Apr 11, 2024 - Economy

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

Illustration of the earth with a spotlight in the shape of New York state shining on it.

Illustration: Brendan Lynch/Axios

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.

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