Public Information Notice: IMF Board Discusses Possible Features of A Sovereign Debt Restructuring Mechanism

IMF News, April 3, 2003

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Public Information Notice: IMF Board Discusses Possible Features of A Sovereign Debt Restructuring Mechanism

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Bibliographic details

• Published: April 3, 2003

Background

• IMF Executive Board continued discussions on possible features of a Sovereign Debt Restructuring Mechanism (SDRM) on March 14, 2003.
• Context and rationale:
  • Emerging markets have benefited from wider sources of financing, but the diverse creditor community of bond holders can be problematic when debt becomes unsustainable and must be restructured.
  • The International Monetary and Financial Committee (IMFC) in September 2002 endorsed the Fund's work on crisis prevention and requested a concrete SDRM proposal for its meeting scheduled for April 12, 2003.
  • The March 14, 2003 discussion was based on the staff paper "Proposed Features of a Sovereign Debt Restructuring Mechanism", a first draft reflecting convergence of views and informed by extensive consultations including a January 2003 workshop and conference.

Executive Board Assessment — main findings and views

• General assessment:
  • Directors welcomed continued discussion and the first draft of "Proposed Features" in line with the IMFC request.
  • Most Directors support establishment of an SDRM, but not all are convinced of its need or desirability; supporters differ on several design issues.
  • Emphasis on striking a balance between limiting interference with contractual relations and creating incentives that preserve asset value and a credit culture.
• Complementary tools and initiatives:
  • Progress noted on complementary tools, notably Mexico's decision to include collective action clauses (CACs) in new international bond issues; Directors hoped this would encourage broader CAC use.
  • Support for a voluntary Code of Conduct to establish expectations between debtors and creditors; seen as complementary to, but not a substitute for, CACs and/or an SDRM.
• Eligibility and scope:
  • Among supporters, broad agreement that the Proposed Features represent a balanced response and broadly agree with proposed definition of claims eligible for restructuring.
  • Agreement that amendment text should list international organizations whose claims would be excluded, with provision that the list could be modified by a decision of the Board of Governors by 85 percent of the total voting power.
  • Inclusion of judgment claims and privileged claims created through legal enforcement proceedings after SDRM activation was agreed.
• Activation and costs:
  • Most Directors reiterated that a sovereign debtor should be able to activate the SDRM unilaterally, without third-party confirmation.
  • Many Directors opposed requiring the debtor to bear SDRM operation costs when the Fund determines activation was unjustified, noting low likelihood of unjustified activation due to default costs.
  • A number of Directors saw merit in a rule allowing the Fund to recoup administrative costs from the debtor as a disincentive for inappropriate activation.
  • Many Directors recognized that, consistent with international best practice, the debtor should bear reasonable costs of representative creditor committees; some Directors preferred costs be shared equally between debtor and creditors.
• Containing enforcement risks:
  • Recognition that a sovereign may need to continue to service certain claims to limit economic dislocation or because it intends to restructure those claims.
  • Many Directors indicated support for an approach combining alternative measures to prevent disruptive enforcement, including:
  • (i) a "hotchpot" rule to offset advantage of a litigating creditor collecting on a court judgment prior to conclusion of restructuring;
  • (ii) upon request of the sovereign debtor, a general stay on enforcement approved by creditors holding 75 percent of verified claims, applying to all enforcement actions by creditors whose claims are on the SDRM Restructuring List;
  • (iii) upon request of the sovereign debtor, a targeted stay on enforcement approved by a representative creditors' committee (or when verification is completed, approved by creditors holding a 75 percent majority of verified claims), effected by an order of the Dispute Resolution Forum (DRF) to suspend a particular legal action that the DRF assesses could undermine the SDRM restructuring.
  • A number of Directors maintained that a broad-based cessation of payments combined with a temporary, automatic stay on enforcement should be a feature; they argued a general standstill and automatic stay would be most effective against pre-agreement litigation and could improve transparency, predictability, and inter-creditor equity. They asked that merits of an automatic stay continue to be explored, possibly coupled with a provision easing creditor termination of the mechanism.
• Dispute Resolution Forum (DRF) and governance:
  • Most Directors agreed the DRF would be an essential—but strictly circumscribed—feature; it should have authority to promulgate rules on claims administration and dispute resolution procedures, with such rules becoming effective unless overruled by a decision of the Board of Governors by 85 percent of the total voting power.
  • Some Directors emphasized national diversity as a selection criterion for DRF members; a few Directors questioned the necessity of the DRF or whether amending the Fund's Articles of Agreement is the appropriate vehicle for establishing the SDRM.
• Voting thresholds and creditor control:
  • Most Directors supported establishing a 40 percent voting threshold for a creditor vote on termination of an activated SDRM.
  • Some Directors called for greater clarity on criteria for determining that a creditor is under the control of the debtor for purposes of excluding that creditor's vote.
• Coordination with official bilateral creditors:
  • Directors looked forward to staff discussions with the Paris Club Secretariat to determine how best to handle official bilateral creditor claims in the SDRM context.

Key proposed SDRM features discussed

• Unilateral debtor activation of the SDRM.
• Definition and inclusion of claims eligible for restructuring, including:
  • judgment claims;
  • privileged claims where privilege arises through legal enforcement after activation.
• Governance provisions:
  • amendment text to list excluded international organizations, modifiable by Board of Governors decision by 85 percent of total voting power.
  • DRF authority to set claims administration and dispute resolution rules, subject to 85 percent Board of Governors override.
• Enforcement-management measures:
  • hotchpot rule;
  • creditor-approved general stay (75 percent of verified claims);
  • targeted stay via DRF order or creditor-majority approval (75 percent where verification complete).
• Cost allocation options:
  • debtor bears reasonable costs of representative creditor committees (majority view);
  • alternative view: costs shared equally between debtor and creditors.
• Voting thresholds:
  • 40 percent threshold proposed for creditor vote on termination of an activated SDRM.

Outstanding issues and divergent views

• Fundamental question of need and desirability: not all Directors are convinced a statutory SDRM is necessary.
• Degree of permissible interference with contractual relations versus incentive structures to preserve credit culture.
• Whether the SDRM should assume or require a general cessation of payments and an automatic stay on enforcement.
• Appropriate cost-allocation rules when activation is found unjustified.
• Necessity and design of the DRF and whether amendment of the Fund's Articles is the right approach.
• Clear criteria for identifying creditors under debtor control for vote exclusion.

Next steps and procedural context

• The report to the IMFC on the SDRM work and other aspects of crisis resolution will allow the Committee to give guidance on the best way forward.
• The March 14, 2003 Board discussion built on prior informal Board discussions and a December 2002 detailed review; a summary of the December discussion is contained in Public Information Notice 03/06.

Public Information Notice: IMF Board Discusses Possible Features of A Sovereign Debt Restructuring Mechanism — April 3, 2003.

References

• Public Information Notices
• Proposals for a Sovereign Debt Restructuring Mechanism (SDRM)
• Proposed Features of a Sovereign Debt Restructuring Mechanism
• Article IV
• "The Design of the Sovereign Debt Restructuring Mechanism - Further Considerations,"
• Public Information Notice 03/06
• https://www.imf.org/en/home