Sovereign commercial bank restructuring agreements: should bond innovations or other modifications be adopted?

Abstract

... As the 1980s gave way to the 1990s, there was a tectonic shift in sovereign debt restructuring. The 1980s were dominated by commercial bank restructurings as many sovereigns’ debt profiles were weighted heavily toward commercial bank cross-border loans. This shifted to arrangements related to tradable bonds as a result of the Brady initiative and other stimuli. And the shift intensified as pricing became highly attractive and execution could be lightning quick, enabling sovereigns to take advantage of favourable market windows. This shift, while broadening the investor base and facilitating diversification of risk also ‘pose[d] coordination and collective action problems in cases in which a sovereign’s scheduled debt service exceeds its payments capacity’.1 As a result, the dialogue in the international financial community tended away from sovereign commercial bank restructurings and toward the development of techniques and strategies to bring about better restructuring results for bonds and to curb the disruptions of non-consenting bondholders.