Download 20070306_Richard

Sovereign Debt Restructuring in the New
Financial World
Richard Segal
March 2007
Table of Contents
Belize: State of Denial
Ecuador: Drowning in Shallow Water
Zambia: A Rogue by any Other Name
Sovereign Debt Restructuring Frameworks
Investor Relations Programs
Paris Club-Private Sector Issues
Multilateral Development Bank Issues
2
Belize: State of Denial
• External debt climbed unsustainably
• The Government overlooked negative signals
for two years
• The Government resisted an IMF program
• Authorities were wary of disturbing the
BZD/USD currency peg
• Officials eventually “came to their senses”
• The restructuring was successful and valuable
lessons were learned
• Conclusion: It’s never too late to make amends
3
Ecuador: Drowning in Shallow Water
• Belize: Willing but unable – Ecuador: Able but
“unwilling”
• Presidential campaign focused on debt issues
• Politicians did not understand the economic
repercussions of “tough talk”
• “Tough love” from foreign investors could hurt
the economy: eg, capital flight, fewer trade lines
• Competing priorities imply delay in debt decision
• Conclusion: Policy stubbornness can damage
economic prospects
4
Zambia v DAI: A Rogue by any Other Name
• DAI, a US company, purchased Romanian claims
against Zambia in the late 1990s
• Negotiations lasted about seven years but
ultimately failed
• Reasons: DAI’s tactics, Zambia’s internal politics
• DAI ultimately litigated and received a favorable
court judgment
• Debt relief campaigners are aghast
• Some facts: GDP in USD terms has more than
doubled in four years, private investment is 20% of
GDP, external debt is less than 15% of GDP
• Conclusion: Rogueness is in the eye of the
beholder
5
Sovereign Debt Restructuring Frameworks
• Sovereign Debt Restructuring Mechanism (IMF)
• Collective Action Clauses (various private sector
umbrella organizations)
• Two-stage process (JP Morgan)
• “Muddle Through” (pre-existing)
6
Investor Relations Programs (IRPs)
• IRPs arose in the wake of the Mexican peso crisis
• Data transparency has improved tremendously
• Best practices/league tables for both are
published
• Data transparency is essential for any capital
market participant
• The value of IRPs is overstated
7
Paris Club-Private Sector Issues
• “Comparability” should be revisited
• Better/more creditor coordination is advisable
• Paris Club accounting practices are opaque
• The Paris Club’s mission may need to evolve
further
• The Paris Club should take more items in-house
• The Paris Club should not subsidize new borrowing
8
Multilateral Development Bank Issues
• Private Sector Involvement (PSI) is heavy handed
and lacks accountability
• The IMF’s signalling approach should be debated
• Evidence of new initiatives is mixed (FSI v GDDS)
• The IMF/World Bank preferred creditor status
should be reviewed
• Restructuring processes suffer from the lack of an
information clearing house
FSI: Financial Soundness Indicators
GDDS: General Data Dissemination System
9
Conclusions:
• Debt restructuring frameworks have improved
• Borrowers and creditors have become more
transparent
• Information asymmetries still exist, and creditor
coordination is still imperfect
• The roles of the IMF, World Bank and Paris Club
should be further reviewed
• The system is not broken, but complacency is a
risk
10