I was in New York last Monday to participate in a conference at Columbia University organized and hosted by Nobel Laureate Joe Stiglitz. It was an excellent discussion, featuring the "usual suspects" of issues, including the impact of IMF programs on the restructuring negotiations and the "contractual" versus "statutory" divide.
The conference timing was propitious. Just a few days earlier, Mexico had filed a SEC registration for a bond issue including new Collective Action Clauses (CACs). The new clauses, which were developed by the International Capital Markets Association (ICMA) in conjunction with the U.S. Treasury, the IMF and academics, legal practitioners and market players, are designed to address concerns with respect to fairness and transparency arising from the retroactive inclusion of CACs in Greek debt and the impact of recent litigation against Argentina. These "new challenges" have resurrected "old debates" regarding sovereign debt restructuring.
There was broad agreement that the new clauses are a useful addition to the toolkit for restructurings. By neutralizing the troublesome language in pari passu clauses, of the kind governing the pre-restructuring of Argentine debt and facilitating voting across bond issues, the new clauses should help a sovereign intent on working with its creditors to preserve asset values and restore growth to the benefit of all.
I think this is right.
At the same time, it is important not to ascribe too much potency to the ICMA model clauses. They are, almost by definition, an incremental improvement: the IMF estimates that about 30% of the $900 billion in outstanding foreign jurisdiction will mature in more than 10 years. Absent efforts to exchange new bonds for outstanding issues, the impact of the new clauses will only be felt in fullness over time. Moreover, there is a risk that the inclusion of these clauses could increase the returns from “holding out.”
At the same time, as I argued previously, the beneficial effects of any contractual change are likely to diminish over time as innovations to the contracting "technology" to immunize against future restructuring are developed: in the absence of more formal frameworks for restructuring, creditors will seek some means to make their claims senior to existing debt; sovereigns wanting to borrow more will accommodate creditors by making their debt more difficult to restructure. As Patrick Bolton and Olivier Jeanne argue, there is a Gresham’s Law of sovereign debt. Over time, as debt loads progressively increase, “bad” debt — in the sense of being more difficult to restructure — will crowd out “good” debt.
All of this is not to diminish the importance of Mexico’s leadership. For the second time in a little over a decade, Mexico has been the "first mover" in introducing innovations to sovereign bond contracts, having introduced the first-generation CACs in February 2003. My global governance nightmare is that the dynamic emerging economies, which over time will account for an increasing share of the global economy and that complain about the historical anachronism of existing governance arrangements at the IMF and other international fora, might fail to accept the responsibilities and obligations for managing the global economy. Mexico’s example shows that perhaps I worry needlessly.