Op-Ed

Question: when is a country not like a company? When it has run out of money. A company can declare bankruptcy. A country cannot. Debt work-outs for companies are guided by domestic bankruptcy laws. Debt work-outs for countries are not. They can be long and messy.

It is little wonder that the International Monetary Fund and creditor government officials struggling to manage emerging market financing crises are seeking new ways to resolve them. The debacle in Argentina adds urgency. Yet the boldest proposal - a sovereign bankruptcy procedure drawing on the analogy with companies - is likely to prolong debate, not resolve it. The less ambitious US Treasury plan - a renewed effort to press for bond clauses to facilitate orderly debt work-outs - also falls short.

Neither scheme would have stopped Argentina's collapse or made its problems more tractable. Declaring default without changing the currency peg would have triggered more capital flight. Better procedures for dealing with bondholders now would not address the imploding financial system, the crumbling economy and the threat of hyperinflation.

Conversely, if Argentina restores financial stability and a credible framework for growth, its creditors will be keen to strike a deal.

In crises from Mexico to Turkey, debt problems are a symptom as well as a cause of economic trouble. Resolving them requires reforms, notably exchange rate changes that, although needed for growth, cut living standards in the short term. Identifying the reforms, persuading countries to implement them and being ready to stop lending if they do not are the challenges.

Energy should be focused not on the mechanics of debt work-outs but on three deeper issues. First, how to judge when a country cannot pay its debts without crippling its economy. Second, how to strengthen the international community's will to deny money when policies stand little chance of working. Third, how to use existing tools to push debtors and private creditors towards agreement.

When crisis hits, it is hard to tell whether policy reform and temporary official financing will be enough to restore investor confidence. In a few cases, debts may have to be restructured. Tough judgments are involved in deciding when restructuring is the only option and how to share the pain between debtor countries and their creditors.

The IMF is the only body with political legitimacy and the technical ability to make such judgments. It should do so with more transparent guidelines on debt sustainability. Its programmes already require assumptions about a country's ability to raise taxes, cut spending and borrow. What is needed is a more open acknowledgement of when debt restructuring is needed to make these assumptions add up.

At times, it is right for the IMF to provide finance for a country to avoid default. But exceptionally large packages should be more carefully limited, with tightly monitored and credible policies that make a return of confidence highly likely. A fixed exchange rate that has been challenged by the market should almost never be part of the package. And if markets give a thumbs-down or policies slip, lending should stop and the strategy should be rethought.

Some argue that a sovereign bankruptcy mechanism would help the IMF and its shareholder governments to say No. But the IMF already has a powerful tool to push debtors and creditors to negotiate: its ability to lend into arrears, signalling support for a borrower even if it is not paying all its debts to private creditors.

A sovereign borrower has more freedom than any company to stop paying its debts and to force a settlement on creditors. Governments rarely do this. The damage to credibility and loss of access to capital costs too much. Borrowers need the IMF's "seal of approval" as well as financial support to ease the crisis. But the IMF can decide to lend when a country is in arrears to its private creditors if the country is making its best efforts to reform. Then, creditors have little option but to try to negotiate a deal. Unlike a corporate bankruptcy, there are few assets to seize. Creditors need the IMF to bring debtors to the table, with a viable economic plan.

So why has the IMF not made more use of this tool? It requires truly difficult judgments backed by shareholder governments about how much pain a country can and should bear and how much risk default poses for the system.

A new legal superstructure would not make those judgments easier. Rather than wait for more legal powers, the international community should refine its judgment about when to use the power it already possesses. The choice may not be between new IMF loans and default but between throwing good money after bad and new loans to back credible policies and a realistic debt burden.

The writer is a senior director at Stonebridge International, a global strategy company, and adjunct fellow at the Council on Foreign Relations. She was senior

deputy assistant secretary at the US Treasury.