Sovereign debt restructuring: options, obstacles and opportunities

Sponsor: Jubilee USA, Uganda Debt Network, Centre for International Governance Innovation (CIGI), New Rules for Global Finance

Panelists: Eric LeCompte (Executive Director, Jubilee USA), Ezra Sumura (Chairman, Uganda Debt Network), Richard Gitlin (Researcher, CIGI), CHAIR: Jo Marie Griesgraber (Executive Director, New Rules), Sergio Chodos, IMF Alternate Executive Director (Argentina), Miranda Xafa, Senior Fellow, CIGI

The goal of this session is to share, discuss, and debate a variety of proposals and ideas for addressing sovereign debt crises. This session does not seek to promote any particular position or approach, but aims to stimulate, broaden and deepen the dialogue on sovereign debt.

Eric LeCompte

• IMF has released 2 major papers and a minor paper at issues relating to global debt restructuring
• One of the most exciting things about paper last year has been admission that debt restructuring approaches have been too little too late
• Most recently on Monday a new paper reflects some lessons of the recent Argentina legislation to deter predatory behavior, though the focus was exclusively on contract based solutions.
• Though a statutory approach was suggested by the IMF in the possibility of continued problems
• G20 has now endorsed the market approach
• This leaves $9 billion in outstanding unprotected debt stocks
• Global policy makers are demonstrating a degree of urgency, also reflected in the UN General Assembly resolution which demands a need for ongoing work to address this question

Miranda Zafa

• 2012 Greek debt restructuring – largest debt restructuring in history of sovereign defaults
• €205 bn package, was too little too late for debt sustainability
• 2 unique aspects, firstly thanks to its euro membership it may have been able to impose disorderly default or restructuring
• Greece chose not to impose debt restructuring and instead retrofitted CACs to bond contracts, thereby triggering credit default swaps
• The trigger to this massive restructuring was the revelation in October 2009 that the fiscal deficit was actually double what had been reported previously, the new government announced it would be 12.5% of GDP rather than 6% which the prior government had claimed
• This triggered a cascade of credit downgrades all the way to junk by May 2010.
• Greece’s first debt package in 2010 did not include a debt restructuring, which then was a requirement of the second package.
• There was a heated debate as to whether restructuring should have come sooner, but it is true that a deep haircut that was on imposed on private bondholders (53.5%) would have been seen as unnecessary and coercive.
• The delay, by Spring 2011, it was clear that the debt was unsustainable, but the discussion dragged on until 2012, which allowed the private sector debt to reduce and led to a higher public debt than would otherwise have been the case
• The fear was contagion – hence the IMF provided a large bailout despite lack of high probability of debt sustainability.
• The fear proved exaggerated – the key to addressing concerns is not delay, but a credible solution
• Bailouts that do not address sustainability will fail to limit contagion – the reason why the IMF is proposing maturity expansions (essentially a standstill on payments)
• The Greek experience demonstrated that an orderly default is possible in a monetary union with necessary firewalls
• The two instances where credit spreads surged were not triggered by debt restructuring, but the failure of European leaders to agree a backstop of sufficient size (in the ESM), and the second time upon fears of Greek exit when the radical left wing party, Syriza, was considered likely to win the general election
• Without a common backstop to keep borrowing costs low
• Paper for CIGI on the dynamics of the Greek bailout and how private sector creditors benefitted from the delays in eventual restructuring, published in June.
• The delay of a further year appears to me to be unjustified

Ezra Suruma

• African countries have been subject to more debt restructurings than any other region, and many states went repeatedly to the Paris club of creditors, and in our case in Uganda it did not permit us to exit from the problem
• Debt dynamics risk of hitting a 10 year high in 2014, and there is renewed concern about debt risks in African countries
• On the demand side, there are vast needs for infrastructure and poverty reduction. External debt is necessary to meet these legitimate needs
• Multilateral borrowing is insufficient and unattractive due to conditionality, pushing states to source borrowing needs from China and capital markets, therefore new bilateral creditors exist
• The implications of this new type of structure of debt is that it is not clear what kind of restructuring we can look forward to in the coming years, especially as the debt situation is growing rapidly
• Uganda’s rate of growth is thus extremely high
• The conference discussed what we could do to prepare ourselves in the future
• There is a great deal of concern about costly, protracted and uncoordinated restructuring if the coming years for this continent threaten to take us back to very painful experiences of the 1980s and 1990s.
• The novelty is the entrance into international capital markets
• Many states have been issuing Eurobonds in international capital markets, a new phenomenon that is happening in Africa. The cost was initially low, but interest rates are beginning to raise, which raises the likelihood of default due to higher interest rates
• Ghana’s rate has grown to 10% from 7.5%
• It’s not clear what arrangement Africa will have to face, I think we need help to enter this debate so that we are prepared, perhaps some pre-emptive action should be taken to stop them falling into severe crisis

Sergio Chodos

• A distinctive aspect of Argentina’s case is that default occurred
• A key factor of the subsequent solutions, such as the GDP kicker and growth resumption, is that solutions following default are distinct from efforts to avoid default
• Restructurings are as the Fund agrees too little too late as a result of the efforts to avoid default  – the argument of countries welcoming and seeking to default opportunistically
• The key of the issue in this case is the question of privileged treatment
• The sanctity of contract in this case is on Argentina’s side
• The consequence of this system is the socialization of losses
• There is no relationship – as capitalism claims to sustain – between risk and yield

Richard Gitlin

• There is no question we wait too long to fix a country, and when we do so, the job is inadequate
• Solving the holdout problem wont’ solve that – it’ll simply ease the situation slightly when it’s already too late
• The solution is to ensure the ability to impact a sovereign before this situation occurs
• The effect of not addressing problems early the penalty is not imposed on markets but on people, who suffer
• How can we create a system where we start early and effectively.
• In 2002 I proposed a sovereign debt forum in Monterrey in 2002, given that the powers that be would hardly ever suggest a statutory system – as Anne Kreguers’ 2002 suggestion’s failure suggested
• By having an independent organisation that is independent and not sovereign which comprises all the players, and we have it continuously available
• The ambitious programme for a statutory approach was killed by the US Treasury
• We at CIGI, Brett House and I, reviewed the sovereign debt forum proposal
• This is an independent non-profit inclusive membership organisation so that weak or strong sovereigns, IMF, other players participate actively in order to fix countries that are in trouble or distress, and putting systems in place to do that.
• There is nothing like that today, the IMF can’t, the IIF nor Paris Club shouldn’t. No independent organisation can say ‘we are just here to help’ currently, that is designed exclusively to focus on this issue
• Why is too little too late always happening?
• It’s political suicide to go to the IMF, to start a dialogue
• Another reason is that a person, or CEO, would be selected that all parties would respect
• Via discretion and informal dialogue most corporate scenarios are resolved and achieve far greater progress
• Committees can be quite helpful, including in bringing people to the table
• The third benefit is this: the IMF’s recent revamp of the DSA remains confrontational and controversial – an organisation such as this could provide an alternative review, given the high number of questions of interpretation
• We need to build on our positive experiences, not just our negative ones, by having a permanent staff, though limited, would allow us to work to squeeze out of situations positive lessons
• What we would like to do this year is to form the sovereign debt forum within the next 12 months
• We’d like to see if we could get a board, get people, and get it started.