Saturday, October 25, 2014

Restructuring Sovereign Debt

This event was co-sponsored by the Heinrich Boell Foundation’s North America Office, Jubilee USA Network, New Rules for Global Finance, and the Woodrow Wilson International Center for Scholars.


October 26, 2011

Full Audio Recording

Sovereign Debt Restructuring Meeting by New Rules

Event Summary

The last years of financial crises have seen developed countries wrestling with the problems of sovereign indebtedness, long thought to be a problem unique to developing countries. Some former “Heavily Indebted Low-Income Countries” initially avoided the debt trap during the first years of this prolonged financial crisis, but are now face severe indebtedness once again.

This round table discussed what we have learned from the past experiences with restructuring sovereign debts, and what options are (or should be) available to today’s and tomorrow’s sovereign debtors.


  • Jo Marie Griesgraber, Executive Director, New Rules for Global Finance Coalition


  • Mr. Andrés de la Cruz, Partner at Cleary Gottlieb Steen & Hamilton, LLP, New York, scholar and practitioner working to resolve sovereign debt problems
  • Mr. Kent Hughes, Director, Program on America and the Global Economy, Woodrow Wilson International Center for Scholars
  • Mr. Eric LeCompte, Executive Director, Jubilee USA Network
  • Mr. Mansur Muhtar,Alternate Executive Director, representing the Angola, Nigeria and South Africa Constituency on the Board of the World Bank Group, and former Nigerian Minister of Finance
  • Mr. Georges Pineau, Permanent Representative of the European Central Bank to the IMF




This panel took place as a European Summit on the Greek debt was drawing to a close.  Indeed, one of Mr. Andres de la Cruz’ colleagues at Cleary, Gottleib, Steen and Hamilton, LLP in New York was held up in Brussels for another night of negotiating, and hence unable to join the Panel in Washington, DC.  While there was much interest, even excitement, about the outcomes of that Summit, regrettably we would come to learn that such Summits would happen too often, with little definitive outcome.   Audience and panelists alike were awaiting Summit results, notably Mr. George  Pinneau, the European Central Bank’s Permanent Representative in Washington.  In the following months Italy was on the brink of disaster, Prime Minister Silvio Berlusconi was forced out, and a non-political government of Prime Minister Monti would take over the work of imposing austerity.

For many people in the room, and for the Moderator, Jo Marie Griesgraber, Executive Director of New Rules for Global Finance, the norm had long been to focus on low income sovereign debtors.  The Jubilee 2000 Campaign had been exactly that:  to cancel the debts of the poor as a core element in building sustainable development for the world’s poorest peoples.  Now it is the wealthiest countries, the US, Europe and Japan who are among the world’s biggest debtors, and these problems have the awesome negative ramification of bringing financial crises and recessions to the whole world.

Mr. De la Cruz was correct when he said that in the long history of sovereign indebtedness creditors have indeed become more humane, as he recalled that the United States used warships to take over Mexico’s custom houses in Veracruz.  An action not regarded as extreme in the 19th century.  Throughout the Third World Debt crisis which began formally in 1982, bankers met with sovereign debtors in The London Club; the wealthy western donor governments met them in the Paris Club; and the IMF coordinated the austerity responses.  For many years the World Bank, the IMF and regional development banks were the preferred creditors and were not expected to reduce or restructure their debts.  Nigeria’s experience later in the era of developing country debt was exceptional because of the large write-off they received from bilateral donors (The Paris Club), without adhering to years of strict austerity policies.  (Of course Nigeria’s oil experts put her in a unique negotiating position.)

Among the successes of the Jubilee Campaigners was to get the multilateral development banks, and the IMF, to cancel substantial portions of the debts of their poorest borrowers—with wealthy donor countries basically underwriting their losses.  Bilateral donors would also reduced many of their outstanding loans.  But always the creditors set the terms, and relief came only with intense external pressure.  Such an arrangement could not be sustained for the future.  Clearly the global institutional architecture lacked a locus to deal fairly and comprehensively with sovereign debt without causing the citizens of the debtor country to endure excessive suffering as the country repaid debts regardless of the purposes of the loans.

In 1995 the IMF’s First Deputy Managing Director, Anne Krueger, proposed a Sovereign Debt Restructuring Mechanism.  Had she not proposed that the SDRM be located in the IMF and run by the IMF, the debt campaigners would have endorsed the proposal.  The SDRM was also rejected by the United States and by middle income countries, fearing that the private financial lenders would interpret even the slightest support for such a mechanism as a signal that their finances were not in order, or they could be planning for a default in the future.  Jubilee Network USA’s Executive Director clearly reiterated the principles guiding Campaigners’ call for a global debt restructuring mechinism:  1) a single insolvency mechanism for all sovereigns and for all debt owed; 2) the automatic stay on loan payments, without increasing penalties; 3) impartiality in decision-making by the judges or panel who would not themselves be creditors; and 4) determining is all the loans were in fact legitimate contracts for legitimate purposes.

Mr. de la Cruz also reminded the audience of the emergence of the Common Action Clause in all bond contracts.  While less relevant to the low income developing country debtors, this addition to contracts meant that a simple majority of bondholders could agree to renegotiate the terms of the bond (such as interest rate, length of repayment), and not require the agreement of 100% of all the bondholders.

Despite these advances, the situation in Europe demonstrates that sovereign over-indebtedness is a growing problem, scarcely limited to low income countries.  Debt cancellation is not an altruistic aspiration of fringe groups.  Bankruptcy Courts ended the barbarity of debtor prisons.  The global community has not yet agreed that a bankruptcy equivalent for over-indebted countries is needed.  Until then, excessive austerity, like excessive leeching, seems to be the universal—though seldom successful—prescription.  And regrettably, neither the problem nor the cure of sovereign over-indebtedness will remain behind the barriers of political borders.  With a single financial system, the austerity breeds recessions and for very many. 



Event Notes

Panel Discussion on Restructuring Sovereign Debt

Wednesday, October 26, 2011

INTRODUCTION Liane Schalatek  (Heinrich Boell Foundation)

                Provided welcome and introduction and spoke about the timeliness and relevance of this particular topic. In a way, what’s happening now is a strange reversal; in the past, it’s been developing countries dealing with debt problems, not developed countries. There are both similarities and differences between the debt problems in developing countries and developed countries, but what is ultimately missing in the entire system is a way of restructuring sovereign debt.

KENT HUGHES (Director, Program on America and the Global Economy, Woodrow Wilson International Center for Scholars): asked to describe the dimensions of the problem

  • Reality is sobering: If nothing is done, Greek debt could balloon to 20% of GDP. Greece is just the beginning, problem could rapidly spread to Italy, Spain, Portugal. Major problem is that no one knows all the links. If there is a forced default, we don’t know what will happen.
  • Can severe austerity spur the economy? World is seeing big focus on “Austerity mania.” UK as an example. Unclear whether austerity will help or hinder the problem.
  • There is the question of fairness: What is fair in debt relief? Is it fair to ask Germany to help pay back Greek loans?

MANSUR MUHTAR (Alternate Executive Director for the Angola, Nigeria and South Africa Constituency on the Board of the World Bank Group, and former Nigerian Minister of Finance):

  • Asked to speak about the experience in Nigeria: 2005, Paris Club forgave 60% of Nigeria’s debt, largest deal in sub-saharan Africa and was a very big deal because Nigeria hadn’t had the best track record with stable governance or economic growth. There had been several other attempts at debt restructuring (IMF agreement in 2000), but none had worked.
  • The plan in 2005 ultimately worked, there was a political commitment to focus on the Paris Club framework. President Abuja set up a credible economic team, battled corruption, enacted austerity measures (Which didn’t really work, but also didn’t hurt because oil prices were on the rise)
  • Lessons learned: institutional framework provided by Paris Club was necessary.  Austerity measures were not that successful. Needed full commitment by political players and flexibility on the part of creditors.  Lenders must have a sense of shared responsibility.

GEORGES PINNEAU (ECB Permanent Representative in Washington DC with observer status at the IMF since 2008)

  • There really is no legal framework for sovereign debt restructuring. The US could do it at a municipality level, but there’s no international structure.
  • IMF follows the Prague Framework, which is a very market-oriented approach (PSI—private sector involvement). When countries are faced with liquidity problems—the private sector needs to maintain exposure but there is a need to do some type of debt rescheduling or restructuring
  • IMF isn’t directly involved with debt restructuring—they provide economic assistance but creditors work directly with debitors
  • In the 2000’s, there has been less debt restructuring—the peak was in the 1990’s. There is a trend now towards soft PSI and large haircuts as opposed to rescheduling. But higher haircuts are associated with higher market exposure.
  • Debt restructuring isn’t the easy answer: Since WWII there has been no debt restructuring in advanced economies. Debt restructuring tends to have taken place in small to medium economies with low linkages—but even in these smaller economies, there was still a lot of contagion. Spill-over effects from debt restructuring are going to be big in Europe. Hard PSI implies large risk

ANDRES DE LA CRUZ (Partner at Cleary, Gottleib, Steen and Hamilton, LLP, New York and Buenos Aires)

  • Two upfront points  1) we’ve made a lot of progress in addressing how to deal with sovereign debt over the past 110 years; 2) Contracts are valuable things. Contracts allow for reliability and trustworthiness
  • The problems of sovereign debt started 50 years ago—before that, capital flows to other economies was very limited. But now we don’t have a way of dealing with restructuring sovereign debt.  So what can we do? Two approaches: 1) Carrots: Stretching maturity (very costly, implies haircuts); Credit enhancement (trade relief for collateral or third party guarantee); 2) Sticks: Default (very dramatic and very costly); Collective Action Clauses; use local laws to amend terms of debt (has been used).
  • Lessons of Restructuring
  1. When restructuring involves the banking sector, things are much more complicated. Banks can bring sovereign debts down
  2. Don’t wait until the next administration: the sooner the debt is tackled, the easier it is to negotiate a relief package
  3. Keep track of debt stock
  4. Don’t be shy in requesting relief, but be even-handed. Try to get maximum consensus.
  5. Be efficient in managing the process

ERIC LE COMPTE (Executive Director, Julibee USA Network)

  • Jubilee network wants a fair and transparent process to allow for an international bankruptcy court. People in various sectors recognize that this could be a good thing, but the momentum is starting to change as debt crisis migrates from south to north
  • From US perspective: this wouldn’t necessarily be a super costly initiative and it has the ability to deal with lenders outside of the Paris Club (such as China)
  • Basic Principles 
  1. Low income countries face risk of debt distress
  2. Middle income countries are facing debt crises
  3. Restructuring debt has become more and more complicated
  • The necessary guidelines of a sovereign debt restructuring court:
  1. One single insolvency mechanism
  2. Automatic stay
  3. Impartiality in decision-making
  4. Determination of the legitimacy of the loan