Monday, October 6, 2014

IMF supports reforms for more orderly sovereign debt restructurings

The IMF is engaged in a number of reforms designed to reduce the costs of sovereign debt restructurings—for the benefit of debtors, creditors, and the system more generally, it said today.

These reforms include possible changes to the IMF’s lending framework that are designed to give the IMF a broader range of policy responses in the context of sovereign debt distress. Separately, there is a recognition that, in circumstances where a sovereign and its creditors have reached the conclusion that a debt restructuring is necessary, the existing legal framework may not be sufficiently robust to prevent “holdout” creditors from undermining the restructuring process. Recent developments, including the Argentine litigation in the United States, have highlighted these vulnerabilities, a document added.

Sean Hagan, the IMF’s General Counsel, has led the IMF’s latest work in this area.

"The primary motivation for the reform of this provision is, in fact, the litigation involving Argentina. In that case, the pari passu provision was interpreted by the New York courts as requiring ratable or pro rata payment to all creditors. So Argentina—as well as the bond trustee and other parties in the payment chain—were prevented from making any payments to those bondholders who had agreed to restructure their debt unless it also made payment in full to the holdout creditors. The concern—and this is a concern shared by many, not just by the IMF—is that this case may have systemic implications since it will enhance the holdout strategy in future cases. The reform that has just been endorsed by the IMF would involve introducing a proviso into the pari passu clause that clarifies that this clause does not require ratable payment to all creditors, but, rather, only equal legal ranking. In other words, it would only prohibit actions that result in legal subordination of certain unsecured creditors over others," he said.