Sovereign Debt Restructuring’s Trusted Travails
The IIF’s Group of Trustees for an over decade-old debt workout voluntary code of conduct issued a mixed annual review of recent cases and related investor relations progress, while stressing new collective action clauses and other legal changes as main breakthrough channels. Argentina’s new government settled with most holdouts, but $2 billion in claims remain outstanding. Ukraine’s 2015 deal entailed a 20 percent principal haircut on $18 billion in Eurobonds and GDP-linked warrants as an offset, but Russia’s $3 billion holding, although classified as official by the IMF, is the subject of a London court dispute. Mozambique entered “selective default” on $800 million in state tuna company paper, which was exchanged for sovereign exposure in March this year on short notice without full consultation, according to the review. It was presented as a liability management exercise, but contained exit consents forcing action, and later official revealed additional undisclosed borrowing which caused bilateral and multilateral lenders to suspend lines. Venezuela’s oil monopoly has proposed a distressed swap in ratings agency views, with the currency “in free fall” and reported public debt at 80 percent of GDP, including over $30 billion owed China. Puerto Rico, a US commonwealth, reneged on $35 billion in repayments, and congressional legislation ordered a moratorium on hedge fund lawsuits and creation of a fiscal control board. Contract reforms, including on pari passu and creditor engagement, were promoted at the G20 summit in China. In the past two years model practice has been slow for the latter, which requires good-faith dialogue, steering committee recognition, and debtor legal fee coverage.
Proactive investor outreach and data distribution are also integral, and “enormous strides” are apparent, with almost half of 40 counties tracked with dedicated units for these purposes. In the latest overall rankings, Russia, Romania and Zambia moved up with more detailed information, contact availability and web-based communication. Ukraine benefited from external debt renegotiation as it translated sites into English, and Egypt’s score rose with forward-looking policy guidance and targeted lists. Out of a maximum 42 tally, Indonesia, Mexico, Turkey and Uruguay were in the top tier, followed by Brazil, Russia, South Africa and Poland in the second 35+ category. China became a subscriber to the IMF’s statistical standards over the period, and Nigeria released debt time series numbers. The Fund released its own working paper on investor relations priorities, citing positive outcomes for primary and secondary markets, risk appetite and maturing bond rollover with implementation. As the IIF update circulated, Mongolia previewed $1 billion in official support to skirt default on $1.5 billion due on commercial instruments the next two years, more than current reserves. After winning parliamentary elections, the People’s Party revealed a budget deficit close to 20 percent of GDP despite austerity steps, as major mining projects ramp up including the next phase of the copper-gold OYU Tolgoi venture. Reduced capital and social spending aims to half the budget gap, and growth is forecast at 3 percent in 2017. Bilateral Asian creditors are major participants in the rescue, with China’s ties through the Development Bank and One Belt One Road platform matching a corridor plan with Russia to build on rival mistrust.
