Debt Restructuring Principles’ Pothole Paving
The Institute for International Finance released its annual status report on the 15-year old voluntary emerging market debt restructuring code around the IMF-World bank meetings, as it predicted flat capital inflows to twenty-five economies at just over $1 trillion, half to China. With benchmark stock and bond index entry almost $600 billion will go there as a record, while the rest of the universe’s take is “subdued” and 30% lower than in 2017. Trade conflict between Beijing and Washington could weigh on future allocation in “volatile and challenging” conditions which underscore the stability contribution of these agreed practices between government and quasi-sovereign issuers and private lenders and investors, the IIF comments. The anti-crisis guidelines are flexible and market-based and designed to promote communication and speedy resolution alongside dedicated outreach programs and statistical disclosures the group also tracks regularly. The report lists shared creditor-debtor benefits from cooperation and dialogue, as evidenced by individual cases and broader poor country relief initiatives. The trustees overseeing the norms held consultations with the London-based International Capital Markets Association on collective action clauses and the “good faith negotiation” definition, and with the Bank of England on development of model GDP-linked instruments. They expressed concern about Africa’s debt increase since official cancellation to 50% of GDP last year, with bond and non-Paris Club holders now controlling a large chunk. The continent is the focus of the restructuring profiles, with Latin America examples also reviewed. Mozambique, after admitting to hidden and unauthorized borrowing which resulted in bilateral and multilateral aid suspension, unveiled a swap proposal in March with estimated 50% net present value write-offs rejected by major creditors. They contended that future gas revenues and fiscal consolidation gains were not fully calculated, and that Eurobonds and loans were treated differently. In August a counteroffer was presented with a value recovery feature and annual debt-servicing cap. However debt/GDP is over 120% on 3% growth, and anti-corruption safeguards are still lacking, according to the description.
Chad renegotiated its second oil for cash facility with commodity giant Glencore with participation from global asset managers, and in June stuck a deal within the framework of medium-term sustainability under its IMF program. The Republic of Congo turned to the Fund in 2017 following a tenfold jump in Chinese obligations to $3.5 billion, and previously unreported state oil company liabilities which together pushed the debt-GDP ratio to 110%. Construction firm Commisimpex also has $1 billion in unpaid bills, and contractors succeeded in freezing sovereign bond coupon payments to trigger default. Commercial creditors and government advisers are in constructive talks but the workout depends on China’s approach and a new Fund arrangement. Venezuela and Barbados are the other experiences, and the former is behind on $55 billion in combined state and oil company bonds, with acceleration not yet voted to trigger cross-default provisions. US lawsuits have won attachment of Citgo assets, but organized negotiation is “impossible” with the Maduro administration in view of sanctions and unsound economic policies, the IIF observes. Another $15 billion is outstanding in arbitration claims; big bilateral creditors include China and Russia; and instruments either do not contain or have dated collective action clauses to lighten principles’ weight.
