scholarly journals The International Architecture for Resolving Sovereign Debt Involving Private-Sector Creditors—Recent Developments, Challenges, And Reform Options

Policy Papers ◽  
2020 ◽  
Vol 20 (043) ◽  
Author(s):  
Keyword(s):  
Private Sector ◽  
Sovereign Debt ◽  
Debt Restructuring ◽  
Recent Developments ◽  
Contractual Approach

There have been significant developments in sovereign debt restructuring involving private-sector creditors since the IMF’s last stocktaking in 2014. While the current contractual approach has been largely effective in resolving sovereign debt cases since 2014, it has gaps that could pose challenges in future restructurings.

Reforming the Fund's Policy on Non-Toleration of Arrears to Official Creditors

Policy Papers ◽  
2015 ◽  
Vol 15 (67) ◽  
Author(s):  
Keyword(s):  
Sovereign Debt ◽  
Good Faith ◽  
Policy Framework ◽  
Debt Restructuring ◽  
Step Process ◽  
Recent Developments ◽  
Treatment Principle ◽  
Lending Decisions ◽  
Proposed Modification ◽  
Paris Club

Background: As a follow-up to the May 2013 Executive Board’s discussion of the paper on Sovereign Debt Restructuring: Recent Developments and Implications for the Fund’s Legal and Policy Framework (hereinafter, the “2013 Paper“), this paper proposes a reform to the Fund’s policy on non-toleration of arrears owed to official bilateral creditors (“NTP”) with a view to addressing the major issues related to official sector involvement (OSI) discussed in the 2013 Paper. Unlike the Fund’s lending-into-arrears (“LIA”) policy for private creditors, the NTP prevents Fund lending to countries if they owe unresolved arrears to official bilateral creditors, unless the arrears are covered by a Paris Club agreement or the creditor consents to the Fund providing financing. Nature of the problem: As staff foreshadowed in the 2013 Paper, several aspects of the current NTP present challenges in a changing and increasingly diverse landscape for official bilateral finance. For example, the NTP’s reliance on the practices and conventions of the Paris Club creates challenges in an environment where a growing number of creditors are non-Paris Club members. In particular, the NTP’s dependence on the Paris Club’s comparability of treatment principle to deem away arrears to non-Paris Club bilateral creditors is difficult to justify in circumstances where a Paris Club agreement is not sufficiently representative and the bulk of official bilateral claims are held by non-Paris Club creditors. Further, where there is no Paris Club agreement, the current policy can give individual official bilateral creditors a veto over Fund lending decisions, drawing no distinction between creditors that are contributing to the financing requirements of the program and those that are not, thus leaving the system vulnerable to holdouts. Proposed modification: Staff’s proposal envisages a two-step process: in the first step, all creditors would be encouraged to reach a consensus. While the Paris Club is currently a well-established forum for OSI, the Fund would also recognize agreements among creditors reached in other representative fora, should such fora emerge. If an agreement is reached through the Paris Club and the creditor group so formed represents a significant portion of total official bilateral claims, the Fund would rely on its current practices and deem away arrears to nonparticipating creditors based on the Club’s comparability of treatment principle. Only when an agreement cannot be reached (i) with a representative group of creditors in the Paris Club, or (ii) with each creditor in an alternative grouping or bilaterally, would the Fund consider lending into arrears owed to official bilateral creditors in carefully circumscribed circumstances. The decision to lend in these situations would be subject to a need for prompt Fund assistance, an assessment that the debtor is making good faith efforts to reach an agreement and that the absence of a debt restructuring is due to the unwillingness of the creditor to reach an agreement consistent with the parameters of the Fund-supported program, and a judgment on whether the decision to lend could negatively affect the Fund’s ability to mobilize official financing packages in the future. Likely impact: Staff’s proposal will strengthen incentives for collective action among official bilateral creditors in situations where OSI is necessary. The two-step process encourages individual official bilateral creditors to be part of a multilateral agreement, thus reducing the risk that the Fund would be prevented from assisting a member in need because certain official bilateral creditors are seeking more favorable treatment of their claims at the expense of other contributing creditors. Importantly, the policy will continue to protect official bilateral creditors, as any decision to lend into arrears will be subject to the debtor’s good faith efforts, will be applied in a way that preserves the Fund’s ability to mobilize official financing packages in future, and be subject to the Board’s approval. Next steps: If the Board supports the proposed modification, the new policy will apply immediately to all future Fund disbursements (including under existing arrangements) with respect to existing and future arrears owed to official bilateral creditors.

Sovereign Debt Restructuring - Recent Developments and Implications for the Fund's Legal and Policy Framework

Policy Papers ◽  
2013 ◽  
Vol 2013 (35) ◽  
Author(s):  
Keyword(s):  
Collective Action ◽  
Sovereign Debt ◽  
Market Access ◽  
Policy Framework ◽  
Recent Experience ◽  
Debt Restructuring ◽  
Debt Sustainability ◽  
Collective Action Problems ◽  
Recent Developments ◽  
Policies And Practices

his paper reviews the recent application of the Fund’s policies and practices on sovereign debt restructuring. Specifically, the paper: • recaps in a holistic manner the various policies and practices that underpin the Fund's legal and policy framework for sovereign debt restructuring, including on debt sustainability, market access, financing assurances, arrears, private sector involvement (PSI), official sector involvement (OSI), and the use of legal instruments; • reviews how this framework has been applied in the context of Fund-supported programs and highlights the issues that have emerged in light of recent experience with debt restructuring; and • describes recent initiatives in various fora aimed at promoting orderly sovereign debt restructuring, highlighting differences with the Fund’s existing framework. Based on this stocktaking, the paper identifies issues that could be considered in further depth in follow-up work by staff to assess whether the Fund’s framework for debt restructuring should be adapted: • first, debt restructurings have often been too little and too late, thus failing to re-establish debt sustainability and market access in a durable way. Overcoming these problems likely requires action on several fronts, including (i) increased rigor and transparency of debt sustainability and market access assessments, (ii) exploring ways to prevent the use of Fund resources to simply bail out private creditors, and (iii) measures to alleviate the costs associated with restructurings; • second, while creditor participation has been adequate in recent restructurings, the current contractual, market-based approach to debt restructuring is becoming less potent in overcoming collective action problems, especially in pre-default cases. In response, consideration could be given to making the contractual framework more effective, including through the introduction of more robust aggregation clauses into international sovereign bonds bearing in mind the inter-creditor equity issues that such an approach may raise. The Fund may also consider ways to condition use of its financing more tightly to the resolution of collective action problems; • third, the growing role and changing composition of official lending call for a clearer framework for official sector involvement, especially with regard to non-Paris Club creditors, for which the modality for securing program financing commitments could be tightened; and • fourth, although the collaborative, good-faith approach to resolving external private arrears embedded in the lending into arrears (LIA) policy remains the most promising way to regain market access post-default, a review of the effectiveness of the LIA policy is in order in light of recent experience and the increased complexity of the creditor base. Consideration could also be given to extending the LIA policy to official arrears.

Book Reviews

2016 ◽  
Vol 54 (4) ◽  
pp. 1399-1401
Keyword(s):  
Sovereign Debt ◽  
Columbia University ◽  
Debt Restructuring ◽  
Formal Framework ◽  
Contractual Approach ◽  
Debt Crises ◽  
Specific Implementation ◽  
The University

John O. S. Wilson of the University of St. Andrews reviews “Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises,” edited by Martin Guzman, José Antonio Ocampo, and Joseph E. Stiglitz. The Econlit abstract of this book begins: “Fifteen papers, most originally presented at the conference 'Frameworks for Sovereign Debt Restructuring' held at Columbia University in November 2014, examine general issues and goals of debt restructuring as well as the deficiencies of the current nonsystem, focusing on an analysis of the resolution of Argentina's and Greece's debt crises, possible improvements in the contractual approach, and specific implementation proposals for a multinational formal framework.”

Second Progress Report On Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts

Policy Papers ◽  
2016 ◽  
Vol 2016 (73) ◽  
Author(s):  
Keyword(s):  
Sovereign Debt ◽  
Active Role ◽  
Progress Report ◽  
Sovereign Bond ◽  
Sovereign Bonds ◽  
Recent Developments ◽  
Substantial Progress ◽  
Contractual Approach ◽  
Voting Procedures ◽  
The Imf

endorsed in October 2014 the inclusion of key features of enhanced pari passu provisions and collective action clauses (CACs) in new international sovereign bonds. Specifically, the Executive Board endorsed the use of (i) a modified pari passu provision that explicitly excludes the obligation to effect ratable payments, and (ii) an enhanced CAC with a menu of voting procedures, including a “single-limb” aggregated voting procedure that enables bonds to be restructured on the basis of a single vote across all affected instruments, a two-limb aggregated voting procedure, and a series-by-series voting procedure. Directors supported an active role for the IMF in promoting the inclusion of these clauses in international sovereign bonds. The IMFC and the G20 further called on the IMF to promote the use of such clauses and report on their inclusion. In September 2015, the IMF published a progress report on the inclusion of the enhanced clauses in international sovereign bonds as of end-July 2015. The report found that since the Executive Board’s endorsement, substantial progress had been made in incorporating the enhanced clauses: 41 issuances, representing 60 percent of the nominal principal amount of total issuances, had included the enhanced clauses as of July 31, 2015. The 2015 paper also provided initial observations on the patterns of incorporation, the market impact of inclusion of the enhanced clauses, and an update on the outstanding stock of international sovereign bonds. This paper provides a further update on the inclusion of the enhanced clauses and on the outstanding stock of international sovereign bonds as of October 31, 2016. Section II reports on the inclusion of these enhanced provisions, finding that uptake of the clauses has continued, with only a small minority of new issuances not including them. Section III provides an update on the outstanding stock, which reveals that while an increasing percentage of the outstanding stock includes enhanced clauses, a significant percentage of the stock still does not. Section IV reports on the use of different bond structures, and Section V describes the staff’s ongoing outreach efforts. Section VI briefly reports on other recent developments relevant to the contractual approach to sovereign debt restructuring and Section VII concludes with next steps.

Jurisdiction and Cognate Matters

2018 ◽  
Author(s):  
Hayk Kupelyants
Keyword(s):  
Sovereign Debt ◽  
English Court ◽  
Debt Restructuring ◽  
International Jurisdiction ◽  
Class Actions ◽  
Brussels Regulation

Chapter 3 examines the international jurisdiction in sovereign debt disputes and particularly the following matters: service of proceedings; the jurisdiction under the Brussels Regulation, the jurisdiction under English national rules; individual standing of beneficial bondholders; class actions. The chapter also examines the issue of pre-emptive strikes in sovereign debt litigation, in other words whether private creditors may initiate legal actions before the conclusion of the sovereign debt restructuring and how courts may constrain such litigation. The chapter argues that the English courts may stay proceedings if they are brought in contravention of the powers of bondholders under majority action clauses. The chapter lastly addresses the issue of whether the majority may modify the bonds after the English court has issued a judgment.

Risk Management Optimization for Sovereign Debt Restructuring

2015 ◽  
Vol 6 (2) ◽  
Author(s):  
Andrea Consiglio ◽  
Stavros A. Zenios
Keyword(s):  
Risk Management ◽  
Scenario Analysis ◽  
Sovereign Debt ◽  
Risk Measure ◽  
Policy Tools ◽  
Debt Restructuring ◽  
Tail Risk ◽  
Debt Sustainability ◽  
Scenario Optimization ◽  
Management Optimization

AbstractDebt restructuring is one of the policy tools available for resolving sovereign debt crises and, while unorthodox, it is not uncommon. We propose a scenario analysis for debt sustainability and integrate it with scenario optimization for risk management in restructuring sovereign debt. The scenario dynamics of debt-to-GDP ratio are used to define a tail risk measure, termed

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