Pdf on jan 1, 2011, kern alexander and others published sovereign debt restructuring in. In a restructuring, lenders receive a new debt instrument that may di. Collective action clauses or the sovereign debt restructuring mechanism shalendra d. Thus, it is a step forward in sovereign debt restructuring. Sdf sovereign debt forum sdrm sovereign debt restructuring mechanism sdt sovereign debt tribunal about the authors skylar brooks is a research associate in cigis global economy program and a ph. The eurozone crisis which started in spring 2010 as a greek budget crisis has alerted europeans that the issue of defaulting sovereigns is not one reserved just for the poor and poorest countries on this globe. Creating a framework for sovereign debt restructuring that works. Mind the trapriccardo barbieri hermittejune 2016abstractthe academic and policy debate on sovereign debt restructuring mechanisms sdrms has gained momentum of late, with several economists and policymakers advocating a reform of the loose debtrestructuring framework the eurozone developed in 20102012 as it tackled the euro area. Introduction the ultimate goal of sovereign debt restructuring is to restore the sustainability of public debt with high proba bility. A sovereign debt restructuring mechanism sdrm should aim to help preserve asset values and protect creditors rights, while paving the way toward an agreement that helps the debtor return to. Sovereign debt restructuringrecent developments and.
Pdf in recent years, a number of costly and destabilizing sovereign debt crises from. A debt restructuring mechanism for sovereigns do we need a legal procedure. Sovereign debt restructuring main drivers and mechanism. Efforts to restore market confidence and economic growth must include the resolution of such sovereign debt concerns. A more efficient mechanism for debt workouts that dealt better with information and coordination problems is needed to make this possible. The framework and content of the sdrm proposed here differs from earlier proposals in several important respects. A mechanism to regulate sovereign debt restructuring in. The sdrm could also be structured to include bilateral official debt. In close resem blance to the imfs new lending framework, a framework to restructure sovereign debt in the euro area would provide for maturity extensions. Sovereign debt is restructured in the context of a default.
A mechanism to regulate sovereign debt restructuring in the euro. Sovereign debt restructuring mechanisms sdrms have been the subject of a considerable volume of working papers and policy proposals since the eruption of the euro area sovereign debt crisis in 2010. Debt workout mechanism in 20 composed of stakeholders and. Shapma when sovereign debt restructuring or debt reduction becomes unavoidable, what is the appropriate regime that can provide for an orderly restructuring, while at the same. Not everyone agrees, however, that debt restructuring is so difficult or that the costs are prohibitive. Domenico lombardi is director of cigis global economy program, overseeing the research. Protect the value of the assets and the rights of the creditors to avoid litigation. Roadmap and guide for sovereign debt workouts unctad. A sovereign debt restructuring mechanism sdrm should aim to help preserve asset values and protect creditors rights, while paving the way toward an agreement that helps the debtor return to viability and growth. Recent controversies surrounding sovereign debt restructurings show the weaknesses of. Haley is the executive director for canada, interamerican development bank, washington, dc, and the former director of the global economy program at the centre for international governance innovation.
Representatives of the private sector reacted with horror for the most part. Since 1970, more than half of the restructuring episodes with private creditors. The prevalence of maturity extensions has been hard to reconcile with economic theory. Ecuador, pakistan, russia and ukraine were all able to restructure their bonded. A mechanism to regulate sovereign debt restructuring in the euro area j. The current situation in the euro area, characterised by high levels of debt and the continuing trend of many member states to run budget deficits. It can lead a sovereign with unsus tainable debts to delay seeking a restructuring, draining its reserves and leaving the debtor and the majority of its creditors. Imf staff suggested such a mechanism in the early 2000s the sovereign debt restructuring mechanism sdrm but imf 2 the literature has used cacs to describe a number of contract terms designed to ease collective action problems. Most recently, members of the german council of economic experts proposed a sovereign insolvency mechanism for the euro area andritzky et al. Sovereign debt crises involve debt restructurings characterized by a mix of facevalue haircuts and maturity extensions. The design of a sovereign debt restructuring mechanism for the euro area. Strengthening the contractual framework for sovereign debt. Multilateral debt restructuring mechanism presentation at the united nations, first session of the ad hoc committee on a multilateral legal framework for a sovereign debt restructuring new york, february 3, 2015 1.
Sdrm aims at creating a framework for a debtor with unsustainable debts to approach its creditors. It is helpful to keep this context in mind as we discuss possible frameworks for sdr. The ftap proposal argues that a truly comprehensive debt restructuring process must be driven by an independent institution, such as an international arbitration panel. Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts to improve or restore liquidity so that it can continue its operations replacement of old debt by new debt when not under financial distress is called refinancing. Trickett masters of law faculty of law university of toronto 2011 abstract the recent financial crisis and subsequent sovereign debt distress in the eurozone has reinvigorated the debate over bailouts and sovereign debt restructuring. Sovereign debt restructuring obtain debt sustainability by reducing debt burden in an orderly manner. Schwarcz sovereign debt restructuring, supra note 9, at 960. Sovereign debt restructuring ifi creditorsthe relationship between each type of creditor and the debtor is governed by a different set l o a n understanding the dynamics of sovereign debt restructuring o f i c i 9 sovereign debtor bilateral private investors of rulesupon an event of default, the interest of each type of creditor is. The economics and law of sovereign debt and default.
Sdrm sovereign debt restructuring mechanism about the author james a. Countries have been reluctant to give up power to supranational rules or. Restructuring the sovereign debt restructuring mechanism rohan pitchford university of sydney mark l. Restructuring aims achieve the restructuring over a short time of period to reduce disruptions and reaccess capital markets. A mechanism to regulate sovereign debt restructuring in the euro area german council of economic experts 3 anchors the expectations of market participants and thus reduces the risk of destablizing market volatility caused by uncertainty. It also ensures that the restructuring process runs more orderly and rulebased. For the classification and supermajority voting of claims in the approval a. This is envisaged as a comprehensive mechanism that would be open to all countries and that would address private as well as bilateral and multilateral debts. Any to a necessary debt restructuring reduces the size of the pie and is. The goal of this article is therefore to reconstruct the normative implications of current sovereign debt restructuring practice and measure contractual and statutory proposals in. The restructuring and resolution of external sovereign debt concerns about sovereign debt default in europe and elsewhere continue unabated, generating much market instability and contributing to the world economys sluggishness. It begins by recapping in a holistic manner the various policies and practices that underpin the funds legal and policy framework for sovereign debt restructuring, including on debt sustainability.
The design of a sovereign debt restructuring mechanism for. The proposed mechanism is quite innovative in bringing debtors and bondholders together whether or not bond contracts contain cacs, in securing greater transparency, and in providing a mechanism for dispute resolution. We develop a model of endogenous debt restructuring that captures key facts of sovereign debt and restructuring episodes. Sovereign debt restructuring mechanismfurther considerations. Feld jochen andritzky member secretary general july 2016. Creatingaframeworkforsovereigndebtrestructuringthatworks 1. A framework for a formal sovereign debt restructuring.
The restructuring and resolution of external sovereign debt. But these costs also improve borrowing incentives ex ante. While an overwhelming majority of the literature available on sovereign debt restructuring is based on the economic aspects of the subject, the legal aspects involved in. A european mechanism for sovereign debt crisis resolution. Restructuring is a complex issue it involves positive and negative aspects, which need to be analysed in order to be able to determine whether it can deliver any added value. Reconceiving legal solutions for improving debt management jeremy w. The recent experience and literature on sovereign debt and. April 26, 20 sovereign debt restructuringrecent developments and implications for the funds legal and policy. This paper critically assesses several dimensions of a sovereign debt restructuring mechanism sdrm for the euro area.
This briefing provides an overview of the main issues relating to the restructuring of sovereign debt, and outlines the factors which impact the decision as to whether or not to proceed with debt restructuring. Introduction debt restructuring is an efficient mechanism of market economies. Pdf governing sovereign debt restructuring through regulatory. Ultimately, this proposal was dropped in favour of a less ambitious contractual approach based on the inclusion of collective action clauses and other innovations in international bond issuances. 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. Recognizing the vulnerabilities in the existing contractual framework for sovereign debt restructuring, the imf in 2014 endorsed reforms to collective action and pari passu clauses in international sovereign bonds designed to limit the scope for holdout creditors to undermine a restructuring.
Restructuring sovereign debt barry eichengreen a t the end of 2001, in a speech to the national economists club, anne krueger, the first deputy managing director of the international monetary fund, pointed to a. Debt workout mechanism in 20 composed of stakeholders and independent experts. Stiglitz the ultimate goal of sovereign debt restructuring is to restore the sustainability of public debt with high probability1. Sovereign debt restructuring main drivers and mechanism summary this briefing provides an overview of the main issues relating to the restructuring of sovereign debt, and outlines the factors which impact the decision as to whether or not to proceed with debt restructuring. Liquidity assistance is particularly crucial in a monetary union, as euro member countries are indebted in a currency beyond their sovereign control. The problem of sovereign debt has been the subject of significant academic debate. A soft law mechanism for sovereign debt restructuring.
The paris club process may need to be reexamined in order to make it dovetail with the restructuring of privatelyheld debt. About a debt restructuring mechanism for sovereigns. An incremental approach to sovereign debt restructuring. Eventually, however, the most ambitious reform proposals have been systematically abandoned, thereby consolidating debt restructurings as marketled casebycase processes. The most prominent example of a statutory approach is the sovereign debt restructuring mechanism sdrm, which was proposed by the imf in. Finally, with securitized debt markets, there now seemed to be room for significant collective action problems in debt restructuring negotiations, bringing crosscreditor problems to the fore along with the traditional. Sdrm stands for sovereign debt restructuring mechanism a quasibankruptcy court for sovereigns proposed by the international monetary fund in the wake of argentinas ruinous and. Restructuring the sovereign debt restructuring mechanism. Since 1970, more than half of the restructuring episodes with private creditors were followed by another restructuring or default within five years2 evidence inconsistent. Indeed, two competing proposals for dealing with the restructuring of sovereign debt recently have come to the fore.
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