Argentina's bond market access was first disrupted in the spring of2005, when the government attempted to resolve its debt crisis with a global bond restructuring offer. Although PBA launched the offer after negotiating and agreeing to the terms with its largest bondholder, it had not obtained the support of the entire committee. Our world is being transformed by what the World Economic Forum calls the 4th Industrial Revolution, and Latin America is no exception. The Peterson Institute for International Economics is an independent nonprofit, nonpartisan research organization dedicated to strengthening prosperity and human welfare in the global economy through expert analysis and practical policy solutions. In addition to private commercial debt, either in the form of bank loans or bonded debt, and to traditional official and multilateral loans, the external liabilities of many Latin American countries today include exposures to repurchase obligations, supplier credits, secured debts, guaranteed debt of state-owned enterprises and, on many occasions, court judgments or arbitral awards. Key to determining whether or not domestic debt should be part of a sovereign restructuring is weighing the benefits of the lower debt burden against the fiscal and broader economic costs of achieving that debt relief. 2022 International Monetary Fund. In 2003, Uruguay also utilized an exit consent technique to restructure its New York law-governed bonds, albeit narrower than Ecuador's. The IMF does not manage the debt restructuring process. Nowhere is this complexity more evident than in the ongoing case of Venezuela's debt restructuring, where the perimeter of an external debt restructuring, if and when that becomes politically feasible, may include debt of the sovereign, debt of the state-owned oil company PDVSA, various promissory notes, arbitral awards and other liabilities. Economic policy research by the Institutes 50+ internationally recognized scholars is the foundation of our mission and work. Latin American equity markets proved remarkably resilient to COVID-19, in terms both of growth in their major indexes and in new initial public offerings (IPOs), and other stock and rights issuances. 2021 White & Case LLP. American Samoa Australia Bangladesh Bhutan British Indian Ocean Territory Brunei Darussalam Cambodia China Cook Islands Cyprus Fiji French Polynesia Hong Kong India Indonesia Israel Japan Kiribati Korea, Democratic People's . 1 D. Beers, Z. Quiviger and J. F. Walsh (2021), BoCBoE Sovereign Default Database: What's New in 2021? From Colombia (South America) ten days ago to Columbia University (Morningside Heights) yesterday afternoon: I had the privilege of delivering a lecture on sovereign debt restructuring at Columbia | SIPA (School of International and Public Affairs) for Professor Thomas Byrne's course on Sovereign Risk. By drawing comparisons to pre-COVID-19 debt crisis resolutions in the region, we conclude that the solutions found during 2020 and 2021 create a new paradigm for sovereign debt restructurings in the region and globally, where good-faith negotiations between sovereign debtors and organized creditor groups, together with targeted use of contractual mechanisms to reduce holdout risks, can lead to orderly restructuring transactions that provide debtors substantial debt relief, preserve value for investors, and minimize the risk of chronic and acrimonious litigation. 1 https://www.spglobal.com/ratings/en/research/articles/210624-economic-outlook-latin-america-q3-2021-despite-a-stronger-2021-long-term-growth-obstacles-abound-12013558, A disruptive era portends a new wave of disputes using well-established frameworks for commercial and investment arbitration, Sovereign debt restructuring solutions developed in Latin America during 2020 and 2021 create a new paradigm for sovereign debt restructurings in the region and globally, GSS bonds and other forms of sustainable finance have become a mainstream feature of Latin American debt capital markets, COVID-19 has created strong incentives for investment in digital infrastructure in Latin America, especially in 5G, private networks, data centers and fiberoptic cables, Strong pandemic-era performance and a look around the corner, Established trends driving M&A globally are also reflected in Latin American deal flow, Download PDF of 'Latin America Focus Fall 2021'. Under the IMF's Articles of Association, the IMF may only provide its general resources to assist in the resolution of balance-of-payment problems if there are "adequate safeguards" for the IMF resources. However, it is also critical that governments are able to continue servicing their debt and that their debt burden remains sustainable. Varapat Chensavasdijai (SPR) managed the overall project. Vision. In April 2021, the IMF reached a Staff-Level Agreement with Suriname on a three-year EFF program. Series: Having a highly heterogenous debt stock creates additional challenges for sovereign debtors in a restructuring scenario, as creditors holding different categories of claims often have differing expectations as to the relative seniority or priority that should be accorded such claims. While the current contractual approach has been largely effective in resolving sovereign debt cases since 2014, it has gaps that could pose challenges in future restructurings. GO. Brazil, in particular, saw a large number of new publicly listed companies emerge in 2020 2021. Notwithstanding such opposition, PBA's restructuring ultimately obtained the support of 93 percent of its existing bondholders. Instead, sovereign debtors faced the risk of disruption posed by individual bondholders seeking to capitalize on the sacrifices made by other creditors. 0000002080 00000 n A strategy that engages creditors constructively, and as transparently as possible, that relies on market-based incentives, and that presents the exchange as part of a consistent macroeconomic plan typically works best. Some countries like Belize have in the past even undertaken their own debt restructuring program without embedding it in an IMF program. American Samoa Australia Bangladesh Bhutan British Indian Ocean Territory Brunei Darussalam Cambodia China Cook Islands Cyprus Fiji French Polynesia Hong Kong India Indonesia Israel Japan Kiribati Korea, Democratic People's . The source of this problem lies in the terms of sovereign bond contracts themselves, specifically in the requirement (virtually universal prior to 2003) that changes to bond payment terms must attract unanimous creditor support. A use of specific incentives and disincentives would accompany each offer to maximize participation and minimize holdout risk. If the COVID-19 pandemic leads to a significant wave of sovereign debt distress, this role will be closely scrutinized. The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, . Regional Economic Outlooks. The terms of the restructuring would provide Argentina with US$39 billion of debt relief over the following nine years, via a combination of maturity extensions and coupon reductions, and would also enhance the legal terms of the bonds to rectify the observed deficiencies in the ICMA CACs.2. While the current contractual approach has been largely effective in resolving sovereign debt cases since 2014, it has gaps that could pose challenges in future restructurings. %PDF-1.4 % In the absence of a sovereign bankruptcy regime, the resolution of debt crises is ultimately a matter of ad hoc negotiation between a sovereign and its creditors. Wikimedia Commons. The DSSI window has closed however, the threat of a looming sovereign debt crisis remains. The design of CACs evolved over time in response to the evolving strategies and increased financial resources of potential holdout creditors. xref 3144. Accordingly, good-faith negotiation between debtors and their creditor committees remains the lynchpin to successful sovereign and sub-sovereign restructurings. Asia and the Pacific Europe Middle East Sub-Saharan Africa Western Hemisphere The discussion draws on options for improving the functioning of debt restructuring mechanisms from a private sector perspective (a separate seminar looks at policy options and the G20 Common . studies at Harvard Law School, I worked as a . In each of the COVID-19-era restructuring cases, the composition of the creditor committee has been critical. Asset and liability management Such committees have been widely perceived to represent the interests of the broad class of bondholders, giving credibility to the negotiating process and facilitating relatively quick resolutions. Game theory is a useful framework for modeling aspects of sovereign debt recoveries, given that it models the interactions among debtors and creditors in the lending/borrowing "game." While there is a long-established set of precedents for Paris Club (U.S. & European) and multilateral (IMF, etc) creditors' actions, we still have little available information about how China will act in debt . At that time, Argentina's outstanding bonds did not include collective action clauses that would allow payment terms to be amended with supermajority support, and because creditors had allegedly amassed more than 50 percent in some individual series, a comprehensive exit consent strategy was not an option. 0000008993 00000 n Ecuador in 2000, for example, was the first sovereign to use an "exit consent" technique to restructure its debt. 0000008703 00000 n After a "lost decade" of economic stagnation, and superficial and inadequate debt re-profiling efforts, Latin American countries embraced the Brady initiative, persuading their commercial bank lenders to exchange their non-performing loans into tradable instruments that were issued with a principal haircut but were backed by US treasury notes as collateral. This paper examines the causes, processes, and outcomes of Barbados' 2018-19 sovereign debt restructuringits first ever. The FCL provides flexibility to draw on the credit line at any time during the period of the arrangement (one or two years). As emerging and developing economies accumulate more domestic sovereign debt, it is likely to play a larger role in the resolution of future sovereign debt crises. The establishment of representative creditor (particularly bondholder) committees provides an answer to the creditor coordination problem. The views expressed in IMF Working Papers are those of the author (s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. The press release said:. 0000004756 00000 n Bank lenders, often with decades of on-the-ground experience and a profound understanding of local political and economic trends, were replaced by anonymous and dispersed holders of interests in global bonds lodged in the international clearing systems. The Sovereign Debt Forum was launched in October 2019 at the International Monetary Fund as a collaborative effort by the Institute of International Economic Law and the Centre for Commercial Law Studies at Queen Mary University of London.The European University Institute joined the Forum in Spring 2020. Borrowing from these facilities does not require the adoption of a full-fledged program or strict conditionality, unlike when the IMF extends balance-of-payment support (although it does require an assessment of debt sustainability as discussed above). World Economic Outlook. 0000004350 00000 n The IMF Press Center is a password-protected site for working journalists. Sovereign debt restructuring, Please address any questions about this title to publications@imf.org. In the case of Ecuador and Suriname, creditor committees first negotiated temporary deferral of payment obligations to provide breathing space until a longer-term debt restructuring solution could be found. Tags: sovereign debt cyprus a cypriot precedent debt restructuring Authors: Joseph Cotterill Date tagged: 08/01/2013, 06:49 Date published: 06/27/2013, 11:25 . 0 Ultimately, PBA reached a deal with its largest creditor and committee member in July 2021 and subsequently launched an amended offer. GO. The restructuring was comprehensive, featuring several rarely used approaches, including the restructuring of treasury bills, and the use of a retrofitted collective action mechanism. The mainstream view on sovereign debt crises, commonly reproduced in IMF policy, tends to attribute such crises to broad categories of either misfortune or mismanagement. Publications. In "Bridging Latin America's digital divide," our team takes a detailed look at investments in digital infrastructure across the region. Because certain of PBA's bonds issued under its "old" 2006 indenture contained higher CAC thresholds than bonds issued under its more recent 2015 indenture (which contained ICMA CACs), PBA incorporated additional exit consents in the restructuring proposal for those series to disincentivize holdout behavior. Notwithstanding such heterogeneity, the CACs operated to facilitate consensual restructuring outcomes for Argentina, Ecuador and a number of Argentine provinces in 2020/2021. My work focuses on sovereign debt restructuring, IMF lending and surveillance, as well as central bank law and bank resolution. y=.fIk|gkJ6Hdo`u,> bz9n! j` ;j200jwQ H `MtqXUikHL-M+FKY^Zn&^iWASBm^NypN'' r "IRlqg*\R>@ElIud>Q'%-=31$kiRhgNeYK'1Su:3w&. Take, for example, Ecuador's debt buyback in 2008: Ecuador publicly defaulted on two series of bonds, depressing their prices, and then proceeded to buy them back in a Dutch auction using financial intermediaries. This paper analyzes when and how to restructure sovereign domestic debt in unsustainable debt cases while minimizing economic and financial disruptions. To receive DSSI relief, countries were required to apply for an arrangement with the International Monetary Fund. The banks, in turn, extended relatively cheap credit to Latin American countries to finance their fiscal and current account deficits, amounting in many cases to more than two-thirds of external financing. After using the increased cash flow to pay off obligations to the IMF, Argentina, through two debt restructurings, one in 2005 and one in 2010, struck deals with 93% of the bondholders for payments adding up to around 30% of . 0. 0000004424 00000 n This publication is protected by copyright. The IMF's role in sovereign debt restructurings - Contents 3 Executive summary This report focuses on the international architecture for sovereign debt restructurings (SODRs), as seen through the lenses of the International Monetary Fund and with a special attention to the role that the Fund can play in facilitating orderly restructuring processes. Ecuador was the first sovereign to consummate a restructuring transaction in September 2020. While each debtor tailored its restructuring proposal to its particular characteristics, the availability of CACs, coupled with the endorsement of large creditors and well-organized creditor committees, ultimately catalyzed a holistic restructuring for these debtors. Current projections indicate a healthy recovery through the end of 2021, perhaps by as much as 6.9 percent according to S&P Global,1 and thereafter steady growth of about 2.5 percent per annum. 0000073372 00000 n This is especially important for Latin America given the role that connectivity and digital capacity play in driving inclusive economic growth and prosperity. This publication is provided for your convenience and does not constitute legal advice. 0000004387 00000 n Please do not hesitate to let me know if there are any topics that you would like us to cover in future editions. Download PDF (1.3 MB) Download Epub Abstract/Excerpt Prior to my LL.M. Conclusion - B Interaction effects - Enforcement in Sovereign Debt Markets . Asset and liability management We also find that attempts to seize a country's assets abroad are associated with a decline in international trade of the debtor country, over and above the default effect per se (in line with Bulow and Rogoff, 1989a). 0000007663 00000 n Bank of England. In August 2020, Argentina proposed these terms to its bondholders via a structure combining the use of the two-limb CACs with the use of exit consents, in a combined exchange offer and consent solicitation. GO. The reasoning is simple: The conditionality of an IMF program ensures a certain degree of macroeconomic and fiscal discipline, and the adoption of a credible policy framework for the country's return to debt sustainability. By the end of 2020, more than 60 percent of the IMF emergency financing went to Latin America and the Caribbean, the regions hit hardest by the COVID-19 crisis. There have been significant developments in sovereign debt restructuring involving private-sector creditors since the IMF's last stocktaking in 2014. All need to be considered when considering any debt restructuring. Feb 2006 - Jul 201711 years 6 months. International arbitration under investment treaties in particular was used to facilitate the initial settlement agreement with the government of President Mauricio Macri that proved to be the beginning of the end of the Argentine debt saga, although the use of arbitration in the sovereign debt restructuring context is highly dependent on particular facts and treaties, and has been marked by significant debate. At that stage, the public endorsement of the deal by the largest bondholder groups led to overwhelming support for the deal. According to the World Bank, 60% of low-income countries are either suffering from debt distress or at high risk of . While sovereigns in Latin America have historically been reluctant to request financial support from the IMF as part of a fully fledged program, such programs are not only welcomed by creditors, but sometimes required as a pre-condition to a debt restructuring. Over the past 50 years, the Latin American and Caribbean region has experienced at least 50 sovereign debt crises and sovereign debt restructurings (see figure 1).1 Domestic macroeconomic mismanagement, currency crises and commodity price shocks are just some of the drivers that have led countries into distress, rendering governments unable to repay their foreign creditors according to the original terms of the underlying debt contracts. The region's economies contracted by nearly 7 percent in 2020, compared to a global average of only 3 percent. The heyday of debt enforcement seemed to have arrived in the late 1990s, when the hedge fund Elliott used a novel interpretation of thepari passu clause that could have rendered any further asset searches unnecessary (Elliott v. Republic of Peru). As we look forward to 2022 2023, Latin America, in very significant part, will likely continue to face the ebbs and flows of populism, resource nationalism and weak institutions that seem to take turns at flooding some of the countries in the region from time to time. We focus especially on mobile networks (including 5G), data centers and sub-sea cables, exploring also how these investments are being (and might be) funded. International sovereign debt markets allow private entities to loan these much-needed funds to needy governments. If the COVID-19 pandemic leads to a significant wave of sovereign debt distress, this role will be closely scrutinized. 190 27 The amended offer provided that while participating holders were entitled to receive new "A" or "B" bonds, non-participating holders would receive new "C" bonds that have materially worse terms compared to A and B bonds, if the CAC thresholds were met under each series. 2014-05-23 As a follow-up to the Executive Board's May 2013 discussion, this paper considers a possible direction for reform of the Fund's lending framework in the context of sovereign debt vulnerabilities. PIIEs renowned scholars explore and analyze a broad range of economic topics and issues, including globalization, economic and growth prospects, finance, political economy, and trade and investment, as well as economic challenges facing individual regions and countries. 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