Sovereign debt: Principles and practice
The Principles for Stable Capital Flows and Fair Debt Restructuring were agreed in 2004 between big sovereign issuers and leaders in private finance and subsequently endorsed by the G20 ministers in Berlin in 2004.
They incorporate voluntary, market-based, flexible guidelines for the behaviour and actions of debtors and creditors, and have been developed by all concerned parties. The International Institute of Finance says the main benefits of the Principles are their proactive and growth-oriented focus. While they are usefully applied after a crisis has occurred, they are primarily used during times of diminished market access and in the early stages of crisis containment.
• Information sharing and close consultations between debtors and their creditors.
• Strengthened investor relations activity on the basis of market best practices and where investors provide feedback, thus enabling policymakers to make market-informed policy decisions.
• Early corrective action, via policy decisions or direct consultations between debtors and creditors.
• Cooperative behaviour between creditors and debtors towards an orderly restructuring based on engagement and good-faith negotiations toward a fair resolution of debt servicing difficulties, encouraging restoration of market access.
With global credit conditions deteriorating and risk aversion heightened during the most recent global recession, Colombian authorities capitalized on strong international support to make the economy more resilient by securing multilateral financing. Colombia’s sound economic policies were reinforced by a consistent track record in the observance of the Principles that enabled it to become eligible for assistance under the IMF’s new facility for short-term liquidity support, the Flexible Credit Line. It also enhanced its investor relations practices, which have been institutionalized since 2008, with the establishment of Investor Relations Colombia (IRC) under the Public Credit Directorate of the Ministry of Finance and Public Credit, enabling investors to better assess the authorities’ policy measures. This enabled it to access international capital markets and issue 10-year samurai bonds at a yield of 2.42% in late 2009, and $800 million of 11-year peso-denominated bonds with a yield of 7.75% in April 2010.
Cooperative actions and increased debtor-creditor communication is consistent with the implementation of debt relief programmes, such as the Highly Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), as early communication enables more accurate calculation of a common reduction factor to enable debt sustainability. Since 2007 Côte d’Ivoire has reduced its external public debt from 68% of GDP to 54% projected in 2010, through a series of debt relief and restructuring plans, while also restructuring $2.8 billion of Brady bonds in 2010, which it had defaulted on in 2000, but couldn’t restructure because of a civil war over the intervening period. The negotiations were conducted in a way consistent with the required debt relief under the enhanced HIPC initiative. Due diligence had relied largely on transparency and open dialogue between private creditors and authorities. However, a recent political crisis has seen the country miss an interest payment on its Eurobonds.
Non-sovereign and quasi sovereign: Dubai World, Iceland, Kazakhstan
Over the course of 2010 the IIF’s Principles Consultative Group (PCG), made up of senior officials from emerging economies as well as senior bankers and investors, has on a regular basis reviewed cases involving the restructuring of external liabilities of non-sovereign or quasi-sovereign entities: Dubai World, Iceland and Kazakhstan. In the case of Dubai, that has revolved around questions about the transparency of information and the avoidance of discrimination among creditors. In the Kazakhstan and Iceland cases, where state intervention was required as a result of the collapse of their banking systems, and the state sought to influence or modify the legal structure and other key parameters of debt restructuring, several issues have arisen. These include the preservation of a minimum functioning of the banking system, debt sustainability of the sovereign itself, the role of the state in debt resolution and the treatment of trade finance claims.
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