Anthony, Myrvin, Impavido, Gregorio and van Selm, Bert, 2020, “Barbados’ 2018–2019 Sovereign Debt Restructuring – A Sea Change?”, WP/20/34.
Arslanalp, Serkan, Bergthaler, Wolfgang, Stokoe, Philip and Tieman, Alexander, 2018, “The current landscape”, in: Sovereign Debt: A Guide for Economists and Practitioners, (Washington: International Monetary Fund).
Asonuma, Tamon and Trebesch, Christoph, 2016, “Sovereign Debt Restructurings: Preemptive or Post-Default”, Journal of the European Economic Association, Volume 14, Issue 1, pp. 175–214.
Asonuma, Tamon, Chamon, Marcos, Erce, Aitor, and Sasahara, Akira, 2019, “Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel”, IMF Working Paper No. 19/69.
Asonuma, Tamon, Niepelt, Dirk and Ranciere, Romain G., 2018, “Sovereign Bond Prices, Haircuts and Maturity”, NBER Working Paper 23864.
Bardozzetti, Alfredo and Dottori, Davide, 2013, “Collective action clauses: how do they weigh on sovereigns?”, Bank of Italy, Economic Working Papers No. 897.
Borensztein, Eduardo, and Panizza, Ugo, 2009, “The Costs of Sovereign Default”, IMF Staff Papers, Volume 56, Issue 4, pp. 683–741.
Buchheit, Lee and Gulati, Mitu, 2019, “Sovereign Debt Restructuring and U.S. Executive Power”, Capital Markets Law Journal, Volume 14, Issue 1, pp. 114–130.
Buchheit, Lee and Gulati, Mitu, 2020, “The Argentine Collective Action Clause Controversy”, Capital Markets Law Journal (forthcoming 2020).
Cruces, Juan J. and Trebesch, Christoph, 2013, “Sovereign Defaults: The Price of Haircuts”, American Economic Journal: Macroeconomics, 5 (3): 85–117.
Eichengreen, Barry, Kletzer, Kennet and Mody, Ashoka, 2003, “Crisis Resolution: Next Steps”, National Bureau of Economic Research, Working Paper No. 10095.
Hagan, Sean, 2020, “Sovereign debt restructuring: The centrality of the IMF’s role”, Peterson Institute for International Economics Working Paper 20–13.
International Monetary Fund and World Bank, 2020a, Collateralized Transactions: Key Considerations for Public Lenders and Borrowers (Washington).
International Monetary Fund and World Bank, 2020b, Public Sector Debt Definitions and Reporting in Low-Income Developing Countries (Washington).
International Monetary Fund and World Bank, 2020c, Staff Note for the G20 International Financial Architecture Working group (IFAWG)—Recent Developments on Local Currency Bond Markets in Emerging Economies (Washington).
International Monetary Fund and World Bank, Implementation Update on the Joint IMF-WB Multi-Prong Approach for Addressing Debt Vulnerabilities (forthcoming).
International Monetary Fund and World Bank, 2003, Report of the Managing Director to the International Monetary and Financial Committee on a Statutory Sovereign Debt Restructuring Mechanism (Washington).
International Monetary Fund and World Bank, 2013, Sovereign Debt Restructuring – Recent Developments and Implications for the Fund’s Legal and Policy Framework (Washington).
International Monetary Fund and World Bank, 2014, Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring (Washington).
International Monetary Fund and World Bank, 2015a, Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts (Washington).
International Monetary Fund and World Bank, 2015b, The Fund’s Lending Framework and Sovereign Debt—Further Considerations (Washington).
International Monetary Fund and World Bank, 2016, Second Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts (Washington).
International Monetary Fund and World Bank, 2017a, IMF Policy Paper, State-Contingent Debt Instruments for Sovereigns (Washington).
International Monetary Fund and World Bank, 2017b, Third Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts (Washington).
International Monetary Fund and World Bank, 2019, Fourth Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts (Washington).
International Monetary Fund and World Bank, 2020a, The Evolution of Public Debt Vulnerabilities in Lower Income Economies (Washington).
International Monetary Fund and World Bank, IMF Staff Discussion Note, Role of State-Contingent Debt Instruments and Value Recovery Instruments in Sovereign Debt Restructurings (forthcoming).
Mihalyi, David, Adam, Aisha and Jyhjong, Hwang, 2020, “Resource-Backed Loans: Pitfalls and Potential”, Report 27, Natural Resource Governance Institute, February 2020.
Sturzenegger, Federico, 2004, “Tools for the Analysis of Debt Problems”, Journal of Restructuring Finance, Volume 1, Issue 1, pp. 201–223.
Weidemaier, Mark, 2019, “Restructuring Italian (Or Other Euro Area) Debt: Do Euro CACs Constrain or Expand the Options?”, UNC Legal Studies Research Paper.
Zandstra, Deborah, 2017, “New Aggregated Collective Action Clauses and Evolution in the Restructuring of Sovereign Debt Securities”, Capital Markets Law Journal, Volume 12, No. 2, pp. 180–203.
Zettelmeyer, Jeromin, Trebesch, Christoph, and Gulati, Mitu, 2013, “The Greek Debt Restructuring: An Autopsy”, Economic Policy, Volume 28, pp. 513–563.
In 2002, the IMF proposed a sovereign debt restructuring mechanism (“SDRM”), which would have been a statutory sovereign bankruptcy process but did not garner the required membership support. Following this, the IMF endorsed the contractual approach. See: Krueger, Anne 2002, “A New Approach to Sovereign Debt Restructuring” (Washington: International Monetary Fund); IMF 2003, Report of the Managing Director to the International Monetary and Financial Committee on a Statutory Sovereign Debt Restructuring Mechanism (Washington).
See Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework, April 2013, setting out a four-prong work stream.
Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring, October 2014 (the “2014 Paper”). The four progress reports on inclusion of enhanced CACs were published in September 2015, December 2016, December 2017, and March 2019, respectively.
The Fund’s Lending Framework and Sovereign Debt—Further Considerations, Sup. 1, p. 30, April 2015.
Debt restructurings are typically associated with significant output costs but these costs are lower in cases where restructuring is preemptive or where an agreement is reached quickly after a default. Several channels can lead to lower GDP growth after a debt restructuring—which average about 2 percentage points each year on average-including reduced sovereign access to market financing, spillovers on trade, investment, and productivity, and reduced corporate access to foreign credit (Sturzenegger 2004, Borensztein and Panizza 2009). However, output costs are smaller after a preemptive restructuring in which an agreement is reached in a pre-default context. Preemptive restructurings are quicker (only 1 year compared to 5 years in post-default restructurings), have a smaller NPV haircut, and see a quicker re-access to international capital markets (Asonuma and Trebesch, 2016). Even post default, output costs can be reduced when debtors and creditors are able to reach a quick agreement (Asonuma et al. 2019). The quicker agreement seems to be even more important for attenuating output costs after a default than a smaller NPV haircut.
Preemptive and post-default cases accounted for 38 and 62 percent of privately-held external debt restructurings, respectively, in 1978–2010, and the average duration of preemptive and post-default cases was 1.0 and 5.0 years, respectively (Asonuma and Trebesch 2016). These numbers are based on a definition of restructuring events that treats overlapping restructurings involving the same debtor but different debt instruments as separate restructurings. Treating such overlapping restructurings as one event would lead to longer average durations. The fact that the average duration of restructurings since 2014 have been relatively short is robust to these differences in definitions.
See IMF Staff Discussion Note, Role of State-Contingent Debt Instruments and Value Recovery Instruments in Sovereign Debt Restructurings (forthcoming).
Some GDP-linked bonds have suffered from measurement issues that have led to unexpectedly low payouts.
As of August 11, 2020, 43 of the 73 eligible countries (or 59 percent) have made formal requests for the DSSI (based on creditor and debtor data) and requests continue to come in. The G20 estimates debt service deferral under the initiative likely to be on the order of US$ 5.3 billion. Of the remaining DSSI eligible countries, about a quarter have informally indicated interest to participate or are still considering.
Some eligible sovereigns also have no debt to the private sector falling due during the deferral period.
Belize also recently reprofiled its international sovereign bond through a consent solicitation.
Out of the 50 countries with outstanding debt, 25 fully relied on loans at end-2018; see also: IMF Policy Paper, The Evolution of Public Debt Vulnerabilities in Lower Income Economies, February 2020.
SOE debt can be part of transparent on-lending from the government. However, SOEs’ debts are generally off-budget, and can consist of debt used to finance regular business activities but have been in some cases incurred on a collateralized basis. With SOEs’ financial reporting cycles often operating at long lags, their financial position can lack in transparency.
International Monetary Fund and World Bank, Staff Note for the G20 International Financial Architecture Working Group (IFAWG)—Recent Developments on Local Currency Bond Markets in Emerging Economies, January 2020.
Arslanalp Serkan, Bergthaler Wolfgang, Stokoe Philip and Tieman Alexander, “The current landscape”, in: Sovereign Debt: A Guide for Economists and Practitioners, IMF, 2018.
See forthcoming IMF Board Paper on Issues in Restructuring of Sovereign Domestic Debt.
Importantly, this data misses direct (non-syndicated) lending, for which no systematic data sources exist. Data sources based on new reports, government documents and contractor websites suggest that the volume of commodity-backed lending to developing countries is substantial, but the coverage of this data is insufficient to identify trends. For example, a recent report identified 52 commodity-backed loans to sub-Saharan Africa and Latin America totaling $164 billion between 2004 and 2018, (Mihalyi, Adam and Hwang, “Resource-Backed Loans: Pitfalls and Potential”, Report 27, Natural Resource Governance Institute, February 2020).
Generally speaking, escrow accounts in the lender’s jurisdiction are the most readily enforceable (but typically cover only a small portion of the loan), followed by assets located outside the borrowers’ jurisdiction (e.g., equity shares in a company). Movable assets (e.g., oil cargoes) can also be subject to enforcement actions. Assets within the borrower’s jurisdiction are typically harder to enforce.
For key considerations regarding entering into collateralized transactions, see the January 2020 G20 IFA note Collateralized Transactions: Key Considerations for Public Lenders and Borrowers. As recognized in a recent IMF Policy Paper, comprehensive sovereign debt restructurings that have taken place in a few LICs have been protracted, incomplete and non-transparent. For instance, an inadequate first restructuring agreement that raised the NPV of the loan through the imposition of fees required Chad to restructure twice (2015, 2017) in circumstances involving a commercial collateralized lender. For the Republic of Congo, the restructuring that began in early 2018 remains incomplete. See: IMF Policy Paper, The Evolution of Public Debt Vulnerabilities in Lower Income Economies, February 2020.
The three creditor committees were a first group representing small bondholders of international bonds with and without the enhanced CAC (Argentina Creditor Committee, ACC), a second group representing large bondholders also holding both types of bonds (Ad-Hoc Committee, AHC), and a third group representing holders of bonds without the enhanced CACs only (Exchange Bondholders, EB).
Differences in views/approaches among creditors also reflected the diversity in the holdings of domestic-law debt, both in USD, which is being restructuring alongside foreign law-governed debt and in pesos (not being restructured).
The three creditor committees were the “Ad Hoc Group”, comprising major institutional holders of Ecuador’s external sovereign debt, a “Steering Committee” (the “Minority Committee”), and an ad hoc group of holders of the 2024 bond.
On August 10, 2020, the authorities announced that the consent solicitation and the invitation to exchange had been approved by a majority of eligible bondholders, and that they had obtained a high participation rate in the exchange, with around 98.3 percent of the aggregate principal amount agreeing to the exchange.
For purposes of this paper, “new issuances” exclude reopenings of previous issuances or take-downs under programs established prior to October 1, 2014. All shares are calculated in terms of total nominal principal amount. In 2014, the IMF also endorsed revised pari passu provisions that make clear the sovereign has no obligation to make ratable payments to holdout creditors in a restructuring.
The figures presented in this paper are based on information available to staff through the Perfect Information database (i.e., a commercial data service). The sample includes international sovereign bonds issued between October 1, 2014 and June 30, 2020, except Euro-Area sovereign issuances (as they are required by law to include Euro Area-specific CACs), China’s domestic issuances under Hong Kong law, and GDP warrants. There may also be international sovereign bond issuances (e.g., private placements) that have not been captured by the database relied upon by staff.
As a share of the nominal principal amount, about 45 percent of the total stock outstanding of international sovereign bonds are governed by English law and about 52 percent by New York law.
Since 2014, such clauses have also been included in 91 percent and 88 percent of New York and English bonds, respectively, and 91 percent of emerging market sovereign issues and 96 percent of frontier market issues. Pari passu clauses are generally incorporated as a package with the enhanced CACs.
This agreement will translate into one of several upcoming amendments to the European Stability Mechanism (ESM) Treaty. As such, approval of such CACs remains subject to the signing and ratification of the amendment agreement to the ESM Treaty by each ESM Member.
See Eichengreen, Barry, Kletzer, Kenneth, and Mody, Ashoka, “Crisis Resolution: Next Steps”, National Bureau of Economic Research Working Paper No. 10095, November 2003; Bardozzetti, Alfredo and Dottori, Davide, “Collective action clauses: how do they weigh on sovereigns?” Bank of Italy, Economic Working Papers No. 897, January 2013; Bradley, Michael and Gulati, Mitu, “Collective Action Clauses for the Eurozone”, Review of Finance, 2013, pp. 1–58; Chung, Kay and Papaioannou, Michael, “Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?”, IMF, WP/20/162.
Chung, Kay and Papaioannou, Michael, “Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?”, IMF, WP/20/162; note that the empirical analysis sample is from September 2014 to March 2020 and this did not include the period when market started to show price differentiation in Ecuador and Argentina restructurings in 2020.
Ecuador’s 2024 bond provision allowed modifications of reserved matters with the consent of 75 percent of the aggregate amount of outstanding principal. A higher per-series voting threshold may be seen as advantageous in a restructuring for creditors, because it is easier for creditors to acquire a sufficiently high percentage of the bond series to block the deal.
For instance, two of the Exchange Bonds maturing in 2033 have higher coupons, as well as amortization features that require Argentina to make 20 semi-annual installments of principal payment over 10 years before maturity.
The NPV haircuts were 42 percent in Ecuador and 36.2 percent in Argentina.
Over 98 percent of creditors consented to the Ecuador exchange, resulting in 100 percent participation after the use of CACs. Ministry of Economy and Finances of Ecuador, “The Republic of Ecuador Announces Results of its Invitation to Exchange” Press Release, dated August 10, 2020. Over 93 percent of creditors consented to the Argentine exchange, resulting in over 99 percent participation (Press Release, dated August 31, 2020).
Minimum participation threshold is designed to assure creditors that the debtor would only proceed with the debt exchange only if a qualified majority of creditors decide to participate.
Argentina’s offer included a complex “minimum participation condition” which could be met at much lower participation levels (as little as 42 percent prior to the activation of CACs and about 60 percent after activation of CACs).
It refers to a legal technique that can be used in a debt restructuring where a majority of bondholders, when accepting the exchange offer and exiting from the existing debt instruments, can vote to modify the nonpayment terms of these existing debt instruments to make these instruments less attractive to hold and more difficult to enforce.
In Ecuador, bondholders who tendered certain eligible bonds received 86 percent of the accrued and unpaid interest on such bonds covering a specified time period, in the form of a zero-coupon bond maturing in 2030. In Argentina, bondholders who tendered certain eligible bonds received a USD 1.00 percent 2029 Bond or Euro 0.500 percent 2029 Bond (depending on the type of New Bonds the bondholder will receive pursuant to the offer), in an aggregate principal amount determined by reference to interest accrued and unpaid on such eligible bonds, covering a specified time period.
For a more detailed discussion, see Walker, Mark and Chong, Alice, “Collective Action Clauses Reexamined: Thank you Argentina”, SSRN, August 2020.
The UK: Debt Relief (Developing Countries) Act 2010; the UK territories of Jersey and Isle of Man: Debt Relief (Developing Countries)(Jersey) Law 2013, Heavily Indebted Poor Countries (Limitation on Debt Recovery) Act 2012; Belgium: Loi relative à la lutte contre les activités des fonds vauteurs 2015; France: LOI n° 2016–1691 du 9 décembre 2016 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique.
In New York, sovereign debtors sought to use a state statute that codified the common-law doctrine of champerty as a similar defense to lawsuits. See N.Y. Judicial Law §489. However, courts adopted a narrow interpretation, excluding the business model of distressed debt funds from the scope of prohibited activity. See, e.g., Elliott Assocs., LP v. Banco de la Nacion, 194 F.3d 363 (2d Cir. 1999); Turkmani v. Republic of Bolivia, 193 F.Supp.2d 165 (D.D.C. 2002). Further, the statute was subsequently amended in 2004 to eliminate the defense for debt purchases with an aggregate purchase price of more than USD 500,000.
The law’s constitutionality was upheld by the Belgian Constitutional Court against a challenge by NML Capital. Belgium, C.C., May 31, 2018, n°61/2018.
As an example, the composition of Venezuela’s debt means that an eventual debt restructuring would be extremely complex, with significant risk of disruptive holdout behavior: (i) in addition to its bonded debt and loans, there are other significant liabilities, including those arising from arbitral awards (investment disputes), foreign exchange allocation to the private sector, and intra-government debts (e.g., PDVSA’s debt with the central bank); (ii) PDVSA’s bonds do not contain CACs, and a share of its debt is in the form of US-issued promissory notes; (iii) a significant share of the debt owed to official bilateral creditors is likely to be collateralized with receivables from oil exports; and (iv) Venezuela’s oil cargoes and its assets abroad, most notably CITGO as well as other PDVSA refineries and oil-related receivables, could be available for attachment by commercial creditors.
Many countries have a debt portfolio that includes bonds (issued post-2014) with enhanced CACs and bonds (issued prior to 2014) with series-by-series or two-limb aggregated CACs. In Argentina’s 2020 exchange, bonds issued under the 2005/2010 indenture (which did not include enhanced CACs) were allowed to remain under the 2005/2010 indenture, given preference of bondholders. For a discussion of this issue, see Sobel, Mark, “Argentina and creditors enter new round”, OMFIF, June 2020.
These arguments were made by a group of bondholders in recent Venezuela litigation (Casa Express Corp. v. Venezuela, US District Court for the Southern District of New York). Judgment is still pending on this case.
This means that the parties’ legal obligations under an accelerated bond are extinguished by a court judgment on liability—the debtor’s obligation to repay principal and interest becomes merged in the judgment, and the creditor obtains the right to enforce its judgment through the judicial enforcement mechanisms, as opposed to relying on the contractual terms.
Weidemaier, Mark, “Venezuela, Lebanon, and Tools to De-Fang ‘Rush-In’ Creditors”, Credit Slips, February 17, 2020. The rights of bondholders holding a monetary judgment derives from the judgment itself, so arguably a withdrawal of acceleration would no longer affect these bondholders.
Some legal commentators have supported this view – see Weidemaier, Mark, “Judgments > CACs”, Credit Slips, February 12, 2020.
As reported in past papers, federal courts in New York interpreted the pari passu clause contained in the defaulted bonds of Argentina (issued prior to Argentina’s 2001 default but not tendered in its 2005 and 2010 debt restructurings) to require ratable payments to restructured bondholders and holdout creditors. This essentially prohibited Argentina from making payments on its restructured bonds unless Argentina paid in full the principal and interest owed and past due on the original unrestructured claims. Argentina settled the claims with the holdout creditors in 2016. See IMF 2013 and IMF 2016. As noted above, the vast majority of bonds issued since 2014 include revised pari passu clauses that make clear “ratable” payments to holdout creditors are not required. Moreover, New York courts have since clarified that a sovereign’s decision to pay some creditors but not others in and of itself does not give rise to a breach of the pari passu clause, and some other acts by the sovereign are necessary. See White Hawthorn, LLC et al. v. the Republic of Argentina and Ajdler v. Province of Mendoza.
For example, a small group of creditors in the Ecuador (2020) restructuring filed a complaint in federal court in New York the week the exchange was due to close. Ecuador extended the deadline by one business day to allow time for the judge to rule. Plaintiffs’ request to further delay the closing of the exchange was denied, with the judge ruling that the lawsuit was unlikely to be successful on the merits. Contrarian Emerging Markets L.P. et al. v. The Republic of Ecuador, 20 Civ. 5890-VEC (SDNY 2020).
This means that the bank lender remains the lender on record, but all economic rights and risks would have been transferred to the entity which entered into the participation agreement. In general, the bank lender may have to obtain the consent of the participant before agreeing to amendments to payment terms.
Syndicated loan agreements generally provide that certain amendments may be taken by the majority (or super-majority) of the lenders from time to time (often referred to as the majority or super-majority lenders provisions). The majority lenders will usually be defined as those members of the syndicate at the relevant time which (taken together) hold a specified percentage of the total commitments under the senior facilities (typically two-thirds by commitment). Supermajority voting might also be included in an agreement where a higher consent threshold is deemed appropriate for particularly significant amendments or waivers, such as for proposed changes in the security structure. However, certain decisions are considered ‘all lender’ decisions. These generally include (amongst other things) changes to the principal amount of any senior facility, the amounts payable by way of interest or fees and/or the maturity of any senior facility. Guide to Syndicated Loans and Leveraged Finance Transactions, Loan Market Association.
See Weidemaier, Mark 2019, “Restructuring Italian (Or Other Euro Area) Debt: Do Euro CACs Constrain or Expand the Options?”, UNC Legal Studies Research Paper.
See Buchheit, Lee and Gulati, Mitu, 2012, “Restructuring a Sovereign Debtor’s Contingent Liabilities”, SSRN.
Collateral-like features (which are not legally collateral but give the creditor similar features as collateral such as oil pre-payment agreements) may have similar implications.
Exceptions are generally limited to two types: first, liens on a property which is the sole security for payment of the purchase price of such property (so called acquisition financing); and second, liens arising in the ordinary course of banking transactions to secure a debt of not more than one year.
If the clause is breached, creditors may pursue several remedies depending on the contractual terms and applicable law. For instance, violation of the NPC may constitute an event of default and the creditor may decide to accelerate and pursue litigation. Creditors may also seek an injunction to prevent a breach. The creditor may require the debtor to grant security equally and ratably to it or grant an equivalent security. Other possible solutions to an NPC violation will vary depending on the circumstances and the clause but may include early repayment by the borrower of all outstanding financing to the lender; or the borrower seeking to restructure the relevant transaction to make it unsecured or repaying early the violating transactions.
See joint IMF-WB notes for the G20s on Strengthening Public Debt Transparency (June 14, 2018) and on Public Sector Debt Definitions and Reporting in Low-Income Developing Countries (January 31, 2020).
In Mozambique, two large previously unreported external loans were revealed to IMF staff in April-June 2016. The two loans, amounting to US$1.15 billion (9 percent of GDP at end-2015), were contracted in 2013 and 2014 by two SOEs with government guarantees, allegedly for maritime projects.
Sovereigns have not pursued voluntary liability management operations to replace bonds without enhanced CACs with bonds with enhanced CACs due to a number of concerns such as cost.
See paragraphs 23–25 of Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts, September 2015. The bonds in both the recent Ecuador and Argentina restructurings were all issued under trust structures.
See Buchheit, Lee and Hagan, Sean, “From Coronavirus Crisis to Sovereign Debt Crisis”, Financial Times, March 26, 2020.
Developing entire standardized agreements is a related proposal that is broader in scope, but such a proposal presents several challenges—most importantly, that the costs of doing so would likely outweigh the benefits it might bring. Model agreements may help to streamline efforts in producing legal documentation. However, the main transaction documents in a debt restructuring do not lend themselves towards standardized templates, given that many elements are borrower and deal specific. The main impediments to a successful and efficient debt restructuring relate to issues on commercial terms, intercreditor equity and effective debtor-creditor communication, among others. While legal documentation is important, it is not determinative of the speed and success of a debt restructuring. Moreover, given that an extensive consultation process with a wide range of market participants is required, it will likely take significant time to develop model agreements, which detracts from their benefits in an upcoming sovereign debt restructuring scenario.
The IMF has occasionally decided to set conditionality to prevent the contracting of new collateralized debt in certain IMF lending arrangements dependent on the member specific circumstances and when critical for achieving the program goals. The IMF may consider this issue in the broader forthcoming review of the IMF Debt Limits Policy.
Given their small size, distressed debt funds cannot contribute much liquidity to the second market. While they offer other creditors an opportunity to off-load their exposures at very low prices, the benefits of this option are ambiguous (sovereigns would have lost market access, and the conditions under which mainstream investors may want to sell to holdouts may have been created by the holdouts themselves). At the same time, however, it is critical that anti-holdout legislation does not discourage the trading of sovereign debt for reasons unrelated to holdout behavior.
International Monetary Fund, 2013, Sovereign Debt Restructuring – Recent Developments and Implications for the Fund’s Legal and Policy Framework (Washington).
This is because debt relief from the debtor perspective ought to be evaluated at discount rates that do not embody a crisis risk premium, whereas the risk premia that the market uses to discount the value of newly issued debt instruments in a restructuring could be very high. In these circumstances, it may make sense for the debtor country to offer creditors cash, short dated instruments, or partially collateralized long instruments, rather than only risky long instruments. However, this requires upfront financing. So long as IFIs charge an appropriate risk premium to the debtor country, providing such financing could be an efficient use of IFI funds.
IMF-World Bank Staff Note on the Implementation Update on the joint IMF-WB Multi-Prong Approach for Addressing Debt Vulnerabilities (forthcoming).
For example, the Debt Management Facility is a trust fund administered jointly by the World Bank and the IMF for LICs that provides customized advice on sovereign debt management. Since 2009, the Debt Management Facility has supported over 280 TA missions in about 80 countries and 14 subnational entities; see https://www.worldbank.org/en/topic/debt/brief/debt-management-facility.
It is sometimes argued that a large number of sovereign debt restructurings in a short period of time could overwhelm the system. While such a bunching of restructurings could be problematic, a bigger concern is that creditors with claims on many countries undertaking restructurings could face large aggregate losses. While the likelihood that this could threaten financial stability in advanced economies is lower than in the 1980s (when most sovereign debt claims were held by a small number of large banks), this could make sovereign debt restructurings more protracted and difficult. The willingness and ability of commercial banks to accept and write off such losses was the main reason for the long time that it took to resolve the debt crisis of the 1980s.
See, e.g., Buchheit, Lee and Hagan, Sean, “From Coronavirus Crisis to Sovereign Debt Crisis”, Financial Times, March 26, 2020, which proposes amending sovereign immunity laws to explicitly provide judges with the discretion to stay suits in certain situations—for example where the IMF has judged debt to be unsustainable—as a deterrent to disruptive litigation.
See, e.g., Buchheit, Lee and Gulati, Mitu, “Sovereign Debt Restructuring and U.S. Executive Power”, Capital Markets Law Journal, Volume 14, Issue 1, January 2019, pp. 114–130; Hagan, Sean, “Sovereign debt restructuring: The centrality of the IMF’s role,” Peterson Institute for International Economics Working Paper 20–13, July 2020.
U.N. Security Council resolutions are binding on all members, and each member would be required to enact into their domestic laws the immunities set forth in the Resolution. If assets are concentrated in particular jurisdictions, laws or executive actions providing immunity for assets within those jurisdictions could also be designed to have a similar effect in those jurisdictions as a U.N. Security Council resolution. Conversely, international law options could in principle focus on issues other than immunity for assets.
Under the laws of many countries, including the U.S. and U.K., sovereign assets already enjoy broad immunity from attachment, with select exceptions, such as assets used in connection with commercial activity (see. e.g., 28 USC s.1602 et seq.). In this regard, steps to broaden sovereign immunity via additional measures would be particularly useful only for countries with significant commercial assets abroad.