World finance ministers have directed the International Monetary Fund to develop a radical new approach to debt crises in poor nations, one that would allow them to declare sovereign bankruptcy to force creditors to negotiate more lenient repayment terms.
The order to the IMF came as ministers from its 184 member countries conferred in Washington at the annual IMF-World Bank meeting, held behind concrete barricades manned by armed riot police to prevent disruption by anti-globalisation protesters.
IMF staff were instructed to draft a detailed proposal by next April to make it easier for countries facing catastrophic debt defaults to restructure their debts, as an alternative to default which could cause economic collapse.
The proposals mark the most far-reaching change in the global financial system since the Asian currency crisis of 1997-98.
The IMF finance committee adopted the principle of sovereign bankruptcy earlier this year and significantly it has now got the support of US Treasury Secretary Mr Paul O'Neill, despite furious opposition from big lending banks in the US and elsewhere.
"We called on the Fund to develop a concrete proposal for consideration at our next meeting of a statutory sovereign debt restructuring mechanism", Mr Gordon Brown, UK Chancellor of the Exchequer and chairman of the committee, said when making the announcement jointly with the IMF's managing director, Mr Horst Köhler.
The state bankruptcy proposal would end the current system where a single creditor can block reduced repayment terms for nations with unmanageable debt.
Mr O'Neill appealed to bankers at the Institute of International Finance, meeting on the fringes of the IMF-World Bank meeting, to help IMF staff come up with an acceptable approach to national bankruptcies. "Every one of you in this room must engage in this effort - we owe that to the people who have suffered from the chaos of the current system," he said.
Mr Köhler said hard work lay ahead to put the bankruptcy process into place before the proposal is presented to the IMF's directors in April. The plan ultimately would require approval from each of the organization's 184 members.
Crises over debt have forced the question of sovereign bankruptcy to the top of the IMF's agenda. Argentina defaulted on most of its $141 billion in foreign borrowings in December and has not been able to secure a new IMF loan because of what Argentina claims to be unreasonable terms.
The annual IMF-World Bank meeting was overshadowed by deep uncertainty about economic recovery due to falling stock markets, debt crises in South America and Africa and the prospect of war in the Middle East.
In response to critics that the world bodies were not doing enough to help poor nations, World Bank president Mr James Wolfensohn said the US and EU had pledged a combined $12 billion increase in foreign aid over the next three years, which he said would be enough to launch initiatives in a number of areas to achieve the United Nations' goals of cutting world poverty in half by 2015.
The meeting ended yesterday with an appeal from Mr Köhler and Mr Wolfensohn to wealthy nations to pull down trade barriers with poor nations.
The World Bank leader said the $1 billion per day spent by rich countries on farm subsidies "squander resources and profoundly damage opportunities for poor countries to invest in their own development."
Mr Köhler said their main concern must be to strengthen the global recovery, using monetary policy as the first line of defence against weakness.
