Sovereign Debt Restructuring Research Articles

Human Rights and Sovereign Debt Restructurings: Considerations on States’ Legal Arguments in Disputes under Public International Law

This article delves into the intersection of sovereign debt restructurings with human rights. It emphasises that, in disputes under international law, States often omit to raise arguments concerning how adverse judgments could potentially harm the economic, social, and cultural rights of their citizens. The article also draws attention to the applicable law approach of some arbitral tribunals and the behaviour of certain holdouts, explaining how they can also contribute to this ecosystem. Ultimately, it is argued that the current hard-law international architecture is neither optimal nor encouraging to robustly link sovereign debt restructurings and human rights. To this end, the article recommends that these processes be guided by certain general principles of law. These principles, considered sources of international law, should be infused with international human rights law nuances. Rather than advocating for an overhaul, suggestions are made to refine the existing international legal framework and better suit human rights in sovereign debt restructurings.

China’s role in sovereign debt restructuring

As the world’s largest bilateral lender to low- and middle-income countries (LMICs), China faces challenges dealing with some sovereign borrowers in debt distress under the Belt and Road Initiative (BRI). The current global sovereign debt landscape suggests that the fundamental challenge of sovereign debt restructuring in the developing world is not China, but rather how to equitably address unsustainable debt owed to multiple categories of creditors. Nonetheless, by offering early-stage debt relief, China can alleviate the burden on borrowers who disproportionately owe significant debt to China and prevent trapping itself in unpaid debts. China’s policy decision will determine whether it can avoid the same mistake that Western creditors made of eventually losing all financial claims on many debt-distressed, heavily indebted poor countries (HIPCs) by the mid-2000s. Furthermore, a considerate approach by China is key to achieving the dual goals of mitigating LMICs’ debt distress and vulnerabilities to climate change by applying a climate-centered approach toward sustainable socio-economic development. China can contribute to creating better global debt governance, which should go hand in hand with global environmental governance and have critical economic, political, and social implications.

China, international competition and the stalemate in sovereign debt restructuring: beyond geopolitics

Abstract Until recently, developing countries were supposedly enjoying an unprecedented ‘age of choice’ when borrowing. Many observers were arguing then that geopolitical competition between lenders allowed them to extract better terms. Today, many face a looming debt crisis: financing options have shrivelled and restructuring talks are painfully slow, compounding debtors' misery. This is frequently attributed to creditors' geopolitical rivalry, reflecting China's rise as a sovereign lender. But why should competition between providers, once supposedly a boon for borrowers, now be a bane? This article explains this, by switching an inadequate geopolitics lens for a political economy analysis. The earlier expansion in lending was primarily driven not by geopolitical contestation but by prevailing politico-economic conditions within China and on international financial markets amid US-led quantitative easing, and was, furthermore, facilitated by China's fragmented internal governance. As economic conditions changed, financing dried up and creditors scrambled to secure returns. China's current chief competitors are not western states, but rival lenders: commercial bondholders and multilateral development banks. Given China's fragmented governance, lenders' commercial motives to recoup their loans primarily drive Chinese behaviour, not geopolitical objectives. This limits China's hegemonic potential and suggests developing countries may benefit less from the ‘second Cold War’ than some imagine.

Implementing the debt-for-nature swaps for marine protected areas: case studies from Seychelles and Belize

As a financing method providing financial support for environmental protection, debt-for-nature swaps (DFNS) have been implemented for nearly forty years. DFNS have covered marine protected areas (MPAs) in four countries since 2015. Although extensive literature discusses the various issues surrounding DFNS, only some researchers have connected the topics of DFNS and MPAs to evaluate the performance of implementing DFNS for financing MPAs. This paper contributes to filling this gap by analyzing the performance of the DFNS for financing MPAs from economic, legal, and environmental aspects by case studies from Seychelles and Belize. It aims to find an answer to the research question of whether the implementation of DFNS is a viable option for financing MPAs by exploring the current performance and discussing the future development of implementing the DFNS for MPAs. The DFNS has played a positive role in establishing MPAs in Seychelles and Belize by providing stable financial support for MPAs and improving the debt sustainability of debtor countries to some extent. However, there are various barriers from a legal perspective in reaching a swap agreement, ensuring the effective implementation of the agreement, and improving the transparency construction. With the trend of increasing scale and amount of debt relief and funding, the DFNS is expected to play an important role in promoting the establishment of MPAs, realizing the economic benefits, and having a satisfactory performance by legal measures. It concludes that with the transparency construction of information disclosure, special legislation on DFNS, an appropriate scale of debt for conversion determined by considering the debt sustainability, an adaptation to the innovation of the contractual approach of sovereign debt restructuring, and complementary assistance from different levels, the implementation of DFNS can be a viable option for financing MPAs.

Statutory and Policy Measures to Enhance Private Sector Participation in Sovereign Debt Restructurings

Statutory and Policy Measures to Enhance Private Sector Participation in Sovereign Debt Restructurings

The Legal Contours of Sovereign Debt Restructuring under the UNCTAD Draft Principles: Antagonism and Convergence between Standards of Domestic Insolvency law and International Investment Protection Law

The Legal Contours of Sovereign Debt Restructuring under the UNCTAD Draft Principles: Antagonism and Convergence between Standards of Domestic Insolvency law and International Investment Protection Law

Українські реалії реструктуризації суверенних боргових зобов’язань крізь призму історичної ретроспективи

Geopolitical challenges and socioeconomic upheavals, which intensified as a result of the armed military aggression unleashed by the russian federation, significantly complicated the process of forming the revenue part of the State budget and caused a significant increase in public expenditures, which led to a budget deficit and the inability of Ukraine to service its sovereign debt obligations in the form of Eurobonds. Therefore, there was a need to restructure sovereign debt obligations. The problem statement of the article includes determining the prerequisites and evaluating the prospects of restructuring Ukraine's sovereign debt obligations in wartime conditions. The aim of the article is to highlight the retrospective, current trends and to assess the prospects for reaching agreements with creditors in the process of restructuring sovereign debt obligations on favorable terms for the economy of Ukraine. General scientific and special methods are used: dialectical, system, comparative, historical, statistical, method of grouping, expert evaluations, predictions. The essence and significance of the restructuring of sovereign debt obligations in the external State debt management system is revealed. Attention is focused on the peculiarities of the restructuring of sovereign debt obligations in the conditions of wartime. The retrospective of the formation of approaches to restructuring during geopolitical disasters is analyzed. The foreign experience is systematized and the best practice of sovereign debt management is summarized. The prospects for the restructuring of sovereign debt obligations on favorable terms for the economy of Ukraine are substantiated. It is proved that geopolitical upheavals, such as wars, revolutions and the collapse of empires, are usually accompanied by significant write-offs of foreign debts. Historically, it has been confirmed that during wars and revolutions, the average discount (write-off) of the current value of the debt during restructuring reaches 98%. It is emphasized that the Government of Ukraine needs to reach the agreement of creditors regarding the write-off of 60% to 98% of the external debt in accordance with the best practices in the field of sovereign debt restructuring.

Normative Framework for the Regulation of Holdout Creditors in the Sovereign Debt Market

Abstract This article challenges the contemporary negative and dismissive narratives about distressed debt hedge funds (DDHFs), a subset of holdout creditors. A soft normative framework for regulating this category of creditors and other holdout creditors is however proposed to address their disruptive activities in the sovereign debt market. It is proposed that the Basel III framework be a conduit for enforcing the proposed normative framework because hedge funds are customers of institutions subject to Basel III oversight. One of the characteristics of these funds is their relatively sophisticated and high use of leverage. The authors therefore envisage the Basel III framework being expanded to provide for enforcement in this context. Finally, the normative framework proposed in this article differs from previous proposals including the Sovereign Debt Restructuring Mechanism (SDRM) and contractual solutions including Collective Action Clauses (CACs) and exit consents as it proposes the Basel III framework as an enforcement mechanism and is not a contractual solution.

Sovereign debt and post-war Ukrainian economic growth – system dynamics approach

The aim of the article is to examine the post-war national economy, notably overburdened with significant war expenditures and the effects of sovereign debt restructuring in a wartime period. The research uses system dynamics modelling methods, operates with S-shaped growth, overshoot and collapse dynamic patterns. The oscillation patterns of behaviour have been used to demonstrate the scenario options of possible external debt minimization.The dynamic hypothesis about non-linear behaviour of post-war debt trajectory has revealed the intrinsic growth rate in debt-dependent economy and the inflection point of no return to stable economic growth without radical decision of sovereign debt cancellation. The direct consequence of a negative solution for debt cancellation would be the unpredictable, even chaotic fluctuations of national economic growth rate. Baseline simulation to prove the results of research has been provided. The embedded “dependent-economy” type of macrostructure does not allow to overcome the critical debt overhang level and needs a new national model with appropriate policy to stabilize the economy. Performance of post-war debt repayment depends mostly on an innovative fund, which can be created by export abilities in the framework of post-war recovery plan. The results of the research may be applied by national authorities responsible for macroeconomic debt policy. The obtained results of the study allow us to draw a conclusion about the impossibility of developing the national economy within the framework of the existing economic structure of the developing country. The debt trap, which cannot be eliminated, does not allow to develop the national innovative economy and ensure economic growth and development.
 JEL classification: E37, F34, F35, G28, H63

Defaulting Differently: The Political Economy of Sovereign Debt Restructuring Negotiations

Abstract Negotiations to restructure sovereign debt are protracted affairs, and their outcomes, known as “haircuts,” range from 0 to 80 percent creditor losses. Haircuts impact states’ ability to borrow, cost of borrowing, and economic recovery; they also redistribute income—between states and creditors and between domestic interest groups. I conceptualize the interaction between governments and private creditors as a bargaining game where the government’s will to repay is private information. Creditors can make inferences about repayment based on the government’s political economy, but distributional signals are muddled when there are multiple veto players. Where additional uncertainty persists, governments can issue a public declaration of default, triggering costs in international financial markets. This costly signal separates governments that are willing to repay from those that are not and extorts greater concessions as a result. Using data on haircuts and public default declarations in market-based restructurings from 1980 to 2009, I find that governments are more likely to engage in costly signaling when they face heightened domestic constraints. When governments issue public declarations, they are subsequently rewarded with higher haircuts. Defaults do not all look the same, and the economic consequences are varied.

Unilateral responses to an international problem: sustainable sovereign debt restructuring and the case for second-best solutions

Unilateral responses to an international problem: sustainable sovereign debt restructuring and the case for second-best solutions

Human Rights Due Diligence by Corporate Creditors in Sovereign Debt Restructurings – A Great Missing Link

AbstractThis article studies human rights due diligence by private corporate creditors in the context of sovereign debt restructurings. First, the legal bases of this specific due diligence are presented and systematized. Then, by providing empirical statistical evidence, the article analyses whether haircuts applied by creditors across countries regularly consider the social and economic human rights situation of the debtor countries in question, as part of creditors’ due diligence. Also, the main characteristics of bond markets that contribute to understanding the asymmetric power relationship between private lenders and sovereign borrowers are described. Finally, Argentina’s latest debt restructurings are studied in depth to determine whether human rights were taken into account when agreeing on the size of haircuts. From quantitative and qualitative data, this article concludes that the haircuts agreed by creditors are regularly not sensitive to the social and economic human rights situation of debtor populations or to the impact that debt agreements could have on them.

Debt Distress on China’s Belt and Road

This paper shows that China's lending boom to developing country sovereigns has largely ended and that debt distress and defaults are increasingly common. Chinese lenders react to this challenge through two main coping strategies: first, bilateral sovereign debt restructurings–typically with maturity extensions but no face value cuts–and, second, rescue loans that allow debtors to avoid or delay default. Low-income countries tend to receive debt restructurings, whereas emerging market countries are more likely to receive rescue loans. We speculate that the differential crisis response is due to the different exposure levels of Chinese state banks.

Avoiding a lost decade—an interim update

Abstract All sovereign debt restructurings are inherently messy, expensive, exasperating, time-consuming, and contentious. These are the familiar pathologies in the international system to resolve unsustainable sovereign debts. But the period since the onset of the Covid-19 crisis has revealed (to use a term we all learned during pandemic lockdowns) several new co-morbidities. These include a breakdown in the ability of the major external creditor groups (traditional Paris Club lenders, non-Paris Club bilateral creditors like China and bondholders) to coordinate their debt relief efforts, the increasingly diverse nature of the private-sector entities holding claims against a debtor state, and the total absence of any mechanisms—statutory or contractual—that can be used to ensure that the sacrifices made by the vast majority of claimants and official sector sponsors in the economic recovery process cannot be exploited by the uncooperative few.

Informal creditors and sovereign debt restructuring

A conventional view of sovereign debt restructuring suggests that costly sovereign debt restructuring is required to lower the interest rate charged on it. In the presence of a negative external shock, under certain conditions, we show that (a) debt restructuring leads to interim social welfare gains and ex ante efficiency gains, (b) participation by citizens will lead to efficient debt restructuring. Using our results, we discuss provide a normative case for the proposed UNCTAD Roadmap.

Creditor Discrimination During Sovereign Debt Restructurings

Creditor Discrimination During Sovereign Debt Restructurings

Sovereign Debt Restructuring and Reduction in Debt-to-GDP Ratio

Sovereign Debt Restructuring and Reduction in Debt-to-GDP Ratio

The Role of International Reserves in Sovereign Debt Restructuring under Fiscal Adjustment

Highly indebted developing economies commonly also hold large external reserves. This behavior seems puzzling given that governments in these countries borrow with an interest rate penalty to compensate lenders for default risk. Reducing debt to the same extent as reserves would maintain net liabilities constant while decreasing interest payments. However, holding reserves can have insurance benefits in a financial crisis. To rationalize the levels of international reserves and external debt observed in the data, a standard dynamic model of equilibrium default is extended to include distortionary taxation and debt restructuring. This paper shows that fiscal adjustments induced by sovereign default can generate large demand for reserves if taxation is distortionary. At the same time, a non-negligible position in reserves modifies the debt restructuring negotiations upon default. A calibrated version of the model produces recovery rate schedules that are increasing with reserves, as seen in the data, being also able to replicate large positions of reserves and debt to GDP. Finally, I study how both mechanisms play a key quantitative role to generate such result, in fact, not including them, produces a counterfactual demand for reserves that is close to zero.

Barbados

Despite a series of economic shocks, Barbados has made good progress in implementing its Economic Recovery and Transformation (BERT) plan since the government led by Prime Minister Mia Mottley took office in May 2018. Macroeconomic stability was restored with a combination of comprehensive sovereign debt restructuring, fiscal consolidation, and structural reforms to reduce fiscal dominance and enhance growth. International reserves have increased to US$1.4 billion by end-September 2022 from a historical low of US$220 million in 2018. While fiscal consolidation was interrupted by the COVID-19 pandemic, public debt was put back on a downward path starting in FY2021/22. Building on the successful completion of a 2018-22 Extended Fund Facility (EFF), the authorities have requested a successor EFF program along with a Resilience and Sustainability Facility (RSF) to strengthen fiscal sustainability, support the structural reform agenda, and increase resilience to climate change.

Boundary objects in complex governance systems: collective action clauses in European sovereign debt governance

ABSTRACT This contribution argues that policymakers instrumentalise legal ambiguity to provide solutions to crises and achieve their preferences in complex governance systems. It looks at the Eurozone crisis and the introduction of sovereign debt restructuring as part of the policy solution. Despite initial opposition from the European Central Bank (ECB) and European Commission (EC), as well as negative market reactions, Greece’s debt was restructured in 2012. The notion of collective action clauses (CACs)—a private contractual term in bond documentation that enables bondholder coordination—was promoted as the credible tool for enabling sovereign debt restructuring. However, this paper argues that the success of CACs is related to how it functions as a boundary object, enabling a shared space of interpretive flexibility that allows policymakers to interpret CACs in terms of their preferences, despite a lack of consensus on the permissibility of future Eurozone sovereign debt restructurings. While enabling cooperation, this interpretive flexibility leads to different iterations of CACs—the Euro-CAC and Greece’s retrofit-CAC—which connects EU fiscal policy to monetary policy in a way that induces legal uncertainty as to the viability of future debt restructurings vis-à-vis the ECB’s bond-buying programmes.