Sovereign Debt Restructuring’s Reamed Remedies

As the IMF continues outside consultations before presenting formal sovereign debt workout proposals based on last year’s staff options paper citing lessons from Greece and Argentina, private sector lobby groups which sank the original SDRM template have again responded critically and pre-emptively to assumptions and ambitions in a series of events and papers. In the alphabet soup of main industry associations EMTA held panels in New York, London and Washington, as a 50-member IIF task force issued comments and the Eurobond specialists ICMA drafted new majority voting guidelines. The Fund’s April report asserted that recent restructurings were “too little and late” and that the contractual market-driven approach was less effective for collective action. It cited risks from official lending used to bail out commercial creditors, and urged that at least maturity extension be considered as a precondition when a country loses market access, although immediate haircuts could be applicable in cases of outright insolvency. In pre-default instances the sovereign would be able to unilaterally table terms, while the policy for lending into arrears could still be honored in the absence of a creditor committee. Accompanying covenant changes would unify aggregation clauses across bond issues to thwart blocking minorities, even though holdout and litigation resort has been rare according to a Moody’s survey of exchanges since the late 1990s. Such steps would undermine cooperation and confidence and be too “demanding and rigid” in the IIF’s view. They could affect the credibility of Fund debt sustainability analysis, and repeat the previous unviable effort to require advance “private sector involvement.” Good faith dialogue with a representative debt holder group is “instrumental” and investor diversity is not an obstacle, it argues. The crisis resolution experts from the banking and securities communities welcome revisions to aggregation and pari passu provisions which have complicated outcomes, but warn against sweeping language raising equal treatment and enforcement issues. A decade-old code of conduct remains in place to bolster contractual arrangements although both could be “enhanced,” they add.

While attention is on Europe and Latin America-Caribbean experience, low-income economies in Africa and elsewhere are likewise under Fund scrutiny with the spike in post-HIPC commercial borrowing rendering 5-year old indicative limits obsolete. Since 2009 concessional facilities have been defined as a minimum 35 percent grant component, with bilateral and multilateral providers allowing market-based debt on a case-by-case basis. The cutoff may be arbitrary according to a December review, and instead only “macro-significant” loans at 1-2 percent of GDP, which may not be tied to specific projects, should be covered in program and surveillance activity. In countries with weak capacity and at high risk of distress additional safeguards may apply, including detailed annual reporting on obligations and purposes. They would be quantified in nominal or present value form and the approval process and management strategy should be designed to strengthen poor country “bargaining power” as the scales tip to global private sourcing, the paper advises.