Sovereign debt restructurings with private creditors

Restructuring Debt Restructuring

a An option was included to convert US 30 year bond into a US 12 year bond with debt reduction.

At a time when new sovereign debt restructurings are distinct possibilities, such action is crucial.

The mechanics of debt restructuring are straightforward.

Proposals on debt restructuring frameworks

O. Sovereign Debt Restructuring and Dispute Resolution, speech by Anne Krueger, First Deputy Managing Director of the International Monetary Fund, 6 June 2002.

The country s sovereign debt should have been restructured without delay.

But internal devaluation requires debt restructuring.

Sovereign debt was eventually restructured through the creation of Brady bonds.

European policymakers, for their part, worry that a sovereign debt restructuring will damage the financial system and be a black mark for their monetary union.

See IMF Reviewing the process for sovereign debt restructuring within the existing legal framework, Policy Development and Review, International Capital Markets, and Legal Departments, 1 August 2003.

Debt restructurings often entail conflicts among different claimants.

If this principle prevails, no one would ever accept debt restructuring.

There have been many proposals on debt restructuring mechanisms.

After the Argentine crisis, President George W. Bush s administration vetoed proposals to create a mechanism for sovereign debt restructuring.

But the restructuring of debt has been too little and has come too late.

So the need for debt restructuring is an unavoidable reality.

But, as we know from experience, there is life after debt restructuring.

As a result, there is not even the pretense of attempting fair and efficient restructurings.

There is a simple way to deal with a debt overhang reduce payments by restructuring the debt.

Some combination of debt restructuring and permanent debt monetization (quantitative easing that is never reversed) will in some countries be unavoidable and appropriate.

But the most contentious part of debt restructuring could well be reaching inter governmental agreements.

Then, once the financial system has been stabilized, a combination of debt restructuring and recapitalization is required.

Unfortunately, however, ideas for debt restructuring mechanisms remain just that purely theoretical constructs.

Indeed, the agreements have been used to challenge government actions ranging from debt restructuring to affirmative action.

In these cases, debt restructurings produced a haircut on exchanged bonds.

Some believe that this vacuum is the primary difficulty with the international debt system. Ambitious proposals to redress it, such as a Sovereign Debt Restructuring Mechanism (SDRM) housed at the International Monetary Fund, have always run into political roadblocks.

UNCTAD has continued to provide support to African and other debtor countries in preparing their negotiations on the rescheduling or restructuring of bilateral official debt in the framework of the Paris Club.

In an ideal world, Europe would deal with its excessive debt burdens through a restructuring of Greek, Irish, and Portuguese liabilities, as well as municipal and bank debt in Spain.

Indeed, restructuring undermines the foundation of the entire financial system the safe asset role of sovereign debt.

The size of the haircut tended to be commensurate with the depth of the economic recession before restructuring.

The international community has, so far, failed to develop effective and equitable arrangements for restructuring sovereign debt, despite the clearly dysfunctional and problematic consequences of past international public debt crises.

Rather than resorting time after time to bailouts and delay, isn t there a way to more swiftly and decisively restructure the debts of insolvent sovereigns?

First, as Lee Buchheit, the attorney who oversaw the Greek private restructuring, has proposed, maturities on official Greek debt could be greatly extended.

Absent external assistance and a credible plan for restoring fiscal order, Greek sovereign debt could not be rolled over, forcing a default, probably in the form of a restructuring of Greek debt.

The most noteworthy was the IMF sovereign debt restructuring mechanism,29 which suggested some core features majority rule in restructuring decisions, a legal stay against claims by creditors, protection of creditors' interests, seniority of new money and a dispute resolution forum.

Debt restructuring writing down the debts of homeowners and, in some cases, governments will be key.

In the aftermath of the global financial crisis, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System urged that we design an efficient and fair system for the restructuring of sovereign debt.

Sovereign Debt at Square One

The Root of All Sovereign Debt Crises

To lend more to Spain s government so that it can recapitalize the country s banks adds to its debt burden and scares markets, which fear future debt restructuring.

At the very least, it renders non viable all debt restructurings under the standard debt contracts.

But it is a bit late for the ECB to describe debt restructuring as unthinkable.

The Lethal Deferral of Greek Debt Restructuring