Restructuring Debt Restructuring

Proposals on debt restructuring frameworks

The Lethal Deferral of Greek Debt Restructuring

Argentina s interests and those of its creditors were thus aligned both wanted growth. It was the equivalent of a Chapter 11 restructuring of American corporate debt, in which debt is swapped for equity, with bondholders becoming new shareholders.

There have been many proposals on debt restructuring mechanisms.

IMF staff have produced a number of reports on corporate insolvency, bank insolvency and the restructuring of unsustainable sovereign debt, including Orderly and Effective Insolvency Procedures Key Issues (1999) (analysing major policy choices to be addressed in the design of an effective corporate insolvency system).

Canada has been restructuring government spending to reduce its debt.

Third, while pesification removes balance sheet losses from domestic foreign currency debts, external contractual obligations cannot be redenominated unilaterally. Thus, the exit from the dollar peg requires a restructuring of external debt, both sovereign and corporate.

The most recent debt restructuring of Argentina illustrated well the conditions described above.

India did its part by writing off the debt owed by African countries under the HIPC Initiative and by restructuring commercial debt.

The objective is to tailor debt restructuring to the financial needs of the country concerned and to ensure debt sustainability and an exit from Paris Club debt reschedulings.

NEW YORK Nothing illustrates better the political crosscurrents, special interests, and shortsighted economics now at play in Europe than the debate over the restructuring of Greece s sovereign debt. Germany insists on a deep restructuring at least a 50 haircut for bondholders whereas the European Central Bank insists that any debt restructuring must be voluntary.

For many heavily indebted non HIPC and middle income countries, debt sustainability will require significantly more debt reduction or restructuring than has yet been proposed.

NEW YORK Like individuals, corporations, and other private firms that rely on bankruptcy procedures to reduce an excessive debt burden, countries sometimes need orderly debt restructuring or reduction. But the ongoing legal saga of Argentina s fight with holdout creditors shows that the international system for orderly sovereign debt restructuring may be broken.

It also welcomed the reference to the need to consider debt relief or restructuring for those middle income countries that had an unsustainable level of debt.

Then, unless the EFSF pot were tripled a move that Germany would resist the only option left would become an orderly but coercive restructuring of Italian and Spanish debt, as has happened in Greece. Coercive restructuring of insolvent banks unsecured debt would be next.

And even 2 growth will not render Europe s triple digit debt GDP ratios sustainable. Europe still needs debt restructuring, though the continent s leaders refuse to acknowledge this.

Under the Evian approach, the Debt Sustainability Analysis (DSA) undertaken by IMF for each debtor country plays a critical role in shaping the outcome of debt restructuring.

Then, unless the EFSF pot were nbsp tripled a move that Germany would resist nbsp the only option left would become an orderly but coercive restructuring of Italian and Spanish debt, as has happened in Greece. Coercive restructuring of insolvent banks unsecured debt would be next.

In such a situation, the only option available for the Government was to seek debt restructuring to alleviate the debt burden or to have short term cash flow relief.

Fifth, debt burdens that cannot be eased by growth, savings, or inflation must be rendered sustainable through orderly debt restructuring, debt reduction, and conversion of debt into equity. This needs to be carried out for insolvent governments, households, and financial institutions alike.

And Greece is in the throes of a humanitarian crisis today because the inevitable restructuring of its debt has been used as an excuse for postponing that restructuring ad infinitum. As a high ranking European Commission official once asked me Your debt will be cut come hell or high water, so why are you expending precious political capital to insist that we deliver the restructuring now?

Poor s found that, a year later, these firms total debt amounted to 14.2 trillion, eclipsing the 13.1 trillion of outstanding debt in the United States and making China the world s largest issuer of corporate debt.

The international community has, so far, failed to develop effective and equitable arrangements for restructuring sovereign debt, despite the clearly dysfunctional and problematic consequences of past international public debt crises. This prevents timely debt workouts when needed, effectively impeding recovery.

Such contracts should also include collective action clauses, which make it impossible for vulture funds to hold up debt restructuring. When a sufficient proportion of creditors agree to a restructuring plan (in the case of Argentina, the holders of more than 90 of the country s debt did), the others can be forced to go along.

The most reasonable comparison is with Latin American countries during their debt crises in the 1980 s and 1990 s. Despite significantly lower debt GDP ratios and continuous debt restructuring, they eventually needed the large debt reduction that came with the issuance of Brady bonds to achieve some breathing room.

Lee Buchheit, a leading sovereign debt attorney and the man who managed the eventual Greek debt restructuring in 2012, was harshly critical of the authorities failure to face up to reality. As he put it, I find it hard to imagine they will now man up to the proposition that they delayed at appalling cost to Greece, its creditors, and its official sector sponsors an essential debt restructuring.

Where realistic debt restructuring scenarios indicate capital shortfalls, across the board conversion of bank debt into equity will be necessary. And where this does not suffice, banks will need immediate capital injections by their governments.

The most noteworthy was the IMF sovereign debt restructuring mechanism,29 which suggested some core features majority rule in restructuring decisions, a legal stay against claims by creditors, protection of creditors' interests, seniority of new money and a dispute resolution forum.

Everyone knows that Greece will be unable to work its way out of crisis without massive debt relief. The only question is whether the country s debt restructuring will be orderly and controlled or chaotic and contagious.

The mechanics of debt restructuring are straightforward. Governments can offer a menu of new bonds worth some fraction of the value of their existing obligations.

There is a real need for significant debt reduction or restructuring, not only for the least developed countries but also for middle income developing countries.

21. Calls for a comprehensive and sustainable solution to the external debt problems of African countries, including cancellation or restructuring for heavily indebted African countries not part of the Heavily Indebted Poor Countries Initiative that have unsustainable debt burdens, and emphasizes the importance of debt sustainability

This approach has several advantages by leaving the face value of the debt unaltered, EU officials could argue that restructuring Greece s debt did not amount to a default, thereby limiting contagion. European banks holding Greek government debt could keep pretending that it is worth its full value.

Recognizing the current debate on sovereign debt restructuring, especially the efforts led by sovereign debtors and private creditors to develop a voluntary code of conduct, and stressing that modalities for sovereign debt restructuring should be voluntary, market friendly and flexible, with due consideration of the specific circumstances of individual countries, and should result from the participation of all relevant stakeholders,

How is that possible? As corporate finance experts have been saying for 30 years, having too much debt and too little equity is costly, so reducing the face value of debt can sometimes benefit not only equity holders, but also debt holders.

28 Bilateral investment treaties which include bonds in the definition of investment can lead to claims against debtors for expropriation in the context of debt restructuring.

Urgent consideration needed to be given to providing significant debt relief or restructuring for low and middle income developing countries that were not covered by the Heavily Indebted Poor Countries (HIPC) Initiative and whose debt burden was unsustainable.

Some believe that this vacuum is the primary difficulty with the international debt system. Ambitious proposals to redress it, such as a Sovereign Debt Restructuring Mechanism (SDRM) housed at the International Monetary Fund, have always run into political roadblocks.

If this principle prevails, no one would ever accept debt restructuring. There would never be a fresh start with all of the unpleasant consequences that this implies.

See IMF Reviewing the process for sovereign debt restructuring within the existing legal framework, Policy Development and Review, International Capital Markets, and Legal Departments, 1 August 2003.

29 See Krueger A. O. Sovereign Debt Restructuring and Dispute Resolution, speech by Anne Krueger, First Deputy Managing Director of the International Monetary Fund, 6 June 2002.

The successful operations performed by our Government in the management of its foreign debt have led to its restructuring and effective reduction in the past 10 years.

There is a general view that financial and corporate restructuring has been largely completed in South East Asia, while budget deficits have narrowed or, as in Thailand, the budget has remained in surplus.

According to their published forecasts, they believed that, by cutting wages and accepting other austerity measures, Greek exports would increase and the economy would quickly return to growth. They also believed that the first debt restructuring would lead to debt sustainability.