Contractual and Voluntary Approaches to Sovereign Debt Restructuring

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.