Sovereign Debt Restructuring: An overview of ongoing work. Benu Schneider

Transcription

1 Sovereign Debt Restructuring: An overview of ongoing work Benu Schneider

2 Identifying Gaps in IMF Architecture for Debt Resolution in a world of open capital accounts New Financing Standstills Adjustment IMF Debtor-in-Possession Financing by the Private Sector Article VIII 2b, Current Transfers (interest payments) Provision for Standstills for Capital Accounts Transfers Domestic Policies Adjustment through Debt-Restructuring Lack of a rules-based platform for engagement of debtors and creditors, creditor coordination, independent DSAs, Debt Restructuring and no framework for the relationship between the private and public sector

3 Lack of a credible exit strategy How can the Fund exit from a situation in which the sustainability of the debt burden is an issue? sometimes the lack of an acceptable alternative in terms of an orderly exit gives the IMF little choice but to exercise forbearance and continue disbursements even in cases where, on the balance of probabilities, an intertemporal solvency condition may be violated.

4 Meanwhile Restructurings have become larger and also more complex because of the number and diversity of creditors The nexus between debt restructuring and the highly leveraged banking system has implications for the role of the official sector The role of sovereign debt has implications for the expansion of credit with debt writedowns.

5 Moral hazard implications for both debtors and creditors Debtors defer needed adjustments hoping for an improvement in economic conditions Lenders do not correctly price in risk Banks may postpone recognizing losses on their balance sheets

6 Costs of sovereign debt restructurings Output losses Trade losses Decreased access to external credit Higher spreads Financial instability Lower FDI Lower credit ratings Around 5 per cent a year, Up to 10 years. Higher if twin or triple crises Falls bilaterally by about 7 percent per year, average 15 years Drop in private sector access of up to 40 per cent in the year after Greater haircuts = larger post-restructuring bond spreads until 6-7 years after Also highly correlated with duration of capital market exclusion Loss of value of restructured assets, deposit withdrawals and interruption of interbank credit lines, interest rate hikes Drop in flows of up to 2% of GDP per year After 1 year most sovereign bonds: C- rating IMF 2012, Sovereign debt restructurings : Literature survey, data and stylized facts

7 Concerns Creditors Debtors Creditor rights have been eroded Willingness to pay potentially capricious behavior by some debtors Impacted by preferred creditor status Non-system implications for global financial stability Undue lags Insufficient debt relief leading to future debt restructurings Jeopardy to resumption of growth and debt sustainability, impact on trade, FDI etc. Hold outs, litigation Access to finance and the cost of finance

8 Gaps in architecture Lack of a centralized dispute resolution mechanism Lack of organized representation of all stakeholders Lack of enforceable priority rules for creditors Problems with inter-creditor equity and equity between the private and public sector No international law governing international bankruptcies judgments passed in one jurisdiction is not enforceable in another jurisdiction legal diff across jurisdictions No provisions for standstills that provide breathing space. All contributing to uncertainty and delays with high costs

9 What would the SDRM have done? Creditor committees / Voting thresholds Priority financing Restructuring agreement Sovereign debt dispute resolution forum Type of debt to be treated, verification Stays by majority rule Sanctions

10 What is needed to go forward? A balance is needed between restructuring, financing, standstills, and adjustment (all tools should be at disposal use and combination based on circumstances) Debt management - Containment of original sin -Not to contract inappropriate debt Responsible lending Role of honest broker (IMF position compromised because it comes in in a diff. situation) Debt resolution mechanism Action is needed at all levels

11 Role of IMF In the face of rising risk premia, official sector financing actually finances an exit of capital IMF should play a clearer role when there are inflows of capital

12 Efficacy of CACs limited Contractual terms cannot take on the role of public policy such as externalities, societal distribution problems and broad equity terms for stakeholders. CACS have aggregation problems They can facilitate creditor coordination amongst creditors of a single bond issue, but cannot resolve the problems of aggregation across different series of bond issues.

13 Options going forward Ex ante structures and frameworks for creditor committees Standstills contractual vs. statutory Debtor-in-possession financing by the private sector International debt registry Harmonization of regulatory, accounting and tax incentives/disincentives with a framework for debt restructuring Voluntary vs. Statutory proposals

14 EX-Ante Structures for Creditor Committees Voluntary efforts at setting up structures for creditor committees, including permanent committees to speed creditor coordination Adv: Verification of fin data and eco assumptions, Soundings, Single negotiation, stress testing, endorsement, creditor coordination Disadv: Cost, inside information misuse

15 A recent example of creditor committee Belize govt announcement of rules for the creditor committee Voting majority, time bound, information publicly available, public support for committee form the private sector Representative creditor committee can be helpful if ground rules are carefully laid out And an oversight body and governance structure will be an improvement

16 Why standstills? It prioritizes financial stability Prevents cross-border default and acceleration Brings creditors together Gives the official sector time to find a solution.

17 Statutory approach The IMF s capacity under Article VIII, 2(b) to temporarily approve restrictions on current payments (that is to say, interest payments) could result in partial stays on creditor actions on arrears. For other arrears relating to capital payments (for example, nonpayment of bullet payments of principal), an amendment of the IMF Articles of Agreement would be required to achieve symmetry between the treatment of arrears arising from capital and those from current payments. Need to resolve possible conflict of interest in the IMF s role of arbiter and creditor.

18 Contractual approach to Standstills Standstills in bond contracts to set out the contractual terms for non-payment of interest and suspension of payments. Presently it is typical to have a grace period of three to13 days, for resolution of any technical difficulties in making payments only Although consent for new financing could be obtained through trustee relationships or collective action management, trustees don t like discretion, and thus clearer rules are needed. Moreover, timing issues would also have to be overcome, since notice of 21 days is required to call a meeting of creditor committees.

19 Issues in standstills Will a fixed time limit on a standstill would help or hurt a sovereign attempt to restructure? There are also accounting, impairment, credit rating and credit-default-swap trigger issues that would have to be addressed

20 Developing better contracts Are a standardized template for bond and loan contracts the answer? -- representation, engagement, grace period etc Binding on all debtors and creditors

21 State contingent debt Instruments for more equitable risk sharing: Contingent convertible (CoCo) automatically extends the amortization profile in an emergency liquidity requirement and thereby reduce the amount of official sector assistance required and mitigate the problem of subordination of private debt by the IMF or other official support.

22 Bolton and Skeel DIP proposal Address IMF s funding limitations and preserve its role Bring private sector to the heart of debt-restructuring IMF will function like a bankruptcy court charged with granting first-day orders and other DIP financing Besides current procedure, the IMF would put together a funding package including: Priority lending for the private sector Its own funds and other available public funds Negotiations will have to include the private sector, ensuring coordination with seniority as incentive to participate Gradually shift from taxpayer to private sector money Subject to more and more market discipline First-in-time priority regime: Prior DIP loans would have priority over subsequent DIP financing

23 Information on debt stocks and flows Reliable and consistent information on international liabilities is needed to facilitate timely debt restructurings. Proposal to establish an international registry of debt, reported by creditors and reconciled with debtors.

24 Regulation, accounting and tax rules Regulatory, tax and accounting regimes interact to create incentives or disincentives, as the case may be, for the timely, orderly restructuring of sovereign debt Research needed in this area.

25 Accounting and regulatory frameworks provide a disincentive for debt write downs Basel changed the regulatory framework to hard binding floors in restricting the use of capital provisioning to facilitate debt write downs. Since Enron no room for discretion in accounting frameworks in writing down reserves and accounting for asset values. Losses and the way they are dealt with have serious implications for systemic risk and bank stability.

26 Official sector balancing act Providing public funds to protect the banking system, reducing the size of impaired assets and limiting debt write downs The potential subordination of private sector claims that results from the assertion of preferred creditor status, which increases prospective haircuts on other creditors should the assistance package fail and the borrower subsequently default.

27 Assessing debt sustainability Discontent with the current practice of assessing debt sustainability

28 Combing the voluntary and statutory approach Creating the shadow of the court house in voluntary debt restructuring A version of the dispute settlement mechanism of the WTO IMF structure convening power A system in which there are panels of experts (not IMF staff)

29 Combining voluntary and statutory approaches (contd..) STAGE 1: Negotiations are voluntary but with a deadline. Stage 2: If no agreement is reached, the second stage could be a panel, which serves as an arbiter. Stage 3: And finally, if that doesn t work, a panel can settle the dispute which is binding on all.

30 Advantages of the proposal This can assuage the fears of the private sector because the proposal includes all creditors, including new creditors, EXIM and development banks, IMF and MDBs. Private creditors can gain, in a scheme which is statutory in nature. If debt is bought in the secondary market, it should not have any preference in debt restructuring.

31 Resolvency Proceeding Three Steps to a Viable Sovereign Debt Restructuring Mechanism

32 Resolvency Clause This is a contractual clause which permits the sovereign to commence a resolvency proceeding if a status of insolvency has been reached The contractual approach is since 2003 seen as the state of art

33 Resolvency Court One permanent president and a limited pool of potential judges who act as judges only when and if appointed for a particular case

34 Rules of Procedure These rules abstain from any substantive rules. The judges are more supervisers than deciders. The procedure resembles to a certain degree the Chapter 11 proceeding of the Bankruptcy Code. With it it shares the commonlaitiy that the procedure serves as an invitation to negotiation

35 Sovereign Debt Forum Assuage the information and analytical issues associated with the question of debt sustainability Neutral organization with broad participation - permanent, neutral staff seconded from debtors, private creditors and multilateral institutions Aim to design a collective, consistent process to enhance sovereign debt as an asset class.

36 Sovereign Debt Forum (contd..) SDF would foster timely, orderly restructuring of sovereign debt by improving information flows between creditors and debtors providing a template for negotiations facilitating a frank discussion of debt sustainability and the feasibility of required adjustment efforts.