1.
Handling Sovereign Debt Crises:
A Proposal
January 2014
Richard Gitlin & Brett House
Senior Fellows
The Centre for International Governance Innovation (CIGI)
rgitlin@cigionline.org bhouse@cigionline.org

2.
Agenda
I.
II.
III.
IV.
V.
VI.
Context: relevance, diagnosis of problem
An SDF: what, why, when?
SDF focus: research, early consultation
Concerns and limits of the SDF
Links with complementary approaches
Next steps
P. 2 │ Gitlin & House │ CIGI │ SDF

3.
I. Sovereign Debt Crises: Here to Stay
Easing of pressure in Europe, but…
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•
•
•
•
Advanced country debt burdens up 30 ppts GDP since
2008 to 105% GDP
Global markets still highly correlated: risk on, risk off
Capital flows pro-cyclical, delinked from fundamentals
EMs vulnerable to Fed taper, stronger USD
Small island states cannot be made sustainable on existing
conventional Paris Club terms
P. 3 │ Gitlin & House │ CIGI │ SDF

4.
I. Problem: too little, too late
Costs to addressing sovereign distress:
1. Ex ante
2. In media res
3. Ex post
Three major connected issues:
1. Overlending and overborrowing
2. Incentives to delay addressing insolvency
3. Tendencies toward insufficient restructuring in market approach
• Not too much restructuring, too soon.
• Reality: too little, too late.
• Need to lower cost of dealing with debt distress
• Preserve value for creditors and debtors
P. 4 │ Gitlin & House │ CIGI │ SDF

5.
I. TLTL: Post-SDRM status quo doesn’t work
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•
•
•
Non-system does not optimize outcomes
Each crisis requires reinvention, delays, ad hoc-ery
Information flow is too slow, limited, asymmetric
CACs helpful, but can only do so much:
–
–
–
–
They facilitate inter-creditor coordination
But they are reactive, not proactive
Do not bring together stakeholders early to find solutions
CACs are not a restructuring/bankruptcy regime
• Lessons from private debt restructuring:
– Clear, transparent process: faster deals, greater preservation of value
P. 5 │ Gitlin & House │ CIGI │ SDF

6.
I. Greece is Not a Model
“The system needs to be fixed. We should have a
predictable framework for restructurings that ensures
that other countries do not have to go through what
Greece did.”
— Petros Christodoulou, fmr head, Greek debt office
“I hope Greece was a one-off but I am not sure it was. If
you look at all the debt out there it is hard to conclude
that there isn’t a problem. State bankruptcies have not
gone away. In fact they are likely to get worse.”
— Phillip Wood, Allen & Overy
P. 6 │ Gitlin & House │ CIGI │ SDF

7.
I. 7 Specific Issues to Address
Ex ante
• Lack continuous effort to refine processes of dealing with
distressed sovereigns
• No venue to bring creditors and debtors together proactively
In media res
• Absence of an automatic standstill mechanism
• Creditor moral hazard
Ex post
• Pari passu thrown in doubt
• Payment systems vulnerable
• CACs are being circumvented
P. 7 │ Gitlin & House │ CIGI │ SDF

8.
III. An SDF: What is it?
Sovereign Debt Forum (SDF): Addressing ex ante costs
• Non-statutory, uncodified but incorporated body
• Neutrality in practice, venue and staff
• Provides ongoing research, institutional memory
• Standing discussion of surveillance, incipient crises, and, when
necessary, debt treatments
• Transparent joint analysis of DSA, capacity to pay
• Fair, balanced, and comprehensive representation
• Dovetails with existing IMF and/or Troika processes
• Learns from private sector experience
P. 8 │ Gitlin & House │ CIGI │ SDF

9.
II. Why an SDF?
Light:
• Paris Club shows this type of ‘non-institution’ can be effective
• EITI, APEC, GATT, CGAP, WEF precedents
Pragmatic:
• No political support for treaty- or statutory-based approaches
Complementary:
• Enhances existing processes and institutions
Supportive:
• Aid other incremental improvements to debt treatment regime
• Reduce trigger problem
• Dampen political & creditor pressure on IMF staff
Fills gap
• Dedicated to proactive treatment of sovereign financing issues
P. 9 │ Gitlin & House │ CIGI │ SDF

10.
II. An SDF: When?
Before 2008 crisis
• 2002‒03:
SDRM discussions fail
• 2003:
Wider introduction of CACs
• 2003‒08:
No demand for restructuring framework
After 2008 crisis
• 2010:
Greece program; Merkel/Sarkozy - Euro SDRM
• 2011:
European CACs, EFSF/ESM, Greek debt exchange
• 2012:
Greek buyback
• 2013:
Cyprus
Now:
• Crisis stabilized, can work on improving system
• Status quo not a sustainable equilibrium
– Failure of Greek CACs
– Exposure of NY payments system to holdouts by NML vs Argentina
– Small island states cannot be restructured on conventional terms
P. 10 │ Gitlin & House │ CIGI │ SDF

11.
III. An SDF: How do we do it?
Creation
• Incorporate as nonprofit organization
• Informal secretariat at existing public institution
• Expand existing body such as Paris Club, which has already
initiated outreach to new members through Paris Forum
• Create stand-alone unit at IMF or BIS
Initiation
• Build research on best practice, create institutional memory
• Weave into IMF and/or European surveillance process
• Assists in next sovereign workout: small island states (?)
P. 11 │ Gitlin & House │ CIGI │ SDF

12.
III. Expand on PC
Paris Club permanent membership
P. 12 │ Gitlin & House │ CIGI │ SDF

13.
III. More inclusive membership
Private
creditors/
IIF
ILA
IMF
Creditor
Sovereigns
Debtor
Sovereign
P. 13 │ Gitlin & House │ CIGI │ SDF
IIF
SDF
ISDA

14.
III. SDF = early consultation
Status quo
Economic
distress
Adjustment programme
Public financing
Debt
treatment
Growth &
sustainability
Stakeholder
consultation
With SDF
Economic
distress
SDF
Stakeholder
consultation
P. 14 │ Gitlin & House │ CIGI │ SDF
Debt
treatment
Growth & sustainability
Public financing

15.
IV. Concerns & limits of the SDF
Not a panacea
• Cannot enforce participation
• Need to demonstrate incentives for involvement
• Confidentiality necessary?
• Neutrality possible?
• Needs regular consultation to avoid trigger stigma
• No forced stays, does not provide a standstill
• No certainty in binding creditors
SDF proposed as a part of a menu of pragmatic,
incremental reforms
P. 15 │ Gitlin & House │ CIGI │ SDF

16.
V. Complements existing principles
1/ IIF Principles
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•
•
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Transparency and timely flow of information
Close debtor-creditor dialogue to avoid restructuring
Good faith actions
Fair treatment
2/ Review of IMF Lending into Arrears Policy
• Supports prompt Fund support
• Venue for good faith efforts to reach collaborative agreements
P. 16 │ Gitlin & House │ CIGI │ SDF

17.
V. Pragmatic reform agenda
SDF plus…
1/ Define pari passu
•
Rule out ratable payments to nonparticipating creditors.
2/ Enhanced CACs with aggregation
Ex post
• Make aggregation more effective:
– lower threshold within issues (‘two-step’)
– Institute comprehensive threshold across all debt outstanding
(‘one-step’)
3/ Immunize payments systems
• Model legislation after Belgium/Euroclear protections
In media res
4/ Sovereign CoCos, indicator-linked warrants
• Automatic rollovers, maturity extensions and contingent debtservice reductions
P. 17 │ Gitlin & House │ CIGI │ SDF

18.
VI. Next steps
Focus on ‘do-able’ reforms:
• G20 deferral of issues to IMF
• IMF Board paper in June 2014
• Define model contractual language, adopt it
• Issuance of contingent debt
• Test SDF concept with small island states?
P. 18 │ Gitlin & House │ CIGI │ SDF