{
  "title": "Public Information Notice: IMF Board Discusses Possible Features of A Sovereign Debt Restructuring Mechanism",
  "publication": "IMF News, April 3, 2003",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/pn0345",
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  "summary": "Each Public Information Notice contains a background section, a table of selected economic indicators, and an Executive Board assessment.",
  "publishDate": "2003-04-03",
  "sections": [
    {
      "heading": "Background",
      "content": "- IMF Executive Board continued discussions on possible features of a Sovereign Debt Restructuring Mechanism (SDRM) on March 14, 2003.\n- Context and rationale:\n  - 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.\n  - 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.\n  - 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."
    },
    {
      "heading": "Executive Board Assessment — main findings and views",
      "content": "- General assessment:\n  - Directors welcomed continued discussion and the first draft of \"Proposed Features\" in line with the IMFC request.\n  - Most Directors support establishment of an SDRM, but not all are convinced of its need or desirability; supporters differ on several design issues.\n  - Emphasis on striking a balance between limiting interference with contractual relations and creating incentives that preserve asset value and a credit culture.\n- Complementary tools and initiatives:\n  - 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.\n  - 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.\n- Eligibility and scope:\n  - Among supporters, broad agreement that the Proposed Features represent a balanced response and broadly agree with proposed definition of claims eligible for restructuring.\n  - 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.\n  - Inclusion of judgment claims and privileged claims created through legal enforcement proceedings after SDRM activation was agreed.\n- Activation and costs:\n  - Most Directors reiterated that a sovereign debtor should be able to activate the SDRM unilaterally, without third-party confirmation.\n  - 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.\n  - 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.\n  - 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.\n- Containing enforcement risks:\n  - Recognition that a sovereign may need to continue to service certain claims to limit economic dislocation or because it intends to restructure those claims.\n  - Many Directors indicated support for an approach combining alternative measures to prevent disruptive enforcement, including:\n    - (i) a \"hotchpot\" rule to offset advantage of a litigating creditor collecting on a court judgment prior to conclusion of restructuring;\n    - (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;\n    - (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.\n  - 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.\n- Dispute Resolution Forum (DRF) and governance:\n  - 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.\n  - 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.\n- Voting thresholds and creditor control:\n  - Most Directors supported establishing a 40 percent voting threshold for a creditor vote on termination of an activated SDRM.\n  - 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.\n- Coordination with official bilateral creditors:\n  - 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."
    },
    {
      "heading": "Key proposed SDRM features discussed",
      "content": "- Unilateral debtor activation of the SDRM.\n- Definition and inclusion of claims eligible for restructuring, including:\n  - judgment claims;\n  - privileged claims where privilege arises through legal enforcement after activation.\n- Governance provisions:\n  - amendment text to list excluded international organizations, modifiable by Board of Governors decision by 85 percent of total voting power.\n  - DRF authority to set claims administration and dispute resolution rules, subject to 85 percent Board of Governors override.\n- Enforcement-management measures:\n  - hotchpot rule;\n  - creditor-approved general stay (75 percent of verified claims);\n  - targeted stay via DRF order or creditor-majority approval (75 percent where verification complete).\n- Cost allocation options:\n  - debtor bears reasonable costs of representative creditor committees (majority view);\n  - alternative view: costs shared equally between debtor and creditors.\n- Voting thresholds:\n  - 40 percent threshold proposed for creditor vote on termination of an activated SDRM."
    },
    {
      "heading": "Outstanding issues and divergent views",
      "content": "- Fundamental question of need and desirability: not all Directors are convinced a statutory SDRM is necessary.\n- Degree of permissible interference with contractual relations versus incentive structures to preserve credit culture.\n- Whether the SDRM should assume or require a general cessation of payments and an automatic stay on enforcement.\n- Appropriate cost-allocation rules when activation is found unjustified.\n- Necessity and design of the DRF and whether amendment of the Fund's Articles is the right approach.\n- Clear criteria for identifying creditors under debtor control for vote exclusion."
    },
    {
      "heading": "Next steps and procedural context",
      "content": "- 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.\n- 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.\n\nPublic Information Notice: IMF Board Discusses Possible Features of A Sovereign Debt Restructuring Mechanism — April 3, 2003.\n\n---\n\n\n References\n\n- Public Information Notices\n- Proposals for a Sovereign Debt Restructuring Mechanism (SDRM)\n- Proposed Features of a Sovereign Debt Restructuring Mechanism\n- Article IV\n- \"The Design of the Sovereign Debt Restructuring Mechanism - Further Considerations,\"\n- Public Information Notice 03/06\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn0345"
    }
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    "Published: April 3, 2003",
    "IMF Executive Board continued discussions on possible features of a Sovereign Debt Restructuring Mechanism (SDRM) on March 14, 2003.",
    "Context and rationale:",
    "General assessment:",
    "Complementary tools and initiatives:",
    "Eligibility and scope:",
    "Activation and costs:",
    "Containing enforcement risks:",
    "Dispute Resolution Forum (DRF) and governance:",
    "Voting thresholds and creditor control:",
    "Coordination with official bilateral creditors:",
    "Unilateral debtor activation of the SDRM.",
    "Definition and inclusion of claims eligible for restructuring, including:",
    "Governance provisions:",
    "Enforcement-management measures:",
    "Cost allocation options:",
    "Voting thresholds:",
    "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.",
    "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 Notices](https://www.imf.org/en/news/searchnews)",
    "[Proposals for a Sovereign Debt Restructuring Mechanism (SDRM)](https://www.imf.org/external/np/exr/facts/sdrm.htm)",
    "[Proposed Features of a Sovereign Debt Restructuring Mechanism](https://www.imf.org/external/np/pdr/sdrm/2003/021203.htm)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[\"The Design of the Sovereign Debt Restructuring Mechanism - Further Considerations,\"](https://www.imf.org/external/np/pdr/sdrm/2002/112702.htm)",
    "[Public Information Notice 03/06](https://www.imf.org/external/np/sec/pn/2003/pn0306.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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