Panel Discussion “Facilitating International adjustment through Sovereign Debt Restructuring” 2012 Meetings of the International Monetary Fund and World Bank Group
Ms. Shamshad Akhtar Assistant Secretary-General for Economic and Development of DESA, Secretary General’s Special Advisor of Economic and Finance
12 October 2012, Tokyo
Since the adoption of the Monterrey Consensus, the Financing for Development Office in the United Nations Department of Economic and Social Affairs has been mandated to follow-up on agreed outcomes and conduct multistakeholder consultations, expert group meetings and panel discussions. One such theme that the Office is actively engaged in is facilitating discussion on sovereign debt with a view to elicit workable policy options for enhancing the architecture for sovereign debt restructuring and promote consensus amongst stakeholders.
Today, questions related to sovereign debt are once again at the forefront of policy discussions. The challenge of preventing and managing sovereign debt crises has taken on a new urgency in the wake of the global financial crisis. Many of the countries currently struggling with high public debt burdens are in the developed world, making the problem of excessive sovereign debt a global phenomenon and a threat to international financial stability. Problems related to sovereign debt are not confined to emerging markets or debt overhang in low income countries. The sheer magnitude of the issue is reflected in the large-scale bailouts by the official sector to some European countries, the size of which is a first in economic history.
There have been boom bust cycles and hundreds of defaults and rescheduling in history. It is true that eventually some kind of settlement between creditors and the debtor country is reached – the question is at what cost? A recent IMF Survey (IMF 2012, Udaibir Das, Michael G. Papaioannou and Christoph Trebesch, Sovereign debt restructurings 1950-2010: Literature survey, data and stylized facts) documents the high costs of restructuring for debtors and creditors and the time lost in reaching a solution. There is no systematic approach and solutions very often tend to be messy and a case of muddling though. The solution to the problems in Latin America, for example, from the Baker Plan to the Brady bond deals took years to work out. “The Lost Decade” has lessons for devising better ways of going forward.
The social costs of the debt crisis are a major area of concern. The social unrest in Greece is just one recent example that threatens stability in the region and elsewhere. Recent economic history is replete with examples of the loss in output and the impact on the poor in many emerging markets and developing regions as well. Even if down the road debt restructurings are finally carried out – the time involved is costly both for the debtor and creditor as well as for the implications for global financial stability and the future of capital markets.
The existing structure for restructuring sovereign debt is not ideal. Apart from the cost of delays for debtors and creditors, holdouts, litigation, destabilized markets, bailouts by the public sector and eventually the burden of adjustment on the common man, add to the burden, eventually requiring initiatives and policy intervention.
In contrast to the need for procedures and institutional developments to have a smoother resolution when problems do arise, the evolution in this area has been a slow one. The developments since the impasse to find political support for the SDRM such as the inclusion of Collective Action Clauses (CACs) in bond contracts and voluntary code of conduct have not, reduced the need for taking policy action on improving the architecture for debt restructuring. The liquidity in international capital markets deferred the discussion till the explosion of this ongoing debt crisis as there was no immediate problem to resolve.
Gaps in the financial architecture for debt restructuring were revealed by earlier sovereign debt crises in emerging markets and developing countries. While valuable lessons have been learnt from those experiences , concerns remain that efforts to reform the architecture have been insufficient and that the incremental steps taken have been inadequate to provide timely and cost-effective debt crisis prevention and resolution. The introduction of CACs in bond issues as a tool for debt crisis prevention and management, serves a limited function of coordinating creditors of a bond issue. Nevertheless, problems of aggregation remain over the whole range of bonds. While future legal work on aggregation may be able to tackle this issue, apart from creditor coordination, there are other fundamental problems with timely and speedy debt restructuring. Collective Action Clauses cannot perform the role of public policy and a fresh public policy discussion is warranted.
I welcome and thank the distinguished panelists and all of you for coming together today to discuss this issue and explore concrete, practical steps to improve the framework for the timely and orderly restructuring of sovereign debt. The challenge is to explore ex ante incentive structures and institutional arrangements that facilitate or impede restructuring and propose ideas on how incremental steps can be taken to provide greater clarity of the rules by which sovereign debt restructuring will occur.
The aim is to improve the efficiency of global capital markets and reduce losses faced by creditors, sovereign borrowers and others adversely affected by the uncertainty surrounding potential disruptive debt scenarios. It requires dialogue and close cooperation between the different actors involved in this story in forging the way forward. Today’s meeting is an attempt to facilitate this dialogue.
I thank the Centre for Global Governance and Innovation represented here by James Haley, for partnering this meeting with us and the Government of Norway for their generous support for this project.