Orderly Workouts Redux: New Mechanisms for Restructuring Sovereign Debt

The IMF (Deputy MD Anne Krueger) and the US Treasury (Undersecretary John Taylor) have proposed procedures for orderly workouts of sovereign debt. This is not just a response to the Argentine debacle - they take account of recent debt restructurings for Ukraine, Pakistan, Ecuador and Romania. The limited progress towards a new international financial architecture has come mainly in crisis prevention, but as these cases show, there will always be crises. Some may be manageable without default or restructuring (Turkey?), others will require 'private sector involvement'.

Richard Portes, who argued for collective action clauses and bondholder committees in Crisis? What Crisis? Orderly Workouts for Sovereign Debtors (CEPR, 1995), sets out what is now desirable, feasible, and likely in a new sovereign debt restructuring mechanism:

• Until very recently, the US has taken the lead in this debate, even though Europe bears much of the financial cost of dealing with crises. Europe has now entered the debate, and there is some welcome convergence across the Atlantic.

• Big bailouts cannot and should not continue, but Argentina demonstrates the very high costs of disorderly debt workouts. Earlier recourse to a debt restructuring in an appropriate institutional framework could have avoided some of those costs.

• Limits must be placed on the role of the IMF in the debt workout process – the Fund already has excessive scope and conflicts of interest.

• Sovereign and corporate debt differ fundamentally, so analogies with bankruptcy codes for corporates are often misplaced. For example, there is no way to define ‘net worth’ or liquidation value for a country, which invalidates some of the principles of bankruptcy procedures, because the creditor has no well-defined outside option

• The Krueger proposals would require major changes in the IMF Articles, and these are politically infeasible.

• A new institutional framework is required – a mediation agency independent of IMF, to deal with the different classes of creditors, and new contractual arrangements, in particular, collective action clauses in debt instruments.

• All this is necessary to make it feasible to impose presumptive limits on access to official funding, which all agree are desirable but which so far have not been implementable.

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