Legislative pathways to sovereign debt relief: What the IMF gets wrong – and how to fix it
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Article summary
- UK’s proposed Debt Relief (Developing Countries) Bill would cap creditor recoveries within the enforcement jurisdiction of UK courts.
- IMF’s suggestion that creditors might respond by changing the governing law of their instruments is misplaced, as cap applies regardless of the governing law.
- IMF warning that enforcement legislation may raise borrowing costs or damage financial centres has no empirical basis.
In its September 2025 Stocktaking of the Current International Architecture for Resolving Sovereign Debt Involving Private Sector Creditors, the International Monetary Fund (IMF) offers a timely review of an increasingly complex sovereign debt landscape. Although government debt levels in emerging markets (EMs) and low-income countries (LICs) stabilised between 2020 and 2024, risks linked to privately held debt remain elevated, and restructurings are taking longer to conclude than those examined in the IMF’s 2020 stocktake.
The report surveys contractual and legislative tools that are intended to make sovereign debt restructurings more effective. Nonetheless, it misses a central point: contractual tools alone cannot fix the coordination failures that define contemporary sovereign debt workouts. As debt profiles have become more heterogeneous, tools such as collective action clauses (CACs) can only do limited work. They can facilitate amendments to key financial terms if relevant bondholder majorities agree, but they cannot aggregate across different debt instruments. This fragmentation is a major reason why restructurings are slower and more complex today (see Observer Spring 2025).
These limits make the IMF’s discussion of legislative tools especially important. However, the report treats fundamentally different proposals as if they were equivalent, implying they may trigger governing law arbitrage by prompting creditors to amend contracts to avoid their application. This conflation obscures the distinct purposes of different legislative approaches.
Two distinct legislative approaches
The legislative proposals identified by the IMF fall into two categories.The first category consists of substantive contract law interventions. These directly modify creditors’ rights or establish a mandatory statutory restructuring process. New York’s proposed Senate Bill S2333 is an example. It would introduce a domestic majority-voting mechanism for sovereign restructurings that binds all holders of instruments governed by New York law. Critically, this kind of legislation directly alters rights and obligations written into existing contracts governed by New York law.
The second category targets enforcement. It does not alter contractual rights and obligations. Instead, it limits what a creditor can recover through domestic courts if the debtor has undergone a multilateral debt treatment. Examples include the UK’s Debt Relief (Developing Countries) Act 2010, the proposed Debt Relief (Developing Countries) Bill, and New York’s proposed Senate Bill S7458. Under this model, a creditor may obtain a judgment for the full value of the claim, but recovery in the jurisdiction of enforcement is capped at levels consistent with a recognised multilateral restructuring – regardless of governing law.
Both categories promote inter-creditor equity, but they do so through distinct legal mechanisms and create different incentives for debtors and creditors. The IMF’s analysis blurs these lines, leading to misplaced assumptions about what legislative reforms can achieve.
What the UK Bill actually does
The UK’s proposed Debt Relief (Developing Countries) Bill does not amend or override contractual rights, nor does it reduce the nominal value of any debt. It operates exclusively within the enforcement jurisdiction of UK courts, ensuring that those courts – and financial infrastructure subject to their authority – cannot be used to undermine policies the UK endorses internationally.
The Bill would cap creditor recoveries in the UK at levels consistent with designated multilateral debt treatments, including the G20 Common Framework (see Observer Winter 2025, Summer 2025). This would prevent non-participating creditors from exploiting UK enforcement channels to extract preferential recoveries at the expense of participating creditors and debtor states. This is not only a matter of legal coherence but also of public accountability. Every public dollar written off in a multilateral restructuring becomes a dollar available to a non-participating creditor if financial centres allow full recovery. At a time of declining official development assistance and renewed fiscal austerity, such implicit subsidies are increasingly difficult to justify.
As the Bill regulates enforcement rather than contractual rights, the IMF’s suggestion that creditors might respond by changing the governing law of their instruments is misplaced. If enforcement is sought in the UK, the statutory cap applies regardless of the governing law. Changing governing law would deprive creditors of the predictability of English law while offering no practical advantage.
What matters for enforcement is not governing law but the location of attachable assets. As a major financial hub, London hosts the paying agents, trustees and financial institutions on which many sovereign bond issuances depend. These arrangements create jurisdictional hooks that bring enforcement actions to UK courts, and creditors cannot easily depart from them without significant operational and legal risk.
Towards an evidence-based debate
The IMF warns that enforcement legislation may raise borrowing costs or damage financial centres. These claims have no empirical basis. When CACs were first proposed, critics issued similar warnings. The IMF itself later found that pricing effects were negligible or, in some cases, positive.
There is no evidence that enforcement legislation increases sovereign borrowing costs. Following the UK’s 2010 Act, private lending to the 36 countries covered by the legislation increased from $3 billion in 2005–2009 to $24 billion in 2010–2014 and $41 billion in 2015–2019. A 2011 UK Government review found no evidence that the Act harmed London’s status as a financial centre or constrained access to credit. If anything, it supported market development by expanding fiscal space through the Heavily Indebted Poor Countries (HIPC) initiative.
We encourage the IMF to focus on the real determinants of legislative impact: the geography of international payment systems, the location of assets subject to enforcement, and the benefits of coordinated adoption across major financial centres.
If multilateral debt relief is to succeed, domestic legal systems must reinforce the principles their governments endorse in international forums. The UK and other key states have the legal tools to support more orderly and equitable restructurings. It is time to use them.
