Article 3.7 New framework for sovereign defaults
By Elaine Moore
Financial Times August 28, 2014
A group representing more than 400 of the world's largest banks, investors and debt issuers has agreed a plan for dealing with financially stricken countries and their creditors, in a bid to prevent a repeat of the wrangling that has pushed Argentina into default.
After months of talks convened by the US Treasury in the wake of Greece's restructuring, global debt experts will on Friday unveil a new framework that could transform the relationship between critically indebted nations and lenders.
Lawsuits filed by creditors against defaulting governments have doubled over the last decade and the changes come at a time when levels of sovereign debt have risen to record highs around the world in the wake of the financial crisis.
The fallout from recent defaults reignited calls for an international bankruptcy court, but market participants and Washington authorities favour a voluntary response rather than new statutory mechanisms.
The International Capital Market Association, whose members include banks, investors and debt issuers, has created fresh clauses for inclusion in sovereign debt contracts that will give countries the option to bind all investors to decisions agreed by the majority.
The new approach will make it difficult for small holdout investors to undermine restructuring deals by giving countries the option to employ a single vote across all bonds, with a 75% voting threshold, if they restructure their debt. This will hinder the chances of so-called ‘vulture' investors from buying up blocking stakes.
Alternatively governments can choose to take votes on each bond, or votes on individual bonds and a second vote across all debt. The final option has become a standard clause in eurozone government bonds since 2013 in the wake of the bloc's debt crisis.
When Greece restructured billions of euros of debt in 2012 private investors with more than ˆ6bn of Greek bonds would not accept the deal. Their actions put the country's financial future at risk, say analysts, and set a precedent that threatened to discourage investors from agreeing to future restructuring deals.
A further change to be outlined on Friday is intended to make clear that the common ‘pari passu' clause, which hedge fund investors have used to argue for full repayment on Argentine debt, means equal treatments but not equal payments for bond holders.
Around half of all government debt defaults now trigger creditor lawsuits and in countries such as Congo, Ecuador, Iraq, Peru and Poland, small numbers of private investors have refused to take part in government plans to restructure unaffordable debt, holding out for full repayment.
Additional reporting by Robin Harding.
FT
Source: Moore, E. (2014) New framework for sovereign defaults, Financial Times,
28 August.
International bond investors tend to be focused on those issued in hard currency, but it must be borne in mind that the vast majority of emerging economy government borrowing is in the domestic market in the local currency, and increasingly international investors are buying in those markets as inflation and government spendthrift habits are tamed and high economic growth with reasonably stable exchange rates is established - see Article 3.8.