WASHINGTON — Current approaches to restructuring nations’ sovereign debt are inadequate, because they don’t account for systemic risk and rely too much on the International Monetary Fund and similar institutions to bail out debtor nations, a bankruptcy law expert said Thursday.
The panel was part of the Civil Society Policy Forum, a series of panels and speakers hosted by the World Bank Group and IMF for their 2017 annual meetings.
As places like Antigua and Barbuda and Dominica attempt to rebuild after this year’s devastating hurricane season, many countries and territories remain in deep debt to the IMF.
Recent rebuilding efforts have highlighted the need for liquidity, but Duke University business law expert Steven Schwarcz indicated that existing strategies for restructuring that debt may be ineffective.
“The IMF has been the primary provider of liquidity to troubled nations,” he said, “[but] the IMF may not be able, in the future, to provide all of the financing that is needed.”
Schwarcz advocated for a model-law approach — encouraging individual governments to enact a suggested piece of legislation — that he believes will improve on existing debt restructuring practices.
His proposed model law addresses the holdout problem — when one debtor stands in the way of a group settlement — by requiring supermajority voting that can bind dissenting classes of claims and by enabling debtors to aggregate voting beyond individual contracts.
It would also give new lenders priority over existing creditors in order to help debtor states obtain liquidity during restructuring.
The adaptation of a model law “has the potential to solve the problem of the existing stock of sovereign debt contracts,” Schwarcz said.
Speakers at Thursday’s panel also discussed the importance of ensuring that repayment of sovereign debt does not come at the expense of a country’s people.
Tirivangani Mutazu, a senior policy analyst at the African Forum and Network on Debt and Development, said that the IMF has been criticized for insufficient focus on social protection. “We have raised a number of issues with the fund, especially at the national level, in terms of the needs to protect the citizens,” he said. “We have seen, to some extent, that the fund [has] started to listen.”
Similarly, Jubilee USA, which co-sponsored the panel discussion at which Schwarcz and Mutazu spoke, has recently advocated for a moratorium on Caribbean debt until the countries devastated by Hurricane Irma have time to rebuild.
In a September letter to IMF Managing Director Christine Lagarde, Jubilee USA’s leadership asked the fund to cease debt collection until recovery efforts are well under way: “We invite the IMF to implement an immediate moratorium on debt payments for countries severely impacted by the Category 5 storm until they have rebuilt and recovered.”
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