Fixing Financial Crises in the 21st Century

By Andrew G. Haldane | Go to book overview

13

Sovereign bond restructuring

Collective action clauses and official crisis intervention

Kenneth M. Kletzer1


13.1

Introduction

The emerging market financial crises of the last decade have prompted widespread concern about the adequacy of the present international financial architecture to maintain a stable international economy. Recently, attention has focused on the framework for the renegotiation and restructuring of developing country debt. Prolonged and costly sovereign debt renegotiations are widely taken as evidence of inefficiencies in international financial markets that should be addressed by institutional innovation. The possibility that these result from the inability of various creditors to co-operate effectively in debt restructurings has been a concern for many years in many debt crises. Market participants, academics and policymakers have offered a variety of explanations and proposed solutions for collective action failures between lenders in the resolution of sovereign debt problems.

The most recent debates reinvigorate the argument that international bankruptcy procedures are needed to co-ordinate the actions of creditors with diverse interests and information to restructure debts and achieve the timely resolution of debt crises. Recent proposals by Haldane and Kruger (2001) and Krueger (2002) suggest that the IMF plays a prominent role in the reorganisation of sovereign debt obligations. The restructuring of sovereign debt under such proceedings would require the aggregation of debt claims, paralleling corporate reorganisation under Chapter 11 of the United States Bankruptcy Code. Schwarcz (2000) and Miller and Stiglitz (1999) offer other recent proposals to apply bankruptcy reorganisation procedures to sovereign debt. The United States Treasury (Taylor 2002) has counterargued that the creation of a role for the IMF in convening debt reorganisation tribunals is unnecessary.

Another approach to reform are proposals that collective action clauses be required or encouraged for sovereign bond lending. The case for collective action clauses is argued by Eichengreen and Portes (1995) and Eichengreen (1999). Essentially, these proposals argue that bonds issued under UK governing law, which include collective representation and majority action clauses, are more readily restructured to the mutual

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