## Acting Collectively: A Better Way to Restructure Government Debt

_IMF Blog, November 24, 2014_

## Source details

**Canonical URL:** [Acting Collectively: A Better Way to Restructure Government Debt](https://www.imf.org/en/blogs/articles/2014/11/24/acting-collectively-a-better-way-to-restructure-government-debt)

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## Bibliographic details
- Authors: Sean Hagan
- Published: November 24, 2014

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### Context and motivation
- Author: Sean Hagan
- Date: November 24, 2014
- Theme: Sovereign debt restructuring should be prompt, predictable, and orderly to reduce costs to the debtor, creditors, and the financial system.
- Background observations:
  - The global financial crisis led to a new wave of sovereign debt crises, reinvigorating discussion on the sovereign debt restructuring framework.
  - Experience with Greece’s 2012 restructuring and ongoing litigation involving Argentina highlight remaining vulnerabilities.
  - An 18-month process of consultation and collaboration among the IMF, sovereign issuers, market participants, and official-sector representatives produced the endorsed reforms. The International Capital Markets Association (ICMA) and U.S. Treasury were key counterparts.

### What the reforms achieve
- Objectives:
  - Minimize the risk that a restructuring supported by a large majority of creditors could be obstructed by a small group of creditors.
  - Reduce the cost of crisis resolution through market-based solutions and improvements in the IMF’s lending and engagement processes during restructurings.
- Key contractual changes:
  - Pari passu clause:
    - Revision explicitly rules out the New York courts’ interpretation requiring equal payment to all bondholders and limits the clause to a protection of legal ranking.
    - Motivated by Argentina litigation where a minority paralyzed a restructuring approved by 93% of bondholders.
  - Collective action clauses (CACs):
    - Problem with older CACs: most require a majority of each bond series to vote in favor, enabling holdouts to acquire a blocking stake (normally, 25% of that series) at relatively low cost and prevent restructuring of that series.
    - Example: In the 2012 Greek bond restructuring, holdouts were eventually paid out in full—to the tune of €6.5 billion.
    - New approach: aggregated voting basis allowing a restructuring to be passed by a 75% majority across all bond series under the most robust form.
      - The 75% supermajority requirement still preserves creditor support as necessary; it prevents an obstructive minority from blocking the process.
      - ICMA adopted the single voting procedure in their new standard bond terms, with creditor support being a key reason.
- Safeguards and flexibility:
  - All creditors must be offered the same restructuring terms, or a menu of terms.
  - Protections against sovereigns influencing votes (for example, by buying up a large share of the bonds).
  - Issuers and creditors retain flexibility to use other voting procedures where appropriate (e.g., to offer different terms).

### Implementation and early testing
- Early adopters:
  - Mexico, Vietnam, and Kazakhstan have issued bonds incorporating the new clauses.
  - Observation: Use of the new clauses did not have any meaningful price impact.
- IMF stance:
  - The IMF is endorsing critical features of these clauses, not specific language, recognizing that features can be drafted differently across jurisdictions.
  - The IMF will actively encourage and monitor wider adoption by sovereign issuers.

### Limitations, transitional risks, and policy implications
- Legacy bonds:
  - There remains an outstanding stock of sovereign bonds worth a significant $900 billion that do not contain the new clauses, with a large portion not maturing for another 10 years.
  - The risk posed by these legacy bonds during the transition will depend on how New York court decisions are interpreted in future litigation.
  - Possible mitigation: issuers swapping old bond contracts for new ones before maturity.
- Broader policy emphasis:
  - Countries must maintain sound policies to prevent public debt burdens from becoming unsustainable.
  - These contractual reforms are incremental relative to other reforms under consideration (including at the United Nations) but represent meaningful progress achieved through private–official sector collaboration.
  - The reforms make it easier to carry out sovereign debt restructuring when needed while preserving protections for creditor rights.

*Source: Acting Collectively: A Better Way to Restructure Government Debt, Sean Hagan, November 24, 2014 (IMF blog)*

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## References

- [an IMF paper](http://www.imf.org/external/pp/longres.aspx?id=4911)

_Source: https://www.imf.org/en/blogs/articles/2014/11/24/acting-collectively-a-better-way-to-restructure-government-debt_