Commercial banks are rebelling vehemently against proposals by the major industrialized nations that would force banks and bondholders to participate with governments in restructuring emerging market debt.
Under the proposals, private lenders would be obliged to ease the terms of their loans to countries whose debt is being restructured by multilateral lending agencies, such as the International Monetary Fund.
The finance ministers of the Group of Seven countries-the world's top industrialized nations-are pressing for such clauses in loan contracts because they would force commercial banks and bondholders to cooperate with the IMF in easing the debt burden on financially troubled developing countries.
"Mandatory clauses resolving loan and bond claims could stymie the flow of capital to emerging markets," warned William Rhodes, vice chairman of Citigroup Inc., at a press conference Thursday. The conference was organized by the Institute of International Finance, a Washington-based international association that is funded by 300 of the world's largest banks.
The big guns were on hand. Together with Mr. Rhodes, Josef Ackermann, a member of the board of Deutsche Bank AG, and Charles H. Dallara, managing director of the institute, presided over the conference.
They said the G-7 and IMF also want the ability to require private creditors to include in their loan contracts an automatic extension of short-term, trade-finance loans to emerging-market countries that require help from industrialized nations or the IMF. The G-7 governments also would restrict creditors' rights to sue in case a sovereign borrower were to default.
The theory behind the proposals is that a financially ailing country often is hurt further because commercial banks pull back or fail to renew their short-term loans, undermining the efforts of the G-7 and IMF.
The bankers also attacked efforts by the IMF to create a formal policy of lending to countries which have defaulted on their obligations to commercial banks.
Terming the steps "unnecessary and potentially counterproductive," a report released by the institute said the IMF's policy of "lending into arrears is likely to discourage private financing."
The report sharply criticizes efforts to control "disorderly" behavior by private investors and lenders during restructuring negotiations by giving the IMF authority to block creditor litigation.
"The right to litigate is a basic factor in preserving the respect for contractual obligation that underpins all cross-border flows of private finance," the report stated.
Both Mr. Rhodes and Mr. Ackermann warned that the proposals could prove counterproductive just as Asian and Latin American emerging market countries were beginning to regain access to international capital markets after being nearly cut off last year.
"This makes it easier for debtors not to meet their contractual obligations," Mr. Dallara said.
He and the two bankers said that emerging markets have become increasingly dependent on private-sector capital since the start of the decade.
Over the last 10 years, Mr. Dallara estimated, some $1.5 trillion of private sector capital has flowed into emerging markets. He and the two bankers warned that the proposed constraints could wind up backfiring by discouraging additional capital flows.
"The problem is that you set precedents that make markets and financial institutions think twice about providing more financing," Mr. Rhodes said.