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Sovereign Creditors Must Not Rewrite the Rules During the Pandemic

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NEW YORK – In the wake of COVID-19, there is an urgent need for sovereign debt restructuring, including debt relief. In the circumstances caused by the pandemic, many countries’ repayment obligations could have devastating social consequences if they are not adjusted. Financial markets face risks of sovereign default. Understanding the Pandemic Stock Market Drew Angerer/Getty Images Priorities for the COVID-19 Economy Gav Goulder/In Pictures via Getty Images The Main Street Manifesto Andrew Lichtenstein/Corbis via

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NEW YORK – In the wake of COVID-19, there is an urgent need for sovereign debt restructuring, including debt relief. In the circumstances caused by the pandemic, many countries’ repayment obligations could have devastating social consequences if they are not adjusted. Financial markets face risks of sovereign default.

While some ad hoc relief has already been promised by official creditors, indebted poor countries are again facing private creditors without a sovereign-debt restructuring mechanism – the global equivalent of a bankruptcy regime. In the absence of such a framework, called for by the United Nations General Assembly and advocated by many experts and stakeholders, there have nevertheless been some constructive innovations in contractual approaches to sovereign debt. These address at least some of the collective-action problems of restructuring, including opportunistic hold-out behavior.

The most promising measure is a collective action clause (CAC) that allows a restructuring to go forward where approved by a supermajority of the aggregate of creditors. This progress reflects the understandable reaction to litigation by “vulture funds” against Argentina in New York, which threatened an already viable restructuring supported by the majority of the nation’s creditors.

In the ongoing debt negotiations between Argentina and private creditors, one creditor group has proposed moving backward, and is pressuring Argentina to remove this innovative feature in the future. This would be a disastrous precedent that would set back by more than a decade the development of the international legal architecture for sovereign debt. It also has implications for many debtor countries and stability and certainty in international debt markets.

We strongly believe that the international community should press these creditors to withdraw the demand and support Argentina in rejecting it. The creditors’ proposal is to replace enhanced CACs that prevent, or at least discourage, such opportunism with older arrangements that could lead to the vulture-fund predation that an increasing number of countries have faced in the last two decades, where the holdout in question used the US federal court in New York to extort full payment, throwing into potential chaos a restructuring agreement that applied to the majority of creditors.

It is imperative that the international community supports the rejection of such a fateful step backward. In the wake of the New York litigation, the US Treasury, the International Monetary Fund, and other stakeholders developed the new CAC standard allowing a debt restructuring to proceed for all series of bonds if an aggregate supermajority of bondholders across the various series approves.

Joseph E. Stiglitz
The official account of Joseph E. Stiglitz, Nobel laureate economist based at Columbia University.

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