond Documentation: The Sharing Clause', Int'l Fin L Rev (July 1998), at 17.
218. A debtor may be willing to pay in full a small number of dissenters while achieving a favorable restructuring with the others. The other bondholders, in turn, may be willing to allow isolated dissenters to walk away with full repayment. However, the dynamics of renegotiation may work against reaching a rescheduling agreement with creditors accounting for most of the bond issue. As bondholders see dissenters recovering their full exposure, even some initially inclined to participate in a restructuring may opt to join the dissenters. As the number of dissenters grows, the remaining bondholders will be less likely to sacrifice timely and full repayment. The strapped debtor may then be forced to ask the non-dissenters for increasingly favorable restructuring terms, further motivating initially accommodating creditors to defect.
219. See Liz Dixon and David Wall, above n 184, at 144. The rationale for a supermajority is that, while most potential bondholders would accept clauses designed to defeat true vultures or the truly unreasonable investor, they will resist purchasing a bond whose payment terms could be changed over the objection of investors accounting for up to 49 percent of the bond issue.
220. Despite the disruptive potential of lawsuits to enforce the terms of debt instruments in default, there have been relatively few such cases. With the increasing importance of bonds in emerging market financing, the threat of lawsuits may be acquiring more significance in emerging market liquidity crises. In October 2000 the government of Peru agreed to pay a hedge fund essentially what the fund demanded in payment of a Brady bond on which Peru had originally defaulted, and which the hedge fund had bought at a steep discount. See Carol S. Remond, 'Peru Settles Creditor Dispute with Elliott for $58 million', Dow Jones Newswires, Capital Markets Rpt, 29 September 2000 [Westlaw cite: 9/29/00 CMREP 08:39:00]. The fund had refused to participate in an earlier rescheduling which netted cooperating creditors substantially less than the hedge fund received through pursuit of its litigation strategy. By early December some of Ecuador's private creditors who had refused to participate in Ecuador's August 2000 debt restructuring had demanded acceleration of payment of Eurobonds due in 2002 and 2004, with the hint that litigation would follow were the demands not met. See Angela Pruitt, 'Ecuador's Restructuring Holdouts Move on Acceleration', Dow Jones Newswires Emerging Markets Rpt, 18 December 2000 [Westlaw cite: 12/18/00 EMREP 14:52:00]. Market participants identified the Peru case as the catalyst for this disruption of what had previously seemed like a successful restructuring effort by Ecuador.
221. Despite the disruptive potential of lawsuits to enforce the terms of debt instruments in default, there have been relatively few such cases. With the increasing importance of bonds in emerging market financing, the threat of lawsuits may be acquiring more significance in emerging market liquidity crises. In October 2000 the government of Peru agreed to pay a hedge fund essentially what the fund demanded in payment of a Brady bond on which Peru had originally defaulted, and which the hedge fund had bought at a steep discount. See Carol S. Remond, 'Peru Settles Creditor Dispute with Elliott for $58 million', Dow Jones Newswires, Capital Markets Rpt, 29 September 2000 [Westlaw cite: 9/29/00 CMREP 08:39:00]. The fund had refused to participate in an earlier rescheduling which netted cooperating creditors substantially less than the hedge fund received through pursuit of its litigation strategy. By early December some of Ecuador's private creditors who had refused to participate in Ecuador's August 2000 debt restructuring had demanded acceleration of payment of Eurobonds due in 2002 and 2004, with the hint that litigation would follow were the demands not met. See Angela Pruitt, 'Ecuador's Restructuring Holdouts Move on Acceleration', Dow Jones Newswires Emerging Markets Rpt, 18 December 2000 [Westlaw cite: 12/18/00 EMREP 14:52:00]. Market participants identified the Peru case as the catalyst for this disruption of what had previously seemed like a successful restructuring effort by Ecuador.
222. Eichengreen, Moral Hazard, above n 48, at 51.
223. After the 1994-95 Mexican crisis, a working group of officials from G-10 countries suggested use of collective action clauses (albeit somewhat tentatively). Group of Ten, 'The Resolution of Sovereign Liquidity Crises' (1996) http://www.bis.org/publ/gten03.htm (visited 20 August 2001).
224. Summers speech, above n 92.
225. This is precisely the argument offered by the Institute for International Finance, a trade and research group representing large creditor institutions. Institute of International Finance, Summary Report on the Work of the IIF Steering Committee on Emerging Markets Finance (1999) at 2.
226. See G-22, Report of the Working Group on Financial Crises (1998) at viii http://www.bis.org/publ/ othp01d.pdf (visited 20 August 2001). The governments of the United Kingdom and Canada have subsequently included collective action clauses in some of its debt issues. The United States Treasury, however, has pointedly refused to do so, raising questions as to whether the effect of these clauses will be as benign as their proponents maintain.
227. See Barry Eichengreen and Ashoka Mody, 'Would Collective Action Clauses Raise Borrowing Costs?', (Nat'l Bureau of Econ Research, Working Paper No 7458, 2000) http://papers.nber.org/ papers/W7458.pdf (visited 20 August 2001); Barry Eichengreen and Ashoka Mody, 'Would Collective Action Clauses Raise Borrowing Costs? An Update and Expansion' (World Bank Working Paper No 2363, June 2000) http://econ.worldbank.org/docs/1119.pdf (visited 20 August 2001).
228. See Barry Eichengreen and Ashoka Mody, 'Would Collective Action Clauses Raise Borrowing Costs?', (Nat'l Bureau of Econ Research, Working Paper No 7458, 2000) http://papers.nber.org/ papers/W7458.pdf (visited 20 August 2001); Barry Eichengreen and Ashoka Mody, 'Would Collective Action Clauses Raise Borrowing Costs? An Update and Expansion' (World Bank Working Paper No 2363, June 2000) http://econ.worldbank.org/docs/1119.pdf (visited 20 August 2001).
229. See Torbjörn Becker, Anthony Richards, and Yungyong Thaicharoen, 'Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?' (IMF Working Paper WP/01/92, 2001) http://www.imf.org/external/pubs/ft/wp/2001/wp0192.pdf (visited 20 August 2001).
230. See Mark J. Roe, 'The Voting Prohibition in Bond Workouts', 97 Yale L J 232 (1987), at 250-58.
231. The UK government, which has traditionally shown great solicitude for the interests of City financiers, has required inclusion of collective action clauses in bonds issued under its law. Report of the Acting Managing Director, above n 98, at ¶54. The British law on this point appears to reflect experience with sovereign debt problems in the nineteenth century.
232. Another possible externality is the moral hazard that develops when the IMF rescues debtor nations because there are no mechanisms to work out debt efficiently. See Eichengreen, Moral Hazard, above n 48, at 57.
233. See Summers speech, above n 92.
234. Parallel legislation might also be required in other countries whose law might be chosen by issuers and investors if both US and UK law were to require majority voting clauses, though the number is probably limited by the preference of both issuers and investors for a known governing law enforced by a reliable judiciary. Potential havens from bond regulation would have to be major financial centers.
235. The projection in the text is not purely hypothetical. Congress has enacted 60 provisions that mandate that Treasury and the US Executive Director at the Fund either pursue a certain policy aim or vote in a certain way in the Executive Board. See United States General Accounting Office, Rpt GAO-01-214, 'International Monetary Fund - Efforts to Advance US Policies at the Fund' (2001) at 4.
236. For example, Eichengreen and Mody argue that, if the goal of international financial reform is to strengthen market discipline by rewarding creditworthy borrowers and penalizing the less creditworthy, then collective action clauses are a step in the right direction. See Barry Eichengreen and Ashoka Mody, 'Would Collective Action Clauses Raise Borrowing Costs?', above n 193.
237. One account of the Ecuador restructuring shows that effective lawyering can overcome some obstacles to effective resolution of a country's debt problems without benefit of mandated collective action or other clauses. See Lee C. Buchheit, 'How Ecuador Escaped the Brady Bond Trap', Int'l Fin L Rev, December 2000, at 17. It also reflects some of the difficulties encountered, such as the very mixed experience of Ecuador in dealing with its creditors in the absence of a legally structured arrangement. Ibid, at 18.
238. One account of the Ecuador restructuring shows that effective lawyering can overcome some obstacles to effective resolution of a country's debt problems without benefit of mandated collective action or other clauses. See Lee C. Buchheit, 'How Ecuador Escaped the Brady Bond Trap', Int'l Fin L Rev, December 2000, at 17. It also reflects some of the difficulties encountered, such as the very mixed experience of Ecuador in dealing with its creditors in the absence of a legally structured arrangement. Ibid, at 18.
239. See Marcus Miller and Lei Zhang, 'Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill', 110 The Economic J 335 (2000); Eichengreen, Moral Hazard, above n 48, at 19-22; International Monetary Fund, Involving the Private Sector in the Resolution of Financial Crises - Standstills - Preliminary Considerations, 5 September 2000, http://www.imf.org/external/np/pdr/ sstill/2000/eng (visited 20 August 2001).
240. See Marcus Miller and Lei Zhang, 'Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill', 110 The Economic J 335 (2000); Eichengreen, Moral Hazard, above n 48, at 19-22; International Monetary Fund, Involving the Private Sector in the Resolution of Financial Crises - Standstills - Preliminary Considerations, 5 September 2000, http://www.imf.org/external/np/pdr/ sstill/2000/eng (visited 20 August 2001).
241. See Marcus Miller and Lei Zhang, 'Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill', 110 The Economic J 335 (2000); Eichengreen, Moral Hazard, above n 48, at 19-22; International Monetary Fund, Involving the Private Sector in the Resolution of Financial Crises -Standstills - Preliminary Considerations, 5 September 2000, http://www.imf.org/external/np/pdr/ sstill/2000/eng (visited 20 August 2001).
242. Eichengreen, Moral Hazard, above n 48 at 2.
243. For an explanation and example of such clauses, see Lee C. Buchheit, How to Negotiate Eurocurrency Loan Agreements (London: Euromoney Publication 1995) 101-05.
244. See Eichengreen, Moral Hazard, above n 48, at 10 ('[w]hy the imposition of controls is not a palatable solution to the creditor-panic problem - as the behavior of most governments reveals - is a deep question').
245. See Sule Ozler, 'Have Commercial Banks Ignored History?', 83 Am Econ Rev 608 (1993) (concluding that countries that have defaulted on international debt are able to reenter credit markets only after a long hiatus and settlement of outstanding claims).
246. Foreign Sovereign Immunities Act, 28 United States Code (USC) §1611 (1994); United Kingdom State Immunity Act, 1978, ch 33, §13(2).
247. 28 United States Code (USC) §1610 (1994); United Kingdom State Immunity Act, 1978, ch 33, §13(3)(4).
248. The Order of Attachment and Restraint was not reported. However, the issuing court made reference to this order in a later reported decision in the litigation. Elliott Associates, L.P. v Banco de la Nacion, 194 FRD 116, 117 (US SDNY 2000).
249. See Köln Report, above n 101, at ¶50.
250. An explanation of Fund policy on this point is included in International Monetary Fund, IMF Policy on Lending into Arrears to Private Creditors (1999) http://www.imf.org/external/pubs/ft/privcred/ lending.pdf (visited 20 August 2000).
251. The full relevant sentence of Article VIII, section 2(b) reads as follows: 'Exchange contracts which involve the currency of any Member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member.' One occasionally hears arguments that national courts are already obligated by Article VIII, section 2(b) to refuse to enforce debt contracts against countries or nationals of countries which have imposed exchange controls. It is true that Article VIII, section 2(b) has been incorporated into US law by statute. 22 United States Code (USC) §286h. However, US courts have interpreted the term 'exchange contract' so narrowly as to exclude conventional loans or bonds. See Libra Bank v Banco Nacional de Cost Rica, 570 F Supp 870 (US SDNY 1983); J. Zeevi and Sons, Ltd. v Grindlays Bank (Uganda) Limited, 37 NY 2d, 200, 333 NE 2d 168, 371 NYS 2d 892, cert. denied, 423 US 866 (1975) (New York). British courts have similarly read 'exchange contract' narrowly, though some continental European courts have construed the phrase more broadly. See Allan T. Marks, 'Exchange Control Regulations Within the Meaning of the Bretton Woods Agreement: A Comparison of Judicial Interpretations in the United States and Europe', 8 Int'l Tax & Bus Lawyer 104 (1990).
252. See Geithner, above n 116.
253. See Marcus Miller and Lei Zhang, above n 203, at 357.
254. Miller and Stiglitz retort that the existence of standstill will reassure creditors that everyone's claims will be frozen at the same time, thereby removing the incentive to exit as quickly as possible. See Marcus Miller and Joseph Stiglitz, 'Bankruptcy Protection Against Macroeconomic Shocks: The Case for a "Super Chapter 11"' (unpublished manuscript 1999). Whether this optimistic prediction would be realized in practice is of course unknown and provides another example of how unintended consequences could be very serious if the assumptions of rules-proponents prove wrong.
255. Under US law a debtor's bankruptcy petition automatically effects a stay. Any fraud or other defect in the petition is sorted out later by a court empowered to impose sanctions.
256. The idea in the text is an extension of a proposal in the wake of the Mexican peso crisis to amend US and UK law so as to render sovereigns immune from suit and their property immune from attachment when 'a restructuring plan [was] being negotiated in good faith by, or had been accepted by, a supermajority of similarly situated creditors'. James B. Hurlock, 'The Way Ahead for Sovereign Debt', 14 Int'l Fin L Rev 10 (July 1995), at 12. This application of bankruptcy law principles to sovereign debt cases was directed more at the problems of free riding creditors and vultures than at panic-driven capital outflows.
257. See International Monetary Fund, Involving the Private Sector in the Resolution of Financial Crises - Standstills - Preliminary Considerations, 5 September 2000, http://www.imf.org/external/ np/sstill/2000/eng (visited 20 August 2001).
258. Allied Bank International v Banco Credito Agricola de Cartago, 757 F 2d 516 (US 2d Cir), cert. denied, 473 US 934 (1985).
259. Ibid, at 519.
260. Ibid. More recent cases have similarly cited this US policy in declining to extend comity treatment to actions of foreign governments that result in defaults. See Pravin Banker Associates v Banco Popular del Peru, 109 F 3d 850, 855 (US 2d Cir 1997) and cases cited therein.
261. 50 United States Code (USC) §§1701-1706 (1994).
262. 50 United States Code (USC) §1702(a) (1994).
263. 50 United States Code (USC) §1703(a)(1)(A) (1994).
264. 50 United States Code (USC) §1703(a)(1)(B) (1994).
265. 50 United States Code (USC) §1702(b) (1994).
266. See Committee on Ways and Means, US House of Representatives, Overview and Compilation of US Trade Statutes, 105th Cong, 1st Sess 168-72 (Comm Print 1997).
267. See Dames & Moore v Regan, 453 US 654, 662-66 (US Sup Ct 1981).
268. Ibid, at 672.
269. Ibid, at 675.
270. Ibid, at 672.
271. Ibid, at 688-89.
272. See Pardissiotis v Rubin, 171 F 3d 983 (US 5th Cir 1999) (no jurisdiction to hear claim); 767 Third Avenue Associates v United States, 48 F 3d 1575 (US Fed Cir 1995) (closing of offices and freezing of assets not regulatory taking because government actions 'merely frustrated' the lessor's expectations and had not been directed against it); Chang v United States, 859 F 2d 893 (US Fed Cir 1988) (overwhelming public knowledge of bad US-Libyan relations at time employment contracts entered meant that termination of those contracts as result of sanctions could have been foreseen and thus not a taking); Belk v United States, 858 F 2d 706 (US Fed Cir 1988) (former hostages did not suffer unconstitutional taking when US extinguished their claims against Iran because propriety of President's action political question); D.C. Precision, Inc v United States Government, 73 F Supp 2d 338 (US SDNY 1999) (blocking of assets mere temporary action, not a seizure or expropriation by the government).
273. Shanghai Power Co. v United States, 4 C Cl 237, 246-47 (US Court of Claims, 1983).
274. See Jason Luong, 'Forcing Constraint: The Case for Amending the International Emergency Economic Powers Act', 78 Tex L Rev 1181 (2000); David Meezan, 'Forgotten Rights: Taking Claims and the International Emergency Economic Powers Act', 21 Vt L Rev 591 (1997).
275. See Jason Luong, 'Forcing Constraint: The Case for Amending the International Emergency Economic Powers Act', 78 Tex L Rev 1181 (2000); David Meezan, 'Forgotten Rights: Taking Claims and the International Emergency Economic Powers Act', 21 Vt L Rev 591 (1997).
276. For purposes of the present discussion, the term 'nations' in the text should be read to include the European Union. Although, as indicated later, I am skeptical that dual US-EU leadership is possible today, it is conceivable that effective coordination with certain EU organs such as the Commission or the European Central Bank may one day be feasible.
277. Federal Reserve Press Releases of 29 September, 15 October, and 17 November 1998 http:// www.federalreserve.gov/boarddocs/press/general/1998 (visited 20 August 2001).
278. Ibid. In only one of its three statements did the FOMC even mention the world economy, and there only insofar as it affected the United States: 'The action was taken to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies and of less accommodative financial conditions domestically. The recent changes in the global economy and adjustments in U.S. financial markets mean that a slightly lower federal funds rate should now be consistent with keeping inflation low and sustaining economic growth going forward.' Federal Reserve Press Release, 29 September 1998.
279. Even national officials confident of their discretionary prerogatives in familiar areas may be reluctant to exercise their legal authority in novel areas or circumstances. The exercise of seldom used or politically controversial legal authority carries greater risks of a political backlash, as occurred following the 1995 decision of President Clinton and Secretary of the Treasury Rubin to use the Exchange Stabilization Fund (ESF) to provide support for Mexico during the peso crisis. Congress responded by temporarily limiting Treasury's discretion to use ESF for a period that turned out to include the onset of the Thai crisis. Where similar political costs can reasonably be anticipated, national officials may refrain from exercising their discretionary authority unless the alternatives appear truly frightening (as, indeed, Clinton and Rubin regarded the Mexican situation).
280. The Treasury, for example, may desire additional authority for itself or the Fund, but fear that inviting Congress to legislate in this area may yield undesirable rules changes instead of, or in addition to, those requested by the Administration.