Report from the Expert Seminar - Promoting governance innovation in sovereign debt restructurings: What are our options?
This seminar took place in the context of an emerging wave of debt crises across the globe, and an especially acute situation in Argentina, which had already partly defaulted on sovereign debts and announced that action on debt needs to be taken.
Centro de la Cooperación Cultural Floreal Gorini, Buenos Aires, 29 November 2019, 14:00 – 17:00
Frente de Todos headed by Alberto Fernández won the elections in October. The formation of the cabinet of the new government took place in parallel to this event.
The meeting convened about 20 experts from Argentina and Europe, the majority with a background in academia, some practitioners from Argentinian institutions dealing with debt, and representatives of civil society organizations.
The seminar’s objectives included:
- Discuss how the new government of Argentina could champion new initiatives on debt policy at the international level
- How innovative approaches could be pioneered in a (potential) new debt restructuring in Argentina.
The following report summarizes the discussion, which were held under Chatham House rules.
The new UN Basic Principles on Sovereign Debt Restructurings, adopted in 2015 following an Argentine and G77 initiative, have had some, albeit limited, impact: in particular with regard to the principle of transparency. Creditors have requested new transparency requirements in bond contracts under New York law and Argentina needs, for example, to submit information about political and economic strategies. Participants flagged that governments (sovereign debtors) need to make more efforts to codify soft law initiatives such as those in the new UN Principles. Creditors are currently exploiting such soft law to their advantage, which creates imbalances
New (aggregated) collective action clauses (CACS) should make debt restructurings easier, as they allow for aggregation and thus facilitate majority restructurings. They have also been introduced in newer Argentine bond issuances, following the experiences made with vulture funds litigation at New York courts. However, not all bond series have the new CACs, some have old CACs, or no CACs at all. Bonds under foreign legislation will become a problem. But the short-term bonds, which are currently most difficult to serve, are under Argentine law.
However, the absence of information on who holds bonds remains a challenge. Also, bonds can be secured and packaged in other investment products, which further complicates things and hides their true ownership. Public bondholder registers would make a lot of sense, as has been flagged often in international discussions. Creditors who hold more than 1% of a bond series should be obliged to disclose ownership. Argentina has the legal right to access information about bondholders and must do so, especially ahead of a restructuring.
The European Union has recently scaled up work on debt problems in developing countries. Three EU Member States have vulture funds legislation (UK, Belgium and France). The law in the UK is however just for HIPC countries, excluding cases such as Argentina. The Belgian law limits the amounts that a bondholder (vulture fund) can get through litigation to the price it paid for the bond on the secondary market, thus reducing the incentive to buy solely for the purpose of litigation. Belgium is not an important financial centre. Still, the vulture fund NML Capital had litigated against the law at the Belgian Supreme Court, indicating that they are scared of the pioneer effect. The European Commission has submitted a scoping study exploring the possibility of EU-wide vulture funds litigation.
The UNCTAD Roadmap and Guide on Sovereign Debt Workouts was circulated in advance to participants. Some stressed that it leaves room for improvement. It does not sufficiently reflect on the different character of indebtedness and the particular precarious role of developing countries. Moreover, it would be important to have spaces where debtors can cooperate, not just to advance creditor coordination.
The London Debt Accord of 1956, which resolved Germany's post-war debt problems in a sustainable manner, has been cited as a successful case of a debt workout. Key characteristics include a comprehensive process covering most debt categories, a substantial haircut on the principal amount owed, and linking payment terms to economic performance, in this case to a trade surplus, which generated the foreign currency needed to pay down external debts.
Argentina has de facto ceded some sovereignty through becoming indebted in foreign currency. Issuing bonds under foreign law continues to be a problem. Argentina’s bonds are mostly under New York law, which cannot be influenced by Argentina legislators. Greece managed to restructure most of its bonds a decade ago by passing new legislation that retrofitted collective action clauses to existing bonds. This policy option is not available to Argentina. The new Greek bonds, swapped in the restructuring process, are however under English law, so Greece might face more holdout problems in future.
Argentina had, prior to the dictatorship, traditionally rejected cooperation with the IMF. The current crisis produced by the government of former president Macri is in many ways similar to the default in the early 2000s. Participants stressed that the new government should take a proactive stand to resolving the sovereign debt problems inherited from its predecessor.
The IMF should not assume leadership or coordination roles in a potential new debt restructuring. Any debt restructuring should be a transparent process without foreign intervention. The intervention of the IMF through the Stand-By Arrangement agreed in June 2018 has done more harm than good, and has obscured the difficult financial situation. The huge loan of more than 40bn SDR, of which the lion share was disbursed during Macri's term in office, has mainly refinanced capital flight and worsened the debt situation of Argentina. The IMF essentially violated its charter. Or, more moderately viewed, the IMF used a large "grey zone" to make approval of the Argentina loan possible. Debt was assessed as "sustainable but not with high probability." The policy actions of the IMF programme have been counterproductive. The IMF has a co-responsibility for the desolate situation and should assume it.
The new government has already announced that no new disbursements will be requested from the IMF, in order to regain policy space. That implies that the ball is now in Argentina`s court. The current programme is in many ways irrational and should be renegotiated. It has caused and is causing massive social protests due to its inequity. Environmental concerns should also be taken into account. It might however make negotiations with private creditors more difficult if there is no ongoing programme with the IMF. Stopping disbursements has consequences for liquidity, with large payments due in 2022.
The participation of representatives of different sectors of society is important in debt restructuring processes, so as to avoid the government breaking the social contract with its citizens when renegotiating payments on debt contracts. States are indebted to their own citizens in many ways, including through human rights obligations, and pension systems. Argentina’s public pension funds, who have substantial amounts invested in sovereign bonds, need to be protected in debt restructurings.
Views have been expressed that recent bond issuances have been done in an opaque manner, and at least some of the debts contracted in an unconstitutional manner, sidelining necessary authorization by parliament. Agreements with the IMF were not approved by the Argentine Parliament.
When it comes to the scale of the restructuring, one should also look at the issue from the perspective of payment-flows, not just from a stock perspective. The gross financing needs matter. For external debt, the availability of foreign currency matters. The tourism sector is doing well, and there is also the option to regulate imports. It needs to be decided to what extent debts held by the provinces, and by pension funds, will be part of a restructuring.
There is an obvious link between external debt and capital flight from Argentina. Options on how to stop capital flight, and repatriate capital that has left, should be explored and adequate steps should eventually be taken. Targeted taxation is a policy option.
Moreover, it is important that the economy can find its way back to growth, which is ultimately a key determinant of debt sustainability. Portugal is a recent case which exited relatively well from a crisis. However, expansionary policies only became possible after the IMF program ended.
The sequence of negotiations is under discussion. Private creditors want Argentina to negotiate with the IMF first, the IMF wants Argentina to reach an agreement with private creditors. Fernández has announced the intention to hold simultaneous negotiations. A possibility is to extend maturities on the IMF loans. Holdouts or even a major blockade remain a risk.
At the time of writing this summary report, the strategy chosen by the government was still unknown. The expert meeting held in Buenos Aires intended to inspire decision-making, both in the areas of debt restructuring as well as in global economic governance reform.