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Sovereign Debt Restructuring in the New Financial World

This book explores case studies of sovereign debt restructuring in Belize, Ecuador, and Zambia, as well as frameworks for debt restructuring, investor relations programs, Paris Club-private sector issues, and multilateral development bank issues. It discusses the lessons learned and the need for improvement in the current system.

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Sovereign Debt Restructuring in the New Financial World

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  1. Sovereign Debt Restructuring in the New Financial World Richard Segal March 2007

  2. Table of Contents Belize: State of Denial Ecuador: Drowning in Shallow Water Zambia: A Rogue by any Other Name Sovereign Debt Restructuring Frameworks Investor Relations Programs Paris Club-Private Sector Issues Multilateral Development Bank Issues 2

  3. Belize: State of Denial • External debt climbed unsustainably • The Government overlooked negative signals for two years • The Government resisted an IMF program • Authorities were wary of disturbing the BZD/USD currency peg • Officials eventually “came to their senses” • The restructuring was successful and valuable lessons were learned • Conclusion: It’s never too late to make amends 3

  4. Ecuador: Drowning in Shallow Water • Belize: Willing but unable – Ecuador: Able but “unwilling” • Presidential campaign focused on debt issues • Politicians did not understand the economic repercussions of “tough talk” • “Tough love” from foreign investors could hurt the economy: eg, capital flight, fewer trade lines • Competing priorities imply delay in debt decision • Conclusion: Policy stubbornness can damage economic prospects 4

  5. Zambia v DAI: A Rogue by any Other Name • DAI, a US company, purchased Romanian claims against Zambia in the late 1990s • Negotiations lasted about seven years but ultimately failed • Reasons: DAI’s tactics, Zambia’s internal politics • DAI ultimately litigated and received a favorable court judgment • Debt relief campaigners are aghast • Some facts: GDP in USD terms has more than doubled in four years, private investment is 20% of GDP, external debt is less than 15% of GDP • Conclusion: Rogueness is in the eye of the beholder 5

  6. Sovereign Debt Restructuring Frameworks • Sovereign Debt Restructuring Mechanism (IMF) • Collective Action Clauses (various private sector umbrella organizations) • Two-stage process (JP Morgan) • “Muddle Through” (pre-existing) 6

  7. Investor Relations Programs (IRPs) • IRPs arose in the wake of the Mexican peso crisis • Data transparency has improved tremendously • Best practices/league tables for both are published • Data transparency is essential for any capital market participant • The value of IRPs is overstated 7

  8. Paris Club-Private Sector Issues • “Comparability” should be revisited • Better/more creditor coordination is advisable • Paris Club accounting practices are opaque • The Paris Club’s mission may need to evolve further • The Paris Club should take more items in-house • The Paris Club should not subsidize new borrowing 8

  9. Multilateral Development Bank Issues • Private Sector Involvement (PSI) is heavy handed and lacks accountability • The IMF’s signalling approach should be debated • Evidence of new initiatives is mixed (FSI v GDDS) • The IMF/World Bank preferred creditor status should be reviewed • Restructuring processes suffer from the lack of an information clearing house FSI: Financial Soundness Indicators GDDS: General Data Dissemination System 9

  10. Conclusions: • Debt restructuring frameworks have improved • Borrowers and creditors have become more transparent • Information asymmetries still exist, and creditor coordination is still imperfect • The roles of the IMF, World Bank and Paris Club should be further reviewed • The system is not broken, but complacency is a risk 10

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