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The IMF’s Executive Board supports reforms to international sovereign bond contracts designed to address collective action problems in sovereign debt restructurings.
The IMF is engaged in a number of reforms designed to reduce the costs of sovereign debt restructurings—for the benefit of debtors, creditors, and the system more generally. These reforms include possible changes to the IMF’s lending framework that are designed to give the IMF a broader range of policy responses in the context of sovereign debt distress.
Separately, there is a recognition that, in circumstances where a sovereign and its creditors have reached the conclusion that a debt restructuring is necessary, the existing legal framework may not be sufficiently robust to prevent “holdout” creditors from undermining the restructuring process. Recent developments, including the Argentine litigation in the United States, have highlighted these vulnerabilities. The IMF recently endorsed reforms to sovereign bond contracts that are designed to address these issues.
Sean Hagan, the IMF’s General Counsel, has led the IMF’s latest work in this area. In an interview, he discusses both the reasons why these reforms are important and the nature of the Fund’s role going forward.
IMF Survey: Last week, the IMF’s Executive Board discussed a paper on strengthening the contractual framework for sovereign debt restructuring. What is the significance of the Board’s discussion?
Hagan: As you know, the IMF has embarked on a broad reform agenda in the area of sovereign debt restructuring. An important element of that agenda is the strengthening of the legal framework that supports the restructuring process. It has been agreed that reform in this area should be market-based and, accordingly, we have been focusing on potential changes to international sovereign bonds contracts. This is the subject of the paper that was discussed by the Board last week.
The proposals set forth in the paper reflect the outcome of intensive discussions that took place over an 18-month period with the private sector, sovereign issuers, and representatives of the official sector. More specifically, the proposals in the paper are consistent with a number of the features of the clauses that were recently adopted by the International Capital Market Association (ICMA) —which has been a key counterpart in our discussions. ICMA represents many major global financial institutions and sovereign issuers.