The IMF's Imperiled Priority

Abstract

The role of the Official Sector institutions as lenders in crisis situations has evolved over time, and, particularly in the context of the current euro area debt crisis, into something akin to a lender of last resort. Institutions like the International Monetary Fund regularly provide distressed sovereigns with lending at affordable rates when private funding has dried up. To be able to provide this kind of emergency relief in a manner that does not result in large losses for their stakeholders, these Official Sector institutions often assert that their lending will have de facto priority over private lending. As a practical matter, since other creditors could not sue to interfere with the sovereign’s choices regarding whom to pay and in what order, de facto priority was all that was needed in the past for the system to function. All of this may have changed since October 2012 as a result of one case: NML Capital v. Republic of Argentina. This case has given private creditors, for the first time in history, a weapon with which they can go after payments made to any other creditor that has equal legal priority to them, potentially including any Official Sector institution without de jure priority. This leads to the question of whether Official Sector institutions’ half-century-old claim of de facto priority for their lending status can be said to have evolved, as a matter of customary international law, to a level of de jure priority.