Sponsors: United Nations Department for Economic and Social Affairs (UNDESA), Centre for International Governance Innovation (CIGI), Canada
Panelists: Dr. Shamshad Akhtar (Assistant Secretary General, Department of Economic and Social Affairs, United Nations), Jose Antonio Ocampo (Professor of Professional Practice in International and Public Affairs, Columbia University), Sergei Storchak (Deputy Finance Minister, Russian Federation), Barry Eichengreen(Professor of Economics and Political Science, University of California, Berkeley), Willem Buiter (Chief Economist, Citigroup), Robert Gray (Chairman, Debt Financing & Advisory Group, HSBC Bank), Amar Bhattacharya (Director of the Secretariat, Intergovernmental Group of Twenty-Four on International, IMF),
Chair: Benu Schneider (Chief of Debt, Finance, and Systematic Issues Unit, UNDESA)
Shamshad Akhtar
Discussion – how to minimise the uncertainty and damage via debt resolution, and how that can improve the efficiency of global capital markets amongst other positive & beneficial
UN Gen Assembly has focused on role of debt relief and restructuring as a part of the adjustment process
Can orderly debt restructuring be a strategy to address the threat of sovereign debt and financial crisis and instability.
Poorest states have benefitted from HIPC and multilateral initiatives, but despite them at least 20 DCs remain at high risk or are in debt distress including seven HIPC countries, and any workout will have to be ad hoc.
Existing mechanisms are creditor-driven, there is a need for a structure of fairer treatment, for enhanced cooperation in resolution. Even if restructuring is carried out, the time involved is costly for all, and in terms of risk to global financial stability and the future of capital markets. The solution to problems in Latin America – from Bakerplan to Brady Bond deals took many years, causing losses to the economy to investors and so on.
The message from recent forums and discussions is that no solution is one size fits all, and that any debt resolution may require the respecting of key principles, moreover lessons can be learned and have been learned. To date, reforms in this area have been inadequate, ad hoc and unable to provide timely debt resolution. Inclusion of Collective Action Clauses (CACs), and other recent reforms have not overcome the range of problems described.
Note that the years of financial market growth masked the problems that now require sustained policy activity.
Benu Schneider, UN
When UN began, the norm was closed capital accounts – as that broke down adjustment shifted to nominal exchange rates. As capital market integration occurred, the adjustment process included larger balances requiring interventions in the foreign exchange market.
Is a new adjustment mechanism required, are the institutional base and structures lacking ? The IMF lacks the power to enforce a debt restructuring or even a standstill. The draconian measures now used, such as in Greece, demonstrate the problem of illegitimacy and public opposition to domestic adjustment, and of course contagion.
How can we thus bring about adjustment in the global economy given these constraints?
Prof Eichengreen
Question from chair: To what extent is it fair to say that we have recreated the global economy of the 1920s with liberalized markets but inadequate institutional foundations to support those flows. As many have limited the ability to adopt adjustment, how does this constrain.
History tells us that debt restructurings are as old as debt, sovereign debt restructurings are as old as sovereigns. The discussion between judicial and contractual approaches is also very old. It’s not just the SDRM, but also how to strike a balance between making restructuring too hard, and too easy.
History tells us that legalistic approaches are interesting for academics, consultants and others but hard to make progress on. Many SDRM-like plans have been discussed, though none have come to fruition. If the Europeans can’t do it, then what makes us think that the global community can?
Eichengreen’s work has pushed the CAC argument – though acknowledging they do not solve all problems, and currently they are the only game in town.
Greece: The final restructuring was not that disorderly except for the role of Greece’s official creditors for whom my judgement is rather pejorative.
The approach was first to develop an understanding with large bank creditors and give them a take it or leave it offer, then English-law bonds were invoked and helped encourage high investor participation rate.
This wasn’t that different from what Uruguay or Argentina had done a decade or so earlier. The aggregation problem was taken care of by a super-majority, and the high participation rate suggests a contractual approach can strike a balance between success and not being overly coercive.
The problem is that ECB and others’ holdings were not haircut – this was not Greece’s mistake, but a mistake committed by the ECB and the Eurozone – epitomized by Lorenzo Bini Smaghi’s remark that “an orderly debt restructuring doesn’t exist”. Dr Bini Smaghi was wrong.
Lessons
- 1. CACs are useful and can make a positive difference, even though they don’t make restructuring smooth as silk.
- 2. It helps a lot if debt remains under local law
- 3. It would have been a lot better to do it earlier – also a lesson of history and that is maybe a role for the international community to signal what is inevitable.
The next restructurings are going to be harder, due to renationalization of debt in many cases and the premia being paid in primary markets. This is not the best of all worlds – thus is the status quo really that bad?
Benu Schneider
A recent paper ‘sovereign snake oil’ describes CACs as an effective political tool – so do they actually achieve what is claimed.
Robert Gray
Disputing whether current approaches are creditor driven.
Why did SDRM flounder? Why do voluntary approaches prevail? When I worked on the design features of the SDRM I argued the best is that which maximizes the debtors’ ability to return to markets.
Too much time is lost in a restructuring – but let’s recall that the SDRM evolved, from a statutory to a voluntary in nature structure but remained problematic because it retained IMF as arbiter, and had retroactive capacity to over-write investors’ rights.
This alerted creditors to the vulnerability to their position, their only power is to litigate. The past decade has demonstrated that creditors can find common purpose and don’t run to the exits when storms brew.
The EU states’ decision to include CACs is a further vote of confidence in voluntary approaches. We have advocated CACs at ICMA and their adoption in the eurozone.
Contractual changes are necessary but not sufficient, hence we support the principles endorsed by the G20 in 2004 which influence debtors and creditors.
Amar Bhattacharya
Question from chair: Do you think CACs can bear the burden of public policy objectives?
Let’s say it – we are discussing the IMF when we discuss public policy action. I would say the changing nature of the origins of sovereign debt problems is key.
In the 80s the reasons for sovereign debt problems was direct borrowing combined with macroeconomic problems. Now we are increasingly seeing different origins to crises, which are private capital flows and booms and which are then socialized. This was the case in East Asia, and more so in Ireland and so on.
There are three different phases of the problem
- 1. Containment of the original sin
- 2. How not to live on a prayer
- 3. Adequacy of resolution mechanisms.
How do you ensure you do not take on inappropriate debt? How do you avoid standing still and treading water, if not going backwards? How do you avoid increasing the cost?
The case for public action is there at all three levels.
There are two important aspects, firstly the inflow of capital in the form of capital and the other is credit booms – so it is important to be much tougher on that.
Now when we see debt rollover at unsustainable risk premia. CACs don’t deal with it. The code of conduct intended to have a dialogue, but I would put to you in all the cases I’ve seen that code of conduct lacks real traction and does not produce the results that we would like to see towards reducing risk premia and increased growth. Public action is definitely needed.
Regarding resolution there are improvements to be made via a contractual or statutory approach but in both sides there are improvements to be made. One of the most powerful lesions is how do you deal with the shadow public sector?
Hence the important role for public action and particularly in the case of Greece it’s the balance between restructuring, growth and adjustment. Who can do that? The IMF must. Of course many will say that it is compromised.
However an honest broker role is needed, it can’t be left to the private sector and the government.
Jose Antonio Ocampo
How could the IMF develop a sustainable exit strategy? How can its role be strengthened and enhanced, given it lacks any tool to force restructuring?
The IMF should play a clearer role in flagging problems and excessive inflows. When capital inflows occur countries are unlikely to listen too much because the capacity of the IMF to convince states to adopt contractionary policies. That is why something is needed to manage a crisis after a boom.
Greece would not have happened in the way it did without governments’ strong involvement, there is no case I can think of where some government or the IMF is involved though it does not always work well. The 1980s in Latin America was a creditors’ cartel supported by the US Treasury and the IMF, it was excellent to manage a US banking crisis and terrible for Latin America.
That shows you have to have a framework to manage debt crisis at the international level. Countries can do better, but are there successful strictly voluntary examples but in Latin America I do not see one. Argentine success in restructuring has not allowed access to capital markets – as in Ecuador the restructuring was great from the bankers’ perspective, but not politically and required another.
These approaches do not solve problems and lead to sequential restructurings, as will happen to Greece. There the private sector was successful in shifting the problem to European governments. I would continue to flag the need for a true statutory approach to the solution of debt crises and this is the only reasonable way to proceed.
Improvements can be made, such as the generalization of CACs and solve the aggregation problem in Europe. Greece also shows the problem of why the private sector has something to gain from a statutory approach, it’s a problem of the inequities between official and private creditors as was shown in the Greek restructuring. Finally let me say that one thing wrong with SDRM is to have it managed by the IMF itself.
As written in the Stiglitz commission report to the UN General Assembly a system of panels of experts – not IMF staff – as in WTO dispute settlement with a first stage of voluntary negotiations but with a deadline. After that the panel serves as an arbiter, and finally if that doesn’t work a panel seeks to settle the dispute. This system has worked very well and would work very well in this case. The fears of private creditors that official credits will not be taken into account would be solved, and all official creditors including IMF and World Bank would have to settled in the same and unique framework.
Willem Buiter
Question from chair: Is IMF lending the solution to resolution of a debt problem or are there other forms of financing, e.g. In the proposal just put forward could we discuss debtor financing by the private sector, or a public and private sector mix.
Whichever way sovereign debt restructurings work out they will not be pretty as sovereigns are not under the law, they are the law. People seek to get around that by a variety of mechanisms, which seek to put the sovereign under some form of law, at least foreign law, where you can harass the sovereign sufficiently. Statutory approaches assume any set of rules to bang heads will eventually impose its will on sovereigns.
In the euro area, the odds are better thanks to the beginnings of a supranational structure that could hope to force via revision of contract to make some progress. This is why I thought the ESM’s initial design had benefits.
Problems at the moment relating to sovereign crisis is that it started as a private debt crisis, mainly in the banking and in some cases household and construction and then banking sectors. This is not always the problem, in emerging countries for example.
In Europe fatal mistakes were made by the IMF, it was clear in May 2010 that the Greek sovereign was insolvent yet the IMF assessed it to have passed the solvency test thanks to political issues. This was nonsense and the result is that 200bn was passed to sovereign creditors and as well to the IMF.
At this stage the logical solution is to write the lot off. There may be mechanisms such as zero coupon bonds to help the self-righteous north in Europe.
It has been through unmentionable austerity, morally objectionable and unsustainable politically. The emphasis should be structural reforms, but since pension reforms in the first half year of the programs.
Statutory versus voluntary distinctions are therefore really rather blurred.
What must be ensured is that resources are sufficient in restructuring to avoid dragging systemically important financial institutions into bankruptcy, banks also need a resolution mechanism. All of this can be handled, but we must recognize that in Europe at least one country cannot pay anything at all and other counties they won’t pay all of it.
Speed is of the essence, the sooner restructuring occurs the sooner the excess leverage that is a drag on recovery can be moved out of the way. The need is for political courage, not institutions, to demand the write off.
Question from chair: Does the public statement of the ECB pose a systemic problem.
Buiter To add – the ECB is not backed properly to act as a central bank, it requires a full sovereign guarantee and without it the ECB rightly says it needs a treaty change to offer the finance that is being demanded of it, or the sovereigns need to purchase the debt to be restructured from the ECB. Never will they do this.
Ocampo: One clarification – I do believe in seniorities, in favour of those who lend during crisis that is what debtor in possession financing means.
Sergei Storchak
Question from chair – what is your vantage point?
I am 100% for debt restructuring should come at the end of the story. The beginning stage is when one plans for borrowing. If sovereigns were accurate and not so linked to the democratic process of winning elections those responsible for borrowing would find themselves in a better situation.
Those responsible for borrowing take decisions under political pressure, especially to fund electoral processes. We find ourselves in an interesting situation, with much discussion of debt issues. You cannot read a lot into the G20 decisions taken in terms of lessons and for the cases of Greece and other developed nations.
With Russia’s coming presidency, Russia is seeking to bridge the gap amongst discussions, and the necessity to pick up these issues at higher levels. Europeans have already started doing this, thinking about some tough rules on borrowing and penalizing inappropriate activities.
What we are thinking about – making necessary judgments – for example the guidelines on official debt management published by IMF and World Bank a decade ago. It is thought to be a product of real experience of debt restructurings.
- 1. Objectives of debt management should be clearly defined and publicly disclosed
- 2. Government should seek a board investor base
- 3. Materially important aspects of debt and borrowing should be disclosed
In Russia’s case, we passed through the stages of restructuring in the 1990s and started our new debt management policy just as these guidelines papered and we followed what was written there and it proved to be the right approach.
Now we have a low debt/GDP ratio, and can easily borrow more than £30 billion per year, a sum that is larger than needed during the restructuring period. We can now rely on internal and external markets
These are the outcomes of a balanced borrowing strategy and a balanced approach to the utilization of borrowed money. If other colleagues within the G20 will support us in our approach to update the guidelines, and having in mind the recent experience of a number of developed countries, we will make debt management issues one of the priorities during our presidency.
We will follow the statements published now, including the statement of the IMFC and please note one of the paragraphs titled ‘Global Governance’ and notes that this is the second priority, following only job creation.
Chair: What are the necessary steps required to improve debt resolution.
Robert Gray
There is no doubt that early engagement is a good thing, but there are sometimes many obstacles to that, especially when disparate creditor committees are formed, hence a challenge is to get all creditors to coalesce. Voluntarily perhaps is a moot term, but there is the element of the CDS market.
The other aspect is to get the debtor to agree to engage, and examples exist of overly-legalistic approaches taken with poor advice. Hence expectation on the debtor to engage is necessary.
I have never opposed the IMF being in a position to endorse a particular grouping of creditors, and saying this is a validly constituted group of people. Perhaps merit exists in having some place where the debtor goes first, and the IIF played that role well.
Amar Bhattacharya
There is no point closing the floodgates when the water has gone. This is a central problem that needs to be addressed, one aspect of this issue is rising risk premia and the other is the role of official sector arriving and financing the exit of capital.
How do you deal with that kind of limbo situation?
What kind of lessons can we learn from the euro crisis? Perhaps it’s too early?
Jose Antonio Ocampo
There are many aspects to improvement, creditor committees may be good if they do not become cartels and the challenge of how to avoid that is precisely why a statutory approach is needed. The worst kind of creditors’ cartel is that which is officially backed, as occurred in Latin America in the 1980s – the worst kind of approach where the US Treasury and IMF stood behind the creditors.
Rules are required for a creditor committee.
Willem’s point that this is a question of degrees is very useful to understand, nevertheless some new rule-making is required. Someone in the official sector is needed to state explicitly that the rules are binding. This is a scheme that requires clear guidelines, clear deadlines and a basis for all to participate, and forces countries that want to continue borrowing and creditors to engage.
Willem Buiter
A positive of the Greek restructuring was the triggering of the CDS, but that should not hinge on some committee – e.g. whenever a contract changes it should trigger a CDS.
Where possible institutionalization is definitely needed.
There is always going to be a free-rider problem, it cannot be perfectly addressed.
I would like to see a solution that relies on more equity-like debt for sovereigns. Why do governments or households saddle themselves with obligations that are pure debt. I would replace all mortgages with Islamic-like finance, basically equity products.
Sovereigns could move to growth warrants, with a constant interest rate and a component linked to GDP – though this has issues.
Government should issue liabilities that are less likely to end in debt restructuring problems, and in this case engineering can be a growth problem and not just a method to promote regulatory arbitrage or tax avoidance.
Robert Gray
Why does the official sector not take up some of these counter cyclical schemes?
On Debt Sustainability Analysis (DSA) I want to make clear why we cannot be part of that process, providing input to a final formulation still set by the Fund. It is quite evident in the Greek case that the debtor wasn’t particularly involved in the assumption setting, but the DSA set at 120% debt to GDP determined virtually everything that followed.
Barry Eichengreen
There are merits to the approach advocated by Ocampo, but there are questions as to how is enforcement ultimately achieved when sovereigns involved?
Why do those involved in issuing CDS get involved in deciding when it is triggered – conflicts of interest.
Europe needs a debt jubilee and it needs it now – Europe needs a lot less debt or more nominal income. In the US we would engineer a lot more nominal income, the European polity is different and thus has no choice but to see things blow up or write off.
Sergei Storchak
Sometimes it took years for private sector creditors to consolidate their position, and to emerge with a more or less clear understanding of their own conditions. Private sector and sovereigns can find solutions – the London club is the only solution the private sector found during all these years of experience. Going further? We are not ready yet, neither sovereigns nor creditors.
Remember, it is always the case that one group of people negotiates the original borrowing and another negotiates the restructuring – that’s real life.
Lessons:
The importance of new forms of debt that are outside the debate, especially the ambit of CACs, lending via export agencies or from new source states such as China.
There is a public good that could be generated in thinking about a fair system, including one that provides transparency of all lending, of any source. Where it is, who is contracting it, and the terms – hence a debt registry may be good for everyone. This would need to encompass many forms of debt that are perhaps not well understood, e.g. a forward contract on oil delivery.
