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The Constructive Role of Private Creditors

Published online by Cambridge University Press:  28 September 2012

Arturo C. Porzecanski
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Extract

During the past couple of years, policy-makers in Washington and other capitals of G-7 countries have been flogging the idea that the functioning of the world's financial markets must be improved by making it easier for insolvent governments, especially in emerging markets, to obtain debt relief from their bondholders and bankers.

Most savvy investors, financial intermediaries, and emerging-market government officials, however, are at a loss to understand why the G-7 and the International Monetary Fund (IMF) believe the international financial system would function better if there were specific mechanisms to facilitate sovereign bankruptcies.

Type
Articles
Information
Ethics & International Affairs , Volume 17 , Issue 2 , September 2003 , pp. 18 - 25
Copyright
Copyright © Carnegie Council for Ethics in International Affairs 2003

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References

1 Chapter 9 applies to nonsovereign entities such as municipalities, school districts, and publicly owned utilities. For a discussion of why Chapter 9 provides little guidance in the case of sovereigns, see White, Michelle J., “Sovereigns in Distress: Do They Need Bankruptcy?” Brookings Papers on Economic Activity 1 2002 287–319CrossRefGoogle Scholar.

2 See, e.g., Institute of International Finance, Inc. Principles for Private Sector Involvement in Crisis Prevention and Resolution January 2001 Washington, D.C. Institute of International Finance, Inc.; available at http://www.emta.org/ndevelop/iif-psi.pdf.

3 Nor, of course, have they even mentioned the idea of subjecting troubled debtor governments to outside intervention of the type that New York City, for example, had to accept when it could not pay its bills in the early 1970s.

4 According to the first deputy managing director of the IMF, a new approach to sovereign debt restructuring is needed because “in the current environment, it may be particularly difficult to secure high participation from creditors as a group, as individual creditors may consider that their best interests would be served by trying to free ride. … These difficulties may be amplified by the prevalence of complex financial instruments … which in some cases may provide investors with incentives to hold out … rather than participating in a restructuring” [emphasis added]. See Anne O. Krueger, A New Approach To Sovereign Debt Restructuring (Washington, D.C.: International Monetary Fund, April 2002), p. 8; available at http://www.imf.org/external/pubs/ft/exrp/sdrm/eng/sdrm.pdf.

5 For useful background information on sovereign debt defaults and restructurings, see World Bank Global Development Finance 2003: Striving for Stability in Development Finance, vol.1 (Washington, D.C.: World Bank 2003) pp. 56–79; available at http://www.worldbank.org/prospects/gdf2003/GDF_vol_1_web.pdf.

6 See the statement by the U.S. attorneys for Uruguay, Cleary, Gottlieb, Steen & Hamilton, “Uruguay in Groundbreaking $5.2 Billion Debt Restructuring,” Press Release, May 29, 2003; available at http://www.cgsh.com/newsworthy-categories.cfm?strNwsCatName=Restructurings.

7 See the TV interview with President Jorge Batlle of Uruguay, “El Default Significaba el Quiebre Institucional de Uruguay,” July 4, 2003; available at http://www.presidencia.gub.uy/sic/noticias/archivo/2003/julio/2003070404.htm. This version of events had previously been revealed by Vice President Luis Hierro of Uruguay, but had been denied by the IMF's spokesman; see IMF, “Transcript of a Press Briefing by Thomas C. Dawson,” June 26, 2003; available at http://www.imf.org/external/np/tr/2003/tr030626.htm.

8 For a detailed discussion of this and the following cases, see Institute of International Finance, Inc. “Survey of Debt Restructuring by Private Creditors” April 9, 2001 Washington, D.C. Institute of International Finance, Inc. p. 5 (Bolivia), pp. 21–23 (Ecuador), and p. 45 (Nicaragua).

9 On HIPC relief for Bolivia and other countries, see World Bank, “HIPC Initiative: Status of Country Cases Considered Under the Initiative, April 2003,” April 2003; available at http://www.worldbank.org/hipc/progress-to-date/status_table_Apr03.pdf.

10 See Paris Club, “The Paris Club and Nicaragua Agree to a Debt Restructuring under the Enhanced Heavily Indebted Poor Countries Initiative,” Press Release, December 13, 2002; available at http://www.clubdeparis.org/rep_upload/PR01.pdf.

11 This is based on frank, off-the-record conversations with IMF and Ecuadorian officials. For the IMF's version of the events, see Stanley Fischer, “Ecuador and the IMF,” May 19, 2000; available at http://www.imf.org/external/np/speeches/2000/051900.htm.

12 See Paris Club, “The Paris Club Agrees to a Debt Restructuring for Ecuador,” Press Release, September 15, 2000; available at http://www.clubdeparis.org/rep_upload/ec15092000Cpen.pdf; and Paris Club, “The Paris Club Agrees to a Rescheduling of Ecuador's Debt,” Press Release, June 13, 2003; available at http://www.clubdeparis.org/rep_upload/PR01023.pdf.

13 See International Monetary Fund, “Ecuador: Selected Issues and Statistical Appendix,” IMF Country Report No. 03/91, April 2003, p. 112; available at http://www.imf.org/external/pubs/ft/scr/2003/cr0391.pdf.

14 See Group of Ten, “Report of the G-10 Working Group on Contractual Clauses,” September 26, 2002; available at http://www.bis.org/publ/gten08.pdf.