Contractual and Voluntary Approaches to Sovereign Debt Restructuring
There’s Still More to Do - Working Paper #293
The international community took important steps during 2014 to improve the global infrastructure through which we deal with cases of sovereign debt distress—steps on which further progress can be built. The development of better model language for bond contracts, as promulgated by the International Capital Markets Association (ICMA 2014) and largely endorsed by the International Monetary Fund (IMF, the “Fund”; IMF 2014b), should make these bonds easier to restructure when countries hit payment difficulties. Similarly, the reform of some IMF lending practices (IMF 2014a) will likely make the Fund more effective at helping indebted countries avoid unnecessary restructurings. Together, these changes ought to make future episodes of sovereign debt less costly for both debtors and creditors. Concurrent with these developments, the United Nations General Assembly (UNGA) Resolution 68/304 “Towards the establishment of a multilateral legal framework for sovereign debt restructuring processes” (UN 2014) passed by a split vote on September 9, 2014. The resolution expressed the will of many member states to move toward the creation of a multilateral statutory framework for sovereign debt restructuring. It echoed calls by the G77 in the 1970s and in recent UN resolutions (UN 2010, 2011, 2012) for an orderly approach to sovereign debt restructuring. Coming over a decade after the rejection of the IMF’s Sovereign Debt Restructuring Mechanism (SDRM; Krueger 2001) in 2003, this UNGA resolution signals continued interest in treaty-based approaches to enhancing our sovereign debt toolkit.
These innovations underscore that there’s no need to choose between contractual or voluntary approaches versus statutory or treaty-based agreements to improve the machinery of sovereign debt restructuring. The firm partisans for one side or another present a false and by now arid choice: both sets of approaches have their strengths and weaknesses—pros, cons, and exclusive features that have already been aired extensively. Neither path provides a perfect combination of optimal results, efficiency, and political feasibility. But in a time of record debt levels in many countries (BIS 2014; Dobbs et al. 2015) and heightened consequences attached to any policy mistake, it is important to identify where the next incremental steps can be taken to sustain the reform momentum generated in 2014. This is the purpose of the present chapter.
In charting a route toward further reform, it’s notable that the vote on the 2014 UNGA resolution highlighted some of the same differences that undermined the SDRM. Several of the countries that withheld support for the SDRM in 2003 either opposed the UNGA resolution or abstained from the vote. The home countries of the major financial centres where most foreign-law external sovereign debt is issued did not support the resolution, even in its final, diluted form. Some of these countries also expressed a preference for pursuing this discussion at the IMF, rather than at the UN. If there’s any doubt that this represents at least a temporary impasse for statutory- and treaty-based approaches to sovereign debt restructuring, consider how difficult it has been to get the 2010 package of IMF reforms completed even with the explicit backing of the White House and US Treasury. For the moment, a great deal more can be done through contractual and voluntary channels to make sovereign debt workouts smoother and more effective.
Parallel to further developments at the UN, additional efforts should be pursued with vigour to improve the voluntary and contractual means of assisting sovereigns in debt distress. This chapter lays out a pragmatic plan for pursuing this agenda. It first takes stock of the achievements of the past year. It then lays out a set of complementary next steps that would support and extend recent advances. If the proposed work program laid out below were implemented, substantial progress would be made without the difficulties that treaty negotiations inspired by the UN resolution would likely encounter.
About the Authors
Brett House is currently a Senior Fellow at the Sauvé Foundation. Brett’s research focuses on the links between trade policy and macroeconomic performance; the rise of emerging markets and its implications for G10 economies; frameworks for sovereign debt restructuring; and the theory and practice of impact investingPreviously he was a Global Strategist at Woodbine Capital Advisors, a NY-based global macro hedge fund. At Woodbine, he developed a track record of combining quantitative frameworks with qualitative analysis to identify investment opportunities across asset classes in developed, emerging and frontier markets. Prior to joining Woodbine, Brett was Principal Advisor on economic, financial and development issues in the Executive Office of the United Nations’ Secretary-General; Senior Macroeconomist and Policy Advisor at the UNDP; and Senior Macroeconomist at The Earth Institute, Columbia University. From 2000 to 2007 he was an economist at the International Monetary Fund (IMF), where he worked across a wide range of major emerging, frontier, and low-income countries. He also helped to develop Fund policies and models on emerging market vulnerabilities, early-warning systems for financial crises, sovereign debt restructuring and debt relief programmes. Brett held earlier positions as Director of Studies and Stipendiary Lecturer at Keble College, University of Oxford, where he was a Rhodes Scholar; and Lecturer in Economics at the University of Cape Town, where he was a Rotary Scholar. He also worked in the Capital Markets Department of the World Bank and emerging markets fixed-income sales and trading with Goldman Sachs International in London. Brett holds an M.Phil. in economics from Oxford and a B.A. Honours (first class) in economics from Queen’s University.
The Centre for International Governance Innovation (CIGI)
Richard Gitlin, an international bankruptcy lawyer who now runs his own advisory firm, joined CIGI as senior fellow in June 2013. He played a leading role in the development of practices and procedures for successfully resolving complex global restructuring and insolvency cases. Mr. Gitlin has served as advisor to several countries regarding the modernization of their insolvency laws, including Canada, Korea, Indonesia and Mexico, and to the US State and Treasury Departments, and the IMF in connection with corporate and sovereign restructuring reform. He was the lead drafter of the Principles for Sovereign Debt Restructurings issued by the Council on Foreign Relations.
Mr. Gitlin is chairman of Gitlin & Company, which is devoted to facilitating and creating investment opportunities in the restructurings of corporations, banks and sovereigns. Mr. Gitlin recently served as Senior Strategic Advisor to Nomura Group to assist Nomura in implementing restructuring strategies for Japanese companies. Prior to establishing Gitlin Company, Mr. Gitlin was the President of Hebb Gitlin, PC, a firm he co-founded in 1973 to provide strategic and legal advice in global bankruptcy and business restructurings.