IMF staff study, Board discussion examine experience with sovereign bond restructurings

• Pages: 58-61

Page 58

On February 5, the IMF posted on its website (www.imf.org) Involving the Private Sector in the Resolution of Financial Crises-Restructuring International Sovereign Bonds. This report, coauthored by the IMF's Policy Development and Review (PDR) and Legal Departments and originally prepared for the IMF's Executive Board, also includes a summary of the Board's discussion of the topic. The IMF Survey asked Matthew Fisher, Chief of PDR's Capital Account Issues Division, and Sean Hagan, Assistant General Counsel of the Legal Department, to comment on the background to the paper and the report's findings.

IMF SURVEY:What led the IMF to look at restructurings?

FISHER: After the Mexico crisis of 1994-95, there was an international effort to think through how future crises would be handled. A report by the Group of 10 deputies said, among other things, that under some circumstances sovereign bonds would need to be restructured. That was the real starting point.

At that point, of course, the work was still speculative, because there had been no restructurings. I see 1999 as the turning point. In late 1998, the Paris Club decided that Pakistan would need to seek comparable treatment of its international sovereign bonds in the context of a restructuring of the claims of Paris Club creditors. There was enormous opposition from the private sector, which argued either that it was impossible to do this or that the bond market would be ruined by it. The private sector indicated a restructuring would have a major disruptive impact on flows to emerging markets, and it wasn't worth having such an adverse systemic effect for such a relatively small sum of money.

Well, Pakistan went ahead and restructured its bonds, and there were no major systemic effects. Indeed, by the end of 1999, the very same people in the private sector who had been complaining about what had happened were bidding on contracts to restructure the Ukrainian bonds. There was thus a shift in the private sector away from "it can't happen" to "let's see how we do it."

Predictably, when things needed to be done, incentives for earning fee income stimulated people's creative juices, and deals were struck.

The debate then moved on to "well, of course it's going to happen, but how it happens matters." The private sector obviously wanted to see restructurings only in extreme circumstances, but it was also interested in the process.Various groups in the private sector came together under the umbrella of the U.S. Council of Foreign Relations and suggested principles for how restructurings should work. These principles werebased on the private sector's experience in dealing with nonsovereign restructurings and to some extent with its 1980s experience with commercial banks. But the parallels with nonsovereign restructurings and the commercial bank restructurings of the 1980s aren't very strong. There are certainly some important differences.

Nonsovereign debt workouts, for example, are arranged in the shadow of the applicable bankruptcy regimes. Such regimes do not apply to international...