After SCOTUS: Next steps in sovereign debt restructuring

In the wake of the US Supreme Court’s decisions in Argentina v. NML and Argentina’s subsequent default, sovereign debt has emerged as a critical issue for global policymakers. This session brings together a wide range of viewpoints to review practical proposals to remedy the challenges created by the SCOTUS decisions and to make future sovereign debt workouts more effective, efficient and equitable.

Welcoming Remarks:

Brett House, Senior Fellow, Jeanne Sauvé Foundation

Chair/Moderator: Eric LeCompte, Executive Director, Jubilee USA Network

Panelists:

• Sean Hagan, General Counsel & Director, International Monetary Fund
• Benu Schneider, Senior Economic Affairs Officer, UN-DESA
• William Ledward, Senior VP & Portfolio Manager, Franklin Templeton
• Martin Brooke, Division Head, Bank of England
• Jeremy Pam, Visiting Scholar, Columbia University

Sean Hagan

• IMF motivation to restart conversations is recent experience, and need to develop a framework to reduce costs to all actors involved in debt restructuring
• Restructuring often triggered by a decision by the Fund about whether to provide support in absence of restructuring and given loss of market access
• Objective when providing support despite lost access is to restore market confidence, amongst others, however a time can come where the question becomes whether a country can continue to service debts without restructuring
• If IMF provides support that only increases debt burden and delays the inevitable, then it is not achieving its objective and role, and restructuring needs to occur
• A question we face about our lending framework is whether it is appropriately aligned to make such judgments
• Secondly, how can we enhance a legal framework to drive restructuring processes
• This has occurred due to both Greece and legal developments regarding Argentina
• The decision of the US courts raises systemic issues
• The provision of a viable strategy to holdouts will increase their number, and for creditors who are willing to participate face the risk of their stream of payments being interrupted
• This approach we now have set out is market based, and we worked closely with international capital markets association
• The paper identifies the important limitation to the approach of the outstanding stock of international bonds of about $ 900bn, and 40% of those governed by NY law matures in over 10 years
• Range of steps discussed in the paper to address this, including liability management

Martin Brooke

• As in Greece, if the judgment of sustainability is not vindicated, then the composition of creditors can change, such that private creditors are able to exit and more debt is held by official creditors, with equity and moral hazard implications, and a greater eventual cost of any restructuring
• Our paper at the BoE suggests adding an additional clause that if a particular event was triggered than the contractual terms of the debt changes, e.g. a trigger such as IMF or other bilateral official support, which would then automatically extend maturity of all outstanding debt, we suggested about 3 years given it’s the typical length of an IMF programme
• A proposal such as this would automatically reduce the needed amount of official support while keeping private creditors involved, and avoid the problem of often treating official creditors as quasi-preferential
• Since our proposal the Fund has proposed revision of its exceptional access policy, though in their proposals the contractual aspect of our proposal would not be contract-based
• Ours is therefore distinct to the Fund as it would be more frequent, as it is non-discretionary, it would be priced in from the outset, and would provide better market discipline
• Currently we don’t see this being broadly adopted until the Fund’s approach is tested and perhaps would subsequently provide an opportunity for our admittedly more aggressive approach.

Benu Schneider

• Current proposals engage with different parts of the problem
• The 50^th anniversary of the G77, held in Bolivia this year, included a paragraph on the role of vulture funds, calling for measures to ensure a state could function despite the role of such predatory agents
• Many G77 states, not just Argentina, have suffered from the role of holdout creditors
• Recent database of litigation regarding sovereign debt reveals that recent years, of bonds issued in US and UK, demonstrate a general trend to increasing role of holdouts
• Litigation has driven very large externalities with severe costs, such as loss of market access, and hence the interest of the G77
• The UN GA resolution brought criticism that related to process, and about pre-judging outcomes. Notably from the outset there was an intention to take the resolution to a vote
• After adoption, some countries made statements – the BRICS strongly supported Argentina and the resolution
• This is the first time that Russia and Turkey voted with the G77
• The other major difference was in the EU, where only 6 states voted against, and 22 abstained that – in the corridors – was claimed to be to avoid a rift, deriving from votes for or against – in addition they claimed insufficient time to consult capitals and regional institutions
• Hence the resolution was adopted with 124 for, 11 against and 41 abstentions
• Later this year there will begin a process to develop proposals about what will be done, via a modalities resolution

William Ledward

• Sovereign creditors are in too weak a position, and another big problem in the market is the continued flow of official sector lending towards sovereign borrowers at sub market rates
• Another quite significant event recently was the ability of Ecuador to borrow $2 billion from the market, having in 2008 to not bother to pay its debt, and elected to default on 2 of its outstanding bonds while continuing to service two others
• After doing so, it bought back its defaulted bonds at very low prices, then subsequently in 2009 – despite considering the bonds illegitimate – it offered a buyback at 35 cents in the dollar, for which over 90% accepted the offer
• Some did not accept, and worth about $100 million, remains outstanding.
• Despite this outstanding defaulted debt it was still able to borrow this summer at a reasonable rate
• As yet, no bondholder has taken Ecuador to court. Had they done so they could have stopped Ecuador borrowing again
• Enforcing judgments is very very difficult

Jeremy Pam

• The previous proposals are certainly compatible and able to co-exist happily but I wish to argue against that position
• Four considerations are necessary to be considered to address these longstanding and fundamental issues
• First consideration: politics cannot be removed from sovereign debt restructuring, it cannot be reduced to an objective economic, financial or legal mechanism despite the attraction of doing so
• Secondly, specific new legal mechanisms such as those proposed can help, but feasibility is a relevant consideration – this is not an academic exercise, despite the enthusiasm some in academia are attracted to ambitious multilateral treaties or forums which are unrealistic.
• New legal mechanisms can also hurt – our system may not be pretty and may be growing uglier, but it has in most cases most of the time worked

One explanation of the Argentina case is that US judges are confused about a single, obscure clause – so is it a good idea to multiply them?

Secondly the complexity of any new treaty for a new international body may not be a good thing, to set in motion the creation of a giant debt resolution bar as exists around the WTO settlement mechanism

In effect this would be empowering the collective action clauses, for which there is a precedent in some international and national legislative actions related to Iraq’s restructuring in the last decade.