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Proposed NY legislation to delay restructuring

Proposed NY legislation to delay restructuring

24 May 2024 | BY Imesh Ranasinghe

IMF warns risks in adding legislation, says could prolong process for restructuring countries

The International Monetary Fund (IMF) warns that proposed New York (NY) legislation on adding legality to debt restructuring would risk complicating and prolonging debt restructurings in countries such as Sri Lanka.

Accordingly, speaking to Bloomberg, an IMF spokesperson said that the bill which the lawmakers in New York are pushing to change the way sovereign debt overhauls are carried out after a country defaults, would introduce “significant uncertainty” into the existing debt restructuring architecture, although the legislation would add more order to the process.

“They may lead to negative impacts on the timeliness and predictability of the sovereign debt restructuring process,” the Fund representative told Bloomberg.

According to the IMF spokesperson, one proposal would create a bankruptcy-like adjustment process under NY law. “These impacts need to be carefully considered in consultation with all stakeholders,” the spokesperson added.

The IMF has not made any formal recommendations on the matter, the spokesperson said the Fund’s Board has backed a contractual approach to debt restructurings which includes covenants known as collective action clauses.

The warning adds a powerful institutional voice to an increasingly contentious issue that has pitted Wall Street against a cadre of politicians, activists, labour unions and charities backing the legislation. Impact on markets has so far been limited–the bills have yet to be scheduled for a vote and the New York legislative session ends 6 June.

At stake is a key part of the business of emerging-market debt investing. Roughly, United States dollars ($) 800 billion of outstanding hard-currency bonds sold by developing nations are governed by New York law, making the State the foremost jurisdiction for sovereign debt issuance. 

Under current practice, investors holding those bonds negotiate a settlement with governments after they default. 

Lately, however, developing nations have struggled to reach agreements with various creditors, including bondholders, bilateral lenders, and international banks. Recent restructurings in Suriname, Sri Lanka, and Zambia stretched for years.

The bills seek to introduce legal oversight to the process. One of them, the Sovereign Debt Stability Act, would limit the amount bondholders can recoup in the process. Wall Street has rejected the proposals, claiming they would lead to higher upfront borrowing costs for poor nations.

The Chief Economist of the World Bank Group Indermit Gill and a veteran restructuring attorney Lee Buchhei wrote in a blog post last week that while some of the proposals could help ensure losses are equally shared between private bondholders and public creditors–like foreign governments–the language of the bills need to be tweaked.

The proposed legislation “isn’t exactly surgical in its scope,” they wrote, saying the bills should be worded in a way that limits which countries are eligible, and details what “burden-sharing standards” will mean in practice. 

“We believe these flaws may yet be salvaged. There is significant value in limiting how much a creditor can collect in a legal proceeding against a low-income country participating in a consensual debt-workout process,” they wrote. 

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