Academic journal article Law and Contemporary Problems

Sovereign Debt Renegotiation: Restructuring the Commercial Debt of HIPC Debtor Countries

Academic journal article Law and Contemporary Problems

Sovereign Debt Renegotiation: Restructuring the Commercial Debt of HIPC Debtor Countries

Article excerpt

I

INTRODUCTION

In 1996, the International Monetary Fund (IMF) and the World Bank launched the Heavily Indebted Poor Countries (HIPC) Debt Relief Initiative. The HIPC Initiative created a framework for all creditors, including multilateral creditors, to provide debt relief to the world's poorest and most heavily indebted countries, thereby reducing the constraints on economic growth and poverty reduction imposed by the debt build-up in these countries. This initiative marked a big step forward from the previous approach to over-indebtedness of developing countries, which had been limited to temporary postponements of debt-service payments, (1) The HIPC Initiative was modified in 1999 by key enhancements designed to provide more efficient debt relief through a stronger link between debt-reduction and poverty-reduction strategies. Under the HIPC Initiative, the IMF and the World Bank boards first determine (at the "decision point") whether a country is eligible for debt relief.

If an affirmative decision is reached, all creditors (multilateral, bilateral, and commercial) are requested (2) to commit to provide debt relief once the country has satisfactorily carried out certain prescribed policy reforms (the "completion point"). The criterion for debt sustainability and the measure of the requested debt relief are based on a comparison of the net present value of the country's external debt to its exports (or in certain cases, fiscal revenues). The objective is to reduce the country's external debt to not more than 150% of exports (or, in certain cases, 250% of fiscal revenues), which is deemed a sustainable level of debt. (3)

Depending on the level of a country's commercial debt, participation of commercial creditors in the HIPC Initiative may be a significant factor in achieving the HIPC debt-relief objective. (4) As legal counsel to certain latecomers to the HIPC Initiative, we have dealt with the challenges of applying the burden-sharing principle underlying the HIPC Initiative to commercial creditors. This article examines salient issues relating to the restructuring of external indebtedness owed to private creditors of HIPC countries, focusing in particular on the debt-relief mechanisms incorporated in the HIPC Initiative as implemented by the IMF, the World Bank, and the Paris Club. (5) Our purpose is to analyze certain inherent contradictions between the IMF and World Bank-driven debt-restructuring scheme and a truly market-driven debt-restructuring of the kind expected by private lenders. The shortcomings of the debt-sustainability analysis underpinning the HIPC Initiative may help explain why a number of commercial creditors of HIPC debtors have resorted to litigation to collect on their claims rather than participate alongside official and other creditors in the HIPC Initiative, thus raising significant challenges to one of the fundamental principles of the HIPC Initiative: burden-sharing among creditors. (6)

II

BURDEN-SHARING BETWEEN OFFICIAL AND COMMERCIAL CREDITORS

Under the concept of burden-sharing, all creditors of a HIPC debtor country are expected to provide debt relief in proportion to their share of the net present value of debt outstanding at the time of the decision point. (7) This principle contemplates the comparable treatment of different classes of creditors by application of a burden-sharing formula (the "common reduction factor") to the net present value of each class of creditors' debt stock. (8) In practice, the IMF and the World Bank determine an acceptable level of indebtedness (using the 150% or the 250% target level), compare that amount to the net present value of the debt outstanding on a predetermined measurement date, and apportion the required reduction among the official and commercial creditors based on the common reduction factor. (9) If a creditor class has granted debt-stock relief after the measurement date, that relief is automatically taken into account in calculating the further relief needed to comply with the requested HIPC debt-relief effort, since relief is measured by comparing the new debt levels with the levels prevailing on the measurement date. …

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