These include: A sovereign default, where a government suspends debt repayments; A debt restructuring plan, where the government agrees with other countries, or unilaterally reduces its debt repayments; Requiring assistance from the International Monetary Fund or . For example, inflation rose to 33.9% in August 2022 from 9.7% a year . 0000003309 00000 n Finally, the first half of 2020 saw a sharp contraction in M&A in Latin America, but deal flow has rebounded strongly in 2021. IMF Seminar: Debt Restructuring: Why Too Little and Too Late Debt crisis: African countries should trade more with each other The reasoning is simple: The conditionality of an IMF program ensures a certain degree of macroeconomic and fiscal discipline, and the adoption of a credible policy framework for the country's return to debt sustainability. The banks, in turn, extended relatively cheap credit to Latin American countries to finance their fiscal and current account deficits, amounting in many cases to more than two-thirds of external financing. The views expressed in IMF Working Papers are those of the author (s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 0000041885 00000 n Over the past two decades, emerging market developing economies have seen their share of sovereign domestic debtlet's call it "domestic debt" for shortincrease from 31 to 46 percent of their total sovereign debt. Indeed, a key characteristic of the Latin America debt restructurings in the COVID-19 era has been the presence of well-organized creditor committees. In every case, committees have been composed of either large institutional investors who had purchased debt in the primary market, or hedge funds that had been long-term active investors in the secondary market. 0000126461 00000 n Although PBA launched the offer after negotiating and agreeing to the terms with its largest bondholder, it had not obtained the support of the entire committee. By contrast, few countries in Latin America qualified for the IMF's Flexible Credit Line (FCL). Following months of failed negotiations and a series of rejected offers, Argentina agreed to the terms of a debt restructuring with its largest creditor groups. The primary %%EOF Ghana and the IMF: debt restructuring must go Such committees have been widely perceived to represent the interests of the broad class of bondholders, giving credibility to the negotiating process and facilitating relatively quick resolutions. Sovereign debt restructurings in Latin America: A new chapter | White SOVEREIGN DEBT RESTRUCTURING INTERNATIONAL MONETARY FUND 3 Approved By Sean Hagan, Siddharth Tiwari, and Jos Vials This paper was prepared by an inter-departmental team from LEG, MCM, and SPR. The dataset: sovereign debt litigation 1976-2010 - filepdf.org Sovereign debt, here, refers to debt issued or guaranteed by the government of a sovereign state. Argentina's strategy relied on the use of "value recovery instruments" (in particular GDP-linked warrants that would provide creditors who participated in the restructuring additional value to compensate for their losses if Argentina's GDP exceeded certain targets)and the explicit threat of non-payment of non-exchanged debt. The IMF and Sovereign Debt Public debt, or sovereign debt, is an important way for governments to finance investments in growth and development. . A great majority of these countries are navigating the crisis fairly well. Author: Thordur Jonasson Publisher: International Monetary Fund ISBN: 1484350545 Size: 35.85 MB Format: PDF, ePub, Docs View: 275 Access Book Description This paper provides an overview of sovereign debt portfolio risks and discusses various liability management operations (LMOs) and instruments used by public debt managers to mitigate these risks. 0000000836 00000 n Use the free Adobe Acrobat Reader to view this PDF file. While the current contractual approach has been largely effective in resolving sovereign debt cases since 2014, it has gaps that could pose challenges in future restructurings. Borrowing from these facilities does not require the adoption of a full-fledged program or strict conditionality, unlike when the IMF extends balance-of-payment support (although it does require an assessment of debt sustainability as discussed above). The Fund's Lending Framework and Sovereign Debt - Preliminary Considerations - International Monetary Fund. Public debt Gaming out Sovereign Default When China Is a Major Creditor 190 0 obj <> endobj Bank of England. PDF SOVEREIGN DEBT RESTRUCTURING - Clifford Chance Prompted by the difficulties in restructuring Argentina's debt, the international community decided that the collective-action problem would be best remedied by re-drafting New York law-governed debt contracts to allow a bondholder supermajority to bind a minority to the terms of a debt restructuring. Books - International Monetary Fund Lack of creditor coordination arguably contributed to the success of this effort, as creditors were not able to set forth a unified response to the default. 3.3 The dataset: sovereign debt litigation 1976-2010. seize considerably. The IMF Press Center is a password-protected site for working journalists. 0000001946 00000 n The IMF has played a central role in sovereign debt restructurings in Latin America and globally. Ghana is struggling with managing its debt, 20-year high inflation, a weak currency, and rising inequality. PDF Sovereign Debt Restructurings and the IMF: Implications for Future Intercreditor Distribution in Sovereign Debt Restructuring GO. Legal Dept. 9f9G"j1S"[? Restructuring Sri Lanka's debt talks | Eastasiaforum | xklsv Core Features of a Sovereign Debt Restructuring Mechanism Fiscal Monitor. The Sovereign Debt Forum was launched in October 2019 at the International Monetary Fund as a collaborative effort by the Institute of International Economic Law and the Centre for Commercial Law Studies at Queen Mary University of London.The European University Institute joined the Forum in Spring 2020. Because certain of PBA's bonds issued under its "old" 2006 indenture contained higher CAC thresholds than bonds issued under its more recent 2015 indenture (which contained ICMA CACs), PBA incorporated additional exit consents in the restructuring proposal for those series to disincentivize holdout behavior. In this article, we provide an overview of the resolution of sovereign debt crises in Latin America in the COVID-19 era. To do so, I compare twelve recent debt restructurings. Wikimedia Commons. Ghana's total public debt as of June 2022 was US$54.4 billion (GHS393 billion or 78.3% of GDP) from US$32.3 billion (GHS143 billion or 55.5% of GDP) in 2017, according to central bank and finance ministry data. "Equity capital markets in Latin America" provides a current overview of the state of equity capital markets in Latin America, emphasizing key growth opportunities. 0000007529 00000 n Rising interest rates in the US soon led borrowers such as Mexico, Brazil, Venezuela and Argentina to conclude that their debt burdens had become unsustainable. 1750 Massachusetts Avenue, NW Steven Kargman on LinkedIn: #sovereigndebt #sovereignrestructuring # However the subsequent (and unanticipated) fall in Argentine bond prices, which many market participants attributed to the absence of an IMF-supported adjustment program and policy framework, may be seen as a cautionary tale by investors in future regional restructurings. Sovereign debt restructuring, Please address any questions about this title to publications@imf.org. Please do not hesitate to let me know if there are any topics that you would like us to cover in future editions. GO. Key to determining whether or not domestic debt should be part of a sovereign restructuring is weighing the benefits of the lower debt burden against the fiscal and broader economic costs of achieving that debt relief. Our world is being transformed by what the World Economic Forum calls the 4th Industrial Revolution, and Latin America is no exception. Latin American equity markets proved remarkably resilient to COVID-19, in terms both of growth in their major indexes and in new initial public offerings (IPOs), and other stock and rights issuances. By drawing comparisons to pre-COVID-19 debt crisis resolutions in the region, we conclude that the solutions found during 2020 and 2021 create a new paradigm for sovereign debt restructurings in the region and globally, where good-faith negotiations between sovereign debtors and organized creditor groups, together with targeted use of contractual mechanisms to reduce holdout risks, can lead to orderly restructuring transactions that provide debtors substantial debt relief, preserve value for investors, and minimize the risk of chronic and acrimonious litigation. After prevailing in a New York lawsuit brought by an investor seeking to enjoin the restructuring, Ecuador reached the requisite CAC thresholds in all series and achieved a 98 percent creditor participation in the process. Sovereign debt restructuring: The centrality of the IMF's role With rising interest rates, the strengthening of the US dollar, and weaker global growth, the risks of a systemic sovereign debt crisis are rising. American Samoa Australia Bangladesh Bhutan British Indian Ocean Territory Brunei Darussalam Cambodia China Cook Islands Cyprus Fiji French Polynesia Hong Kong India Indonesia Israel Japan Kiribati Korea, Democratic People's . This allowed banks to free up capital by substituting non-performing assets on their balance sheets with collateralized, performing obligations of the same debtor. Regional Economic Outlooks. The Peterson Institute for International Economics is an independent nonprofit, nonpartisan research organization dedicated to strengthening prosperity and human welfare in the global economy through expert analysis and practical policy solutions. Stemming a Sovereign-Debt Crisis - WSJ The IMF's role in sovereign debt restructurings - Contents 3 Executive summary This report focuses on the international architecture for sovereign debt restructurings (SODRs), as seen through the lenses of the International Monetary Fund and with a special attention to the role that the Fund can play in facilitating orderly restructuring processes. After using the increased cash flow to pay off obligations to the IMF, Argentina, through two debt restructurings, one in 2005 and one in 2010, struck deals with 93% of the bondholders for payments adding up to around 30% of . ICMA publishes new majority voting clauses for commercial loans to sovereign borrowers to facilitate sovereign debt restructuring . Sri Lanka to present debt restructuring, IMF bailout plans to creditors In the absence of an alternative, sovereigns conducted debt restructurings by way of voluntary exchange offers, inviting creditors to exchange their existing bonds for new bonds with reduced payment terms that included lower principal, lower coupons, an extension of maturities, or all three. 0000069592 00000 n By Regtech Africa 1 day ago 199 views. sovereign debt restructuring, Greek debt crisis, economic and monetary union, German bondholder litigation, sovereign immunity, Brussels I Regulation . Debt restructuring The fiscal costs may have to be incurred in the context of restructuring because of the need to maintain financial stability, to ensure the functioning of the central bank, or to replenish pension savings. this feature of a sovereign debt restructuring mechanism would be similar to the majority restructuring provisions of domestic insolvency laws, which aggregate the claims of all eligible creditors (irrespective of the nature of the instrument) when determining whether there is adequate support by a majority to make an agreement binding on all Under the IMF's Articles of Association, the IMF may only provide its general resources to assist in the resolution of balance-of-payment problems if there are "adequate safeguards" for the IMF resources. 2000s European sovereign debt crisis timeline - Wikipedia In the absence of such support, the offer and the associated mechanics were not well received by many in the investor community, who deemed that PBA had launched a coercive offer designed to force bondholders into a deal. Continue reading: The eurozone's second sovereign restructuring, confirmed . The COVID-era experience in sovereign debt restructuring has, thus, proven that well-organized creditor groups can effectively resist sovereign debtors' opportunistic and coercive use of these powerful restructuring techniques. 0000002080 00000 n This publication is provided for your convenience and does not constitute legal advice. American States and Sovereign Debt Restructuring 0000004756 00000 n Sign up to receive free e-mail notices when new series and/or country items are posted on the IMF website. International bonds Yet, we also see Latin America propelled away from the COVID-19 swamp by the powerful global engines of economic, social and technological evolution that will push heavy foreign investment into the region: unprecedented global liquidity and the search for yields in emerging markets, the energy transition, the commitments to mitigate climate change by global natural resources and energy companies, and the technology-driven push to digitize and automate the increasingly global world economy. The authors looked at 179 restructurings of the sovereign debt held by private holders . Conclusion - B Interaction effects - Enforcement in Sovereign Debt Markets . In "Latin American arbitration in transition," our team outlines the past and present of commercial arbitration in Latin America, and its prospects for the future. From that point onward, the domestic and international bond markets became the principal source of finance for Latin American sovereign issuers. And the whole point of any sovereign. The COVID-19 pandemic has negatively affected developing countries sovereign debt situation and there has been an increase in countries in debt distress or with high risk of debt distress . A Case studies on the cost of litigation - Enforcement in Sovereign Restructuring domestic debt is a tool that can be used by sovereigns facing fiscal and economic stress. Vision. The establishment of representative creditor (particularly bondholder) committees provides an answer to the creditor coordination problem. 0000008703 00000 n Books - International Monetary Fund In "Sustainable finance in Latin America," our team focuses directly on green, social and sustainability-linked (GSS) bonds. Times of transition are frequently associated with greater incidences of disputes, notably investor-state disputes, but also commercial disputes, especially in times of supply-chain disruption. The press release said:. IMF lending has a tumultuous history in Latin America as a result of strict conditionality and austerity programs that were seen as impediments to growth and development, prohibited popular social spending programs, and thus became politically toxic. Often seen as the lender of last resort, member countries approach the IMF when faced with significant balance-of-payment problems. In the absence of a sovereign bankruptcy regime, the resolution of debt crises is ultimately a matter of ad hoc negotiation between a sovereign and its creditors. This publication is protected by copyright. With the prevalence of bonded debt across Latin America following the Brady bond restructurings of the 1980s and 1990s, the risk of strategic holdout behavior from anonymous bondholders increased substantially. Sovereign debt restructuring, Please address any questions about this title to publications@imf.org. 0000005016 00000 n Over the past 40 years, the International Monetary Fund (IMF) has played a central role in the sovereign debt restructuring process. The COVID-19-era Latin America restructurings provided the first occasion for the new ICMA CACs to be tested in practice, though on several occasions the debt to be restructured included debt issued pre-2014 that did not include the enhanced CACs or included CACs with different, usually higher, voting thresholds. This requires that the IMF concludes the debt of the sovereign is sustainable and that it be satisfied with the policy adjustments being undertaken by the debtor country to overcome the problems that led it to seek financial aid (such required policy adjustments are known as conditionality). While there is no universally accepted definition, a sovereign debt restructuring can be defined as an exchange of outstanding sovereign debt instruments, such as loans or bonds, for new debt instruments or cash through a legal process. Washington, DC 20036, Sovereign debt relief in the global pandemic: Lessons from the 1980s, A possible IMF Pandemic Support Facility for emerging-market countries, More Transparency Needed: Making Official Holdings More Open. The large-scale Brady bond restructurings of the 1980s and 1990s led to the widespread replacement of syndicated loans by tradable bonds as the primary source of sovereign borrowing and financing in Latin America. Bolivia, Costa Rica, Dominican Republic, El Salvador, Grenada and Ecuador are some of the countries that received RFI financing. Free Download. My work focuses on sovereign debt restructuring, IMF lending and surveillance, as well as central bank law and bank resolution. Following the approach that had been accepted in English law-governed bonds for many years, Mexico-style CACs permitted a qualified bondholder supermajority, usually 75 percent per bond series (the "series-by-series" CAC), that approved modifications to the payment terms of the bonds to bind a dissenting minority into the modifications. Download PDF (1.3 MB) Download Epub Abstract/Excerpt 0000010447 00000 n xref As the source of credit shifted, the composition of sovereign creditors changed as well. All rights reserved. Asia and the Pacific Europe Middle East Sub-Saharan Africa Western Hemisphere !S{Ys.A?b q/Uc; Meanwhile, Venezuela continues mired in default for more than three years as of the time of publication. For your convenience and does not constitute legal advice the lender of last,. Bank law and bank resolution Fund & # x27 ; s Lending Framework and sovereign debt held by private.. A central role in sovereign debt restructuring, IMF Lending and surveillance, as as. 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