It’s time to create a “global Chapter 11” process, Canada’s former prime minister Paul Martin says.
As globalization of the economy continues, any hope of achieving the benefits is “offset by the fear of global contagion,” such as the shocks occurring due to countries’ debts in the euro zone, Martin said in a keynote address last night to a conference in Waterloo, Ontario, Canada, on sovereign debt.
In this context, the Sovereign Debt Restructuring Mechanism (SDRM) “is a concept whose time has come,” he said.
SDRM is a statutory framework that would enable creditors and debtor nations to negotiate a restructuring, ratifying an agreement binding on all parties. As in a bankruptcy, all claims would be aggregated for voting purposes. Disputes would be adjudicated through an independent forum, more quickly than through the long negotiations that have plagued the European crises for many months.
Martin is among attendees at a conference called “Sovereign Debtors in Distress: Are Our Institutions Up to the Challenge?” It is jointly hosted by The Centre for International Governance (CIGI) and the Institute for New Economic Thinking (INET).
Proposals to write the SDRM into the treaty governing the International Monetary Fund (IMF) have so far been rejected by member nations, most recently in 2010.
“I was a big proponent” of SDRM, said Martin, who recounted the major objections that arose at that time.
The first objection was moral hazard – a fear that countries might grow more reckless with debt if they did not have to bear the consequences. But moral hazard is actually “an argument in favour” of SDRM, because currently nothing stops a country from walking away from debt, Martin said, citing the case of Cote d’Ivoire, which defaulted on its 2032 $2.3 billion bond and in February received 20 million NOK of debt cancellation from Norway.
If an SDRM is created, Martin said, the critical question is: “who will be the arbiter? The role of the IMF is key” as the institution “that could best wield the sticks and carrots ... the policies that preserve social stability” in debt restructuring.
A second objection to SDRM arises from two alternatives, Martin said: Voluntary restructurings such as in Pakistan, the Ukraine and Jamaica, which have “credibility” due to their voluntary nature but which permit a sort of “theft” by certain classes of creditors who win the most favourable terms; and collective action clauses (CACs), in which a majority of bondholders can force terms on others.
In both alternatives, “the problem is free ridership,” Martin said. Who has the power to force a debt restructuring deal that applies broadly and fairly if certain “vultures can get better terms?”
In its day, Martin said, the informal group of private creditors on the international stage – known as the London Club – could force solutions to national debt crises such as Zaire’s in the late 1970s.
Today, drawn-out negotiations in one country or region can undermine market confidence and lead to credit problems for other countries in similar circumstances, Martin said. In the case of Greece, “the need for a haircut would have been less of a problem if Chapter 11 had been a tool in Europe’s quiver.” Markets deal better with certainty, no matter how harsh, “than uncertainty, no matter how benign.”
The global economy is “now so interdependent that the failure to recognize the need for arrangements is irresponsible,” he said.
Martin noted that the United States had bankruptcy laws as early as 1801, the United Kingdom in the 16th century, and such laws existed in some form in ancient Babylon. “So why is it so difficult," he asked, "in a seamless global economy to see the need” for similar laws on a global scale.
Countries might have to yield some degree of national sovereignty to an SDRM, he said, but would also reap the benefits. Just as many General Motors workers were able to keep their jobs after the automaker filed for Chapter 11 reorganization in 2009, so many Greek workers today would have greater hopes for future employment if SDRM had been approved years ago, he said.
Martin noted that there were issues to be addressed, such as the need for banks to secure capital – problematic if sovereign debt is not considered secure – and the question of the IMF’s ability to arbitrate debt-restructuring disputes when the Fund itself may be a creditor.
He also suggested the G20 Leaders group had an important role to play in pressing for a global solution to sovereign debt restructuring. “Global financial markets today control the flow of capital, so we need global solutions. We need institutions internationally to mitigate the market’s hard edges internationally.”
Martin twice thanked James Haley, CIGI Director of the Global Economy program, for helping to formulate his remarks to the conference. While the conference is occurring under Chatham House Rule, Martin expressly stated that his remarks were on the record.
Martin also expressed his hope that the conference would help to surface ideas to help address the “vacuum” in current policy frameworks to address the sovereign debt problems challenging the world.