Mar 5, 2024 - Business

Why sovereign borrowing could get more expensive

Illustration of Earth made of currency from the G7 countries.

Illustration: Shoshana Gordon/Axios

Restructuring sovereign debt after a default is hard — but New York state legislators think they have a solution. They've revived a bill, first proposed last year, to reshape how these workouts are done.

Why it matters: Sovereign debt is one of the world's largest securities markets, where economies from across the globe access much-needed capital from private investors.

  • Critics of the legislators' efforts say the bill would make an already complex process more confusing if passed, and the uncertainty will wind up hurting the low-income countries that legislators say they want to help.
  • Meanwhile, over in Zambia, a restructuring process has dragged on for three years as China appears to be holding things up — and the New York bill wouldn't do anything to fix that, sources tell Axios.

Context: About half of the world's sovereign debt is governed by New York law, giving lawmakers in remote Albany unique reach into a vast global market.

State of play: New York legislators first launched three separate bills last year that attempted to address some key issues: Sovereign restructurings take too long, and the creditor losses aren't shared equally.

  • Those bills didn't advance to votes before the session ended.

What's new: An amended bill that appears to combine two of those was unveiled on Thursday, led by state Sen. Gustavo Rivera (D).

  • Key among the provisions is that an "independent monitor" appointed by New York's governor would oversee restructuring processes, and it would create a mandate that private sector creditors receive recoveries equal to what the U.S. federal government "would have" recovered if it was a creditor.
  • In a statement provided to Axios, Sen. Rivera said: "New York has the power to close the legal loopholes that allow predatory 'investors' to purchase debt for the sole purpose of litigating with the indebted nations."

Reality check: Although the bill is "tremendously well-intentioned," it's light on details — especially about complex issues like defining comparable treatment for different creditor groups, says Sonja Gibbs, head of sustainable finance at the Institute of International Finance, a trade group that represents private sector lenders.

  • That would create immense uncertainty in the market — not to mention waves of litigation — and drive up borrowing costs for sovereign borrowers, she adds.
  • The costs would go up in regressive fashion. "For countries on the verge of debt distress, like Egypt, Pakistan, Kenya or Nigeria, this could be something that tips them over," says a sovereign debt investor who spoke with Axios.
  • Also: A market innovation known as a collective action clause (CAC) now appears in most bond documentation, binding all creditors to any deal agreed to by a supermajority — and in recent years that's kept private-sector creditors of the "predatory" variety from holding up restructuring deals.

The big question: Whose job is it to fix sovereign debt restructuring?

  • "This is a really complex set of issues, and there's no easy answer to any of it. I don't think you can legislate a quick fix that's going to make all these problems disappear," Gibbs says.
  • Gibbs contrasts the unilateral, top-down proposal in New York to the ongoing efforts of the relatively new Global Sovereign Debt Roundtable, a collaborative series of problem-solving talks involving public and private creditors, multilateral development banks like the IMF, and borrowing countries themselves.
  • As for the roundtable's progress on thorny issues, "It's not quick, but there are really encouraging signs in some areas," Gibbs says. "The groundwork is being laid to improve communications and transparency, which is going to pave the way for a lot of things," she adds.

The bottom line: New York lawmakers aren't waiting around for that.

Read more: Ambitious N.Y. bill takes aim at global debt woes

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