G10 Crisis Proposals Come Under Fire From Banks

The Institute for International Finance (IIF), whose members include many of the world's leading commercial and investment banks as well as fund managers and insurance companies, held out a warning that a G10 report earlier this year on crisis resolution ran the risk of encouraging countries to suspend payments on their bonds.

The IIF said that official approval of payments suspension increased the risk that countries would come to believe that this kind of financial crisis need not be painful.

''We do not want to set up. . . expectations that arrears and defaults are an easy option,'' said William Cline, the IIF's chief economist and chairman of the working group that produced the report.

 

Even worse, the IIF says in a report to be published today, is the G10's proposal to widen the conditions in which the International Monetary Fund will lend money to countries which are in default on their commercial debt.

Traditionally, the IMF refused to lend more money to countries which had not reached an understanding with their commercial creditors on their debt repayments. In 1989, however, the IMF decided to allow new loans to countries which still had unresolved arrears of bank debt.

The IIF report criticises the suggestion by the G10 report for widening this loophole to include bond arrears as well as bank debt as ''misguided''.

''In effect, official sector approval would be conferred on breaching contractual obligations,'' the report says.

Far from widening the loophole, the IIF urges the IMF to return to its pre-1989 policy of not lending to countries with unresolved arrears. But the report's authors said they broadly welcomed much of the thrust of the G10 report, especially its rejection #include virtual="/incs/bottom.inc"-->