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The kind of private-sector
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THE PRESS CONFERENCE at the Institute of International Finance (IIF) at the end of last month was a grand affair. The great and the good present included Jacques de Larosière, former head of the Banque de France, the IMF and the European Bank for Reconstruction and Development. "You are attending a meeting which is to some extent historical," he told journalists. "Issuing countries and the private sector have gotten together and have agreed on a set of principles: this in itself is a great achievement." He waxed almost poetical. "We have tried to bring out the quintessence of what is good and what is rational," he said.
The chaos of Argentina's attempt to resolve its default has highlighted again the worrying absence of agreed procedures for sovereign debt workouts. So, on the surface, such an agreement appears welcome.
De Larosière was followed by HSBC's Robert Gray, chairman of the International Primary Market Association (Ipma), who also lauded the principles. "These are a very important step forward in making the process of debt restructuring more orderly and more predictable," he said.
Issuers were also well represented. "If we had devised this instrument a few years ago, some of the problems we have observed over the past few years would have been considerably attenuated, and some would not have occurred," said Alexandre Schwartsman, deputy governor for international affairs at the Brazilian central bank.
Overseeing the meeting was Charles Dallara, managing director of the IIF and chief architect of the document that had been formally welcomed by the G-20 developed nations and sovereign borrowers only the day before. The principles, he said, were "a potentially important addition to the architecture" supported not only by the G-20 but by a wide range of investors. "We are pleased by the breadth of private financial sector support for these principles," he said, citing the IIF's 345 members, as well as Ipma endorsement.
Discontent in the ranks
The IIF certainly has a lot of members – banks and investors – although the extent of the rank and file's enthusiasm for the principles in question remains in doubt.
Ipma represents debt underwriters, and has a vested interest in remaining on good terms with the largest sovereign issuers. Other private-sector organizations were conspicuous by their absence. Not a single bondholder spoke. Although buy-side organizations such as Pimco are IIF members, and Pimco's chief emerging-market fund manager, Mohamed El-Erian, is even on the IIF's lists of individuals involved in drafting the principles, Euromoney has spoken to a large number of bondholders, all of whom either actively opposed the principles, refused to endorse them, or were too busy to pay much attention to what was going on. El-Erian falls into this last category.
Dallara and de Larosière might trumpet unprecedented collaboration between the private and official sectors, but most of the emerging-market foot soldiers, at least in the private sector, have grave misgivings about the principles in their final form.
The debtor nations in the G-20 were certainly happy with the IIF's "Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets". Brazil, Korea, Mexico and Turkey, having ensured that virtually everything creditors wanted in such a document was excised, have been happy to officially endorse them.
What remains, though, is deeply worrying to many market participants. The principles might have been pushed through by the IIF, a private-sector organization, but in the process the IIF was less of a market animal than a creature of the official sector.
The driving forces behind the principles were Jean-Claude Trichet, then head of the Banque de France; de Larosière; and the first person the official sector turns to when it seeks private-sector coordination, Citigroup's Bill Rhodes.
After the 2002 G-20 meeting in New Delhi, these three, concerned that the IMF's proposed sovereign debt restructuring mechanism (SDRM) could devastate emerging-market finance, tapped Dallara to devise a private-sector alternative.
During the IIF press conference, Alonso García Tames, director of public credit at the Mexican finance ministry, referred to de Larosière as a "private-sector representative". That is a revealing insight into the kind of private-sector representative the official sector likes to deal with. De Larosière spent almost his whole career at the top of the official sector, and represents the private sector now only in his role as an adviser to the chairman of BNP Paribas.
One persistent criticism of the process behind the principles is that people with first-hand market experience, especially traders, lawyers, bondholders and other private-sector trade bodies, were left out when they deviated from the IIF path. Dallara, especially, is often accused of being the type of bureaucrat who operates by getting the most important people on board, then using them to quash opposition lower down their own organizations.
Dallara has an answer to this. "We have worked on this at all levels," he says, adding that "this is not about revisiting process, it's about going forward together: my impression is that even those with remaining concerns do broadly support the thrust of the principles".
An answer to SDRM
The process began as a reaction to the IMF and its attempts to implement SDRM. "The SDRM did not convince the private sector or the issuers," recalls de Larosière. "We were expected to try a more market-based, voluntary approach."
Shortly after Dallara's exercise started at the beginning of 2003, however, Mexico inserted collective action clauses (CACs), into its bond documentation, and the US Treasury sent strong signals that SDRM was effectively dead. If the IIF project was designed as an SDRM killer, its main purpose had now become moot.
The CACs didn't solve anywhere near the same problems that SDRM addressed, however. "CACs are a very narrow solution to a very narrow problem," says Mark Siegel, emerging market fund manager at DL Babson in Washington. "They should be put in the context of some sort of acknowledgement, if not promise, by debtors and multilaterals that there would be an understanding about engagement" – the process by which debtors and creditors arrive at an understanding on any debt restructuring that they might agree is necessary.