Design of SDRM discussed
On December 19 and 20, the IMF’s Executive Board—chaired by First Deputy Managing Director Anne Krueger—continued discussions of the possible features of a new sovereign debt restructuring mechanism (SDRM). The discussion was a step toward fulfilling the International Monetary and Financial Committee’s request for a concrete SDRM proposal that could be considered at its next meeting in April. The Board’s debate revolved around a staff paper that reflected extensive staff contacts with private market participants, debt restructuring practitioners and other workout specialists, academics, and members of the official community.
In her summary of the Board’s discussions, Krueger noted that “most Directors reaffirmed their belief that a carefully designed debt restructuring mechanism can make an important contribution to improving the comprehensive framework for crisis resolution and the international financial architecture more generally. The objective of the SDRM is to provide a framework that strengthens incentives for a sovereign and its creditors to reach a rapid and collaborative agreement on a restructuring of unsustainable debt in a manner that preserves the economic value of assets and facilitates a return to medium-term viability, and thereby reduces the cost of the restructuring process.
“To achieve this objective, the SDRM must not only address collective action problems among creditors, but also catalyze an early and effective dialogue and exchange of information between the debtor and its creditors. By creating greater predictability in the restructuring process, the SDRM should also be expected to improve the functioning of international capital markets—an objective that should remain a primary concern going forward.”
While Executive Directors found much common ground for moving the discussion forward, a wealth of views were expressed on many aspects of a possible SDRM. For some important features of the mechanism, Directors insisted that all options under consideration remain on the table at this stage. Although a brief summary cannot do justice to the breadth of the debate, issues generating the most discussion included the following:
•Scope of claims to be covered. Directors generally agreed that, in cases where a sovereign’s debt burden was unsustainable, a broad range of claims might need to be restructured—both to help ensure a return to debt sustainability and to achieve sufficient intercreditor equity to garner broad support for the restructuring. At the same time, Directors observed that the debtor could decide to exclude certain types of claims from a restructuring, in particular to limit the extent of economic and financial dislocation.
Most Directors therefore thought that the mechanism should identify the range of claims that could potentially be restructured under the provisions of the SDRM while leaving it to the debtor—in negotiations with its creditors—to determine which of these eligible claims would need to be restructured in a particular case. Much of the discussion then focused on which types of claims should be excluded from the SDRM and how to define more precisely those claims that should be included.
In particular, Directors supported the exclusion of claims that were already governed by domestic law and subject to the exclusive jurisdiction of domestic courts. However, they stressed that the mechanism’s transparency requirements would need to help ensure that the restructuring of these claims would be adequately coordinated with the restructuring of claims under the SDRM.
Directors did not reach a definitive view on how to treat the claims of official bilateral creditors. While many thought that such debts had been efficiently restructured in the past (as needed) through the Paris Club, a number of other Directors thought that including official bilateral creditors under the SDRM would be important for achieving greater inter-creditor equity.
•Activation. Most Directors thought that the debtor should be allowed to activate the mechanism unilaterally, without third-party confirmation that the activation was justified. They noted that several proposed features of the mechanism would discourage abuse of the SDRM. Furthermore, the IMF would be able to influence a member’s decision to activate the mechanism through its policy dialogue and the exercise of its financial powers.
•Consequences of activation. A central issue is whether the mechanism should provide a stay on creditor enforcement. Many Directors favored keeping open the option of an automatic stay on litigation that would remain in place for a brief period until creditors were sufficiently organized to vote on an extension.
However, many other Directors noted that an automatic stay would constitute a significant, and possibly unnecessary, erosion of contractual rights. They viewed the use of a more limited approach—which lawyers refer to as the hotchpot provision—possibly supplemented by injunctive relief as a workable alternative that would discourage litigation without imposing a limitation on enforcement rights. Some Directors urged that this rule be supplemented by a feature that would enable the Sovereign Debt Dispute Resolution Forum, upon the request of the debtor and the approval of a qualified majority of creditors, to issue a stay under specific circumstances.
Directors encouraged management and the staff to continue work on the design features of the SDRM. The conference on the SDRM—hosted by the IMF on January 22—will be an important opportunity to make further progress in clarifying outstanding issues and in building consensus on the mechanism’s design.
The full text of the Public Information Notice on the Board discussion and the staff paper are available on the IMF’s website (www.imf.org).
Photo credits: Denio Zara, Padraic Hughes, Pedro Márquez, and Michael Spilotro for the IMF, pages 1, 4-10, and 15; Christophe Simon for AFP, page 16.