## IMF Survey : IMF Supports Reforms for More Orderly Sovereign Debt Restructurings

_IMF News, October 6, 2014_

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## Bibliographic details
- Published: October 6, 2014

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### Overview and significance
- IMF’s Executive Board supports reforms to international sovereign bond contracts to address collective action problems in sovereign debt restructurings.
- Work reflects outcomes of intensive discussions over an 18-month period with the private sector, sovereign issuers, and the official sector; proposals are consistent with features adopted by the International Capital Market Association (ICMA).
- Motivation: reduce costs of sovereign debt restructurings for debtors, creditors, and the system more generally, and address legal vulnerabilities highlighted by recent litigation involving Argentina.

### Collective action problems — analysis and risks
- Definition and mechanism:
  - Individual creditors may decline to participate in a restructuring hoping to recover the full value of their claims (holdout creditors).
  - If holdouts can recover in full, other creditors become less willing to consent to restructurings, creating a collective action problem.
- Systemic effects:
  - Uncertainty and holdout strategies can delay restructurings and may push countries into default unnecessarily—detrimental to debtor, creditors, and the system.

### Contractual reforms proposed
- Focused provisions:
  - Collective action clause (CAC): enables a qualified majority of creditors to take a decision on restructuring terms binding on the minority.
  - Pari passu provision: clarifies legal meaning to prevent the pari passu clause being interpreted as requiring ratable or pro rata payments.
- Specific reforms and features:
  - Single voting procedure across all bond issuances:
    - Replaces issuance-by-issuance voting that allowed holdouts to block restructuring by concentrating holdings in a single issuance.
    - “Either no one is in or everybody is in.” — creates certainty and reduces holdout leverage.
    - Includes safeguards to ensure inter-creditor equity across different issuances.
    - Allows flexibility for more traditional voting procedures when sovereign and creditors deem appropriate.
  - Modified pari passu proviso:
    - Clarifies that pari passu requires only equal legal ranking, not ratable payment to all creditors.
    - Seeks to prevent court interpretations that would block payments to restructured creditors unless holdouts are paid in full.

### IMF’s role and policy stance
- Market-based approach: inclusion and design of clauses ultimately decided by creditors and debtors.
- IMF actions:
  - Board endorsement is first stage; staff will engage with IMF membership to promote the reforms in dialogue with member countries issuing bonds governed by foreign law.
  - IMF intends to encourage use of these provisions as it did in 2003 for CACs in bonds governed by New York law.
  - Monitoring and promotion: IMF will encourage and monitor the inclusion of strengthened clauses in new sovereign debt contracts.
- Early adoption signals:
  - Modified pari passu clause already used by some sovereign issuers.
  - Kazakhstan recently issued a Eurobond including key CAC features endorsed by the Board.

### Outstanding stock and liability management — ongoing challenges
- Significant outstanding stock of bonds without the new clauses remains and will not mature for some time.
- IMF explored accelerating turnover through liability management exchanges (exchanging existing bonds for new bonds without problematic provisions).
- Current market appetite for liability management is limited; may increase if Argentine litigation has broader impact.
- IMF will continue to monitor risks posed by outstanding stock and consider additional steps as needed.

### Key takeaways and policy recommendations
- Adopt and promote CACs with single cross‑issuance voting to limit holdout strategies and create greater certainty in restructurings.
- Clarify pari passu to ensure it requires only equal legal ranking, not ratable payments, to prevent litigation that undermines restructurings.
- Pursue market-based adoption through engagement with sovereign issuers, creditors, and market bodies such as ICMA.
- Monitor outstanding stock and encourage liability management exercises where feasible; remain prepared to assess further measures if litigation dynamics change market incentives.

*IMF Survey : IMF Supports Reforms for More Orderly Sovereign Debt Restructurings — October 6, 2014*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [Third Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bonds](http://www.imf.org/en/Publications/Policy-Papers/Issues/2017/12/15/pp113017third-progress-report-on-cacs)
- [PRESS CENTER](http://presscenter.imf.org/)
- [In The News](https://www.imf.org/en/news/search)
- [Progress Report (September 2015)](http://www.imf.org/external/pp/longres.aspx?id=4983)
- [Read the report](http://www.imf.org/external/pp/longres.aspx?id=4911)
- [Press release](http://www.imf.org/external/np/sec/pr/2014/pr14459.htm)
- [Debt sustainability guidance](http://www.imf.org/external/pubs/ft/dsa/mac.htm)
- [Assessing public debt](http://www.imf.org/external/pubs/ft/survey/so/2014/POL032714A.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sonew100614a_