IMF: N.Y. bill could “prolong and complicate” sovereign debt restructurings

Kate Marino

International Monetary Fund officials think a bill proposed by New York State legislators to change the sovereign debt restructuring process could actually “prolong and complicate” it, an IMF spokesperson tells Axios.

Why it matters: The IMF is a linchpin in the global system for restructuring the debt of countries in financial distress.

The big picture: Most participants in sovereign debt restructurings agree that the process often takes too long, and needs improvement.

Zambia, for example, defaulted on its debt three years ago and still hasn’t been able to wrap up a deal.
Yes, but: The IMF doesn’t seem to think that New York legislators found the solution, and says the adverse impacts should be considered “in consultation with all stakeholders.”

How it works: The bill seeks to diminish the power of holdout creditors who refuse to sign on to restructuring plans that a majority of creditors have backed — holding up the process (see: Elliott vs. Argentina).

The bill would apply to bonds issued under New York law that need to be restructured. It would require debtor countries to choose one of two options:

Reorganize under a new, bankruptcy-like procedure overseen by an independent monitor (who can cram down holdout creditors); or force private sector bondholders to accept the same treatment that official sector creditors (i.e. other national governments) receive.
Zoom in: The IMF says it’s been working on this problem for quite some time, and that innovations in bond structures known as “collective action clauses” (CACs) — which allow for holdouts to be crammed down — have made a big difference.

“Since the early 2000s, the IMF has been working with all stakeholders in a continuous effort to improve the international sovereign debt architecture,” according to the spokesperson.

“CACs have become market practice with more than 95% of the outstanding international sovereign bonds having some form of CACs, and these clauses have functioned well in facilitating timely and organized coordination and improving the dynamics of debt restructurings.”
“The initiatives outlined in the New York bill introduce uncertainty into the existing debt restructuring architecture,” the spokesperson said.
Our thought bubble, via Axios’ Felix Salmon: The IMF is run by representatives of both debtor and creditor countries — precisely the folks who work out the restructuring terms for official-sector creditors. And they appear underwhelmed by the idea that official-sector terms can or should be applied willy-nilly to private-sector bondholders.