Bill Rhodes warns of dangers of EU debt resolution plan


Hamish Risk
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In an exclusive interview with Euromoney, Bill Rhodes, who played the most prominent role of any banker in emerging markets debt restructurings in the 1980s and 1990s, warns that implementing a sovereign debt restructuring mechanism in Europe would be short sighted and could worsen funding conditions for peripheral European sovereigns, not improve them.

William Rhodes, advisor to Citigroup chief executive Vikram Pandit and recently retired former board member of the Institute of International Finance, says the European Union should be wary of trying to resurrect a sovereign debt restructuring mechanism (SDRM) in the midst of a still unfolding crisis because it would have such a destabilising effect on the sovereign capital markets. Rhodes quotes the case of Ireland, where 10-year bond yields rose more than 200 basis points within the space of two weeks after German policymakers began talking up such an approach, forcing the government to accept a bailout from the EU and the IMF. The idea of a SDRM was first proposed in 2001 by Anne Krueger, then first deputy managing director at the IMF, to give international legal protection for bankrupt sovereigns. It was never implemented, but recent comments from German Chancellor Angela Merkel about bailing in senior bondholders of sovereign debt have spooked markets that the idea may be revived. “The EU should move very carefully in trying to impose or resurrect something similar to the SDRM for the very reasons that just have occurred in Ireland and may occur in other countries,” says Rhodes. “I understand that the taxpayers do not want to support these countries that have bad policies, but the ultimate aim here is to get these countries back to the capital markets as soon as possible,” he says. “The risk is that the SDRM will scare the markets and make it difficult for the countries to get financing even though they are enacting proper economic reform policies.” Last month Jean-Claude Trichet, president of the European Central Bank, outlined a series of punitive measures for countries that do not toe the policy line. Rhodes says: “At the end of the day you can always go into an arrangement where you sit down with your creditors and work things out, as we did in the Latin American debt crisis and as we did in Korea, when I restructured its short-term debt.” He adds that creditors and interested parties are now attempting to engage with policymakers in Europe through the Institute of International Finance. Rhodes believes the SDRM would counteract the austerity and stabilization programmes that have been put in place already in Ireland and Greece. “It would not only impede the ability of countries that have problems, like Greece, who are trying to do the right thing and get back to the capital markets,” Rhodes says. Furthermore, “the capital markets would be more concerned about funding in general. Today it is not the emerging markets, it is the so-called developed countries in the southern periphery of Europe, so it basically covers everybody.” Rhodes believes that the problems for European leaders are the same as they were when Latin America faced its sovereign crisis in the 1980s. The solution that Latin governments took was the Brady Plan. Named after then US treasury secretary Nick Brady, the plan backed new sovereign bonds with US treasuries, allowing distressed emerging countries back into the capital markets. “How do you get these countries back to the capital markets and how do you get them to restructure their economies so that they can get back there and make sure they’re doing the proper things for their people and their countries? That has got to be the end strategy here,” says Rhodes. He reflects on what almost was, when the SDRM was being considered in Latin America at the beginning of this decade, and offers words of caution and advice to European leaders: “You want to be careful with what we almost did in 2002. What we ended up coming up with were collective action clauses and the IIF’s principles, which was the right way to go.”