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SDRM finds few friends in the markets

The sovereign debt restructuring mechanism is the most contentious proposal ever to come out of the upper echelons of the IMF. It is almost universally opposed by the private sector, most emerging-market borrowers think it a very bad idea indeed, and before it has even been drafted it has already been blamed for tens of billions of dollars of decreased capital flows to emerging markets.

Part of the problem is that when the idea of SDRM was first introduced, at the end of 2001, it gave far too much power to the IMF; since then, Fund officials have generally attributed the adverse private-sector reaction to SDRM to a failure to understand the changes that were made to it in April.

But the private sector does understand SDRM, as do borrowers. In a nutshell, it's a bankruptcy regime for sovereign issuers, where all the major decisions have to be taken by a supermajority of creditors.

SDRM is supported, as one senior IMF official says, by "people who are making sure that in future crises the prospect of large-scale financial assistance is off the table". That's code for the US Treasury, which opposes an IMF quota increase on the grounds that the Fund having less money is basically healthy and a good idea.

No matter how good an idea SDRM is on its merits, insofar as it replaces direct IMF aid packages it's a bad idea for borrowers. The IMF is working hard to persuade borrowers to see the two things as separate issues, without success.

Investors see the heavy hand of the IMF pushing them down into junior creditor status, ensuring that it will always get repaid first and in full before bondholders and other private-sector creditors get to fight with the Paris Club over what's left.

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