International debt crises: new instruments designed to restructure sovereign bond issues

"The frequency with which international financial crises have occurred since the mid-1990s (Asia 1997, Russia 1998, Brazil 1999, and Argentina 2001) points to the need to reform the international financial architecture. The emergence of and the unregulated approaches used to resolve financial crises lead to major welfare losses in the countries affected and constitute a risk to the stability of the international financial system. Instruments tailored to restructuring sovereign foreign debt therefore constitute an essential element of the international financial architecture. However, these mechanisms have not been developed in keeping with the farreaching upheavals which globalization have entailed for the international financial markets. One important feature of the expansion of globalization in the 1990s was a huge rise in and an altered structure of international capital flows. Sovereign bond issues held by heterogeneous groups of creditors assumed an entirely new significance in the 1990s compared to bank credits, which dominated in the 1970s and 1980s. In the case that a sovereign state is forced to default on a bond issue, the heterogeneous makeup of the creditor structure gives rise to serious problems involving coordination and collective action that cannot be resolved without recourse to new instruments. Under current circumstances a restructuring of bonds takes several years, as can be clearly seen in the case of Argentina. In view of the fact that at present most actors in the international financial markets reject an international insolvency procedure, both a voluntary code of conduct and collective action clauses constitute, in the short term, the most important instruments for restructuring sovereign bond issues. In the medium term, though, an insolvency procedure can play an important role here, since a procedure of this kind is a comprehensive instrument well suited to coordinating different creditor groups prior to and during a debt crisis." (excerpt

Monetary policy under currency board arrangements: An necessary flexibility for transition countries?

One of the main disadvantages of currency boards is the rule-based character of this system and the resulting inflexibility in case of shocks, a frequently recurring event in transition countries. Accordingly, central banks under currency board arrangements (CBA) are unable to respond to short-term liquidity changes in the money market. To cushion negative effects of economic shocks on interest rates and on the volatility of banks' liquidity the Estonian and Lithuanian central banks have to a limited extent used various monetary policy tools which, however, have neither undermined credibility of the central banks nor the ultimate goal of price stability. The most important instrument has been reserve requirements. Changes of the reserve requirement base, the reserve requirement ratio and several other rules to hold reserve requirements have affected the liquidity of the banking systems in both countries. The significance of reserve requirements becomes clear when reserve requirements are set in relation to the monetary base. Between 1998 and 2000 in Estonia this ratio even ranged between 40 and 50 percent and Lithuania this ratio amounted to about 20 percent during this period. Other instruments than reserve requirements played a minor role because the volume was small. --Monetary policy,currency board,exchange rate policy,transition economies

A proposal for a new international debt framework (IDF) for the prevention and resolution of debt crisis in middle-income countries

"The present lack of a comprehensive framework for sovereign debt restructuring not only generates significant costs but also endangers the stability of the international financial system. In addition, collective action problems involved in the restructuring of sovereign bonds place an obstacle to an orderly and rapid restructuring. The case of Argentina presents a good example for difficulties of a sovereign - but also private-sector stakeholders - may face in the absence of an orderly debt-restructuring mechanism. This paper outlines a possible approach for a new International Debt Framework (IDF) that represents a middle ground between a legally binding insolvency procedure and a voluntary code of conduct. A comprehensive restructuring mechanism could be successful only if it were certain that it would meet with intergovernemental support and leadership on the part of both developed and developing countries. Since the Group of 20 (G20) meetings of finance ministers from developed and developing countries have proved to be a successful forum for analyzing and dealing with instabilities of the international financial system, we propose the G20 as the forum to initiate the establishment of the IDF. With a view to ensuring predictability for international creditors, our proposal also includes a general set of principles similar to those contained in the recent proposal for a code of conduct made by leading sovereign issuers of international bonds and leading private creditors. The IDF should have two functions: crisis prevention and crisis resolution. Permanent debtor-creditor dialogues and transparency and information on emerging-market debt markets are necessary to prevent crises. Under the new IDF this would be ensured throug the creation of a permanent IDF secretariat. All stakeholders would be entitled to nominate members for the secretariat. What is needed to resolve the situation of a financially distressed sovereign is faciliation of an orderly debt-restructuring mechanism. An IDF-Commission (IDFC) would assume this function; it would be made up of representatives from the sovereign debtor, private creditors, multilateral lenders, and sovereign creditors. In contrast to the International Monetary Fund's proposal for Sovereign Debt Resturucturing Mechanism (SDRM), the underlying framework for the IDF would not be statutory. According to the proposal, the IDF Commission would aim for a coherent and comprehensive debt restructuring, propose the amount of financial support required, and outline the economic adjustment path that could guarantee long-term debt sustainability." (author's abstract

Internationale Verschuldungskrisen: neuere Instrumente zur Umstrukturierung von Staatsanleihen

"Die Häufigkeit von Finanzkrisen seit Mitte der 90er Jahre (Asien 1997, Russland 1998, Brasilien 1999 und Argentinien 2001) verweist auf die Notwendigkeit einer Reform der internationalen Finanzarchitektur. Die Entstehung und die ungeordnete Bewältigung von Finanzkrisen führt zu hohen Wohlfahrtsverlusten in den betroffenen Ländern und zur Gefährdung der Stabilität des internationalen Finanzsystems. Instrumente für eine geordnete und kostengünstige Umstrukturierung von Auslandsschulden souveräner Staaten stellen daher wesentliche Elemente der internationalen Finanzarchitektur dar. Allerdings wurden diese Mechanismen bisher nicht entsprechend der tief greifenden Umwälzungen auf den internationalen Finanzmärkten infolge der Globalisierung weiterentwickelt. Ein wesentliches Merkmal der zunehmenden Globalisierung in den 90er Jahren war der enorme Anstieg und die veränderte Struktur der internationalen Kapitalflüsse. Staatsanleihen, die von einer großen heterogenen Gläubigergruppe gehalten werden, haben in den 90er Jahren gegenüber den bis dahin vorherrschenden Bankkrediten erheblich an Bedeutung gewonnen. Im Fall der Zahlungsunfähigkeit eines Landes entstehen wegen der heterogenen Gläubigerstruktur gravierende Koordinations- und Kollektivprobleme. Wie der Fall Argentinien zeigt, dauert eine Umstrukturierung von Staatsanleihen unter den gegenwärtigen Bedingungen mehrere Jahre. Kurzfristig stellen ein freiwilliger code of conduct und Kollektivklauseln die wichtigsten Instrumente zur Umstrukturierung von Staatsanleihen dar, weil ein internationales Insolvenzrechtsverfahren zur Zeit von den meisten Akteuren auf den internationalen Finanzmärkten abgelehnt wird. Mittelfristig allerdings kann das Insolvenzrecht eine wichtige Rolle spielen, da es ein wichtiges umfassendes Instrument ist, um verschiedene Gläubigergruppen und verschiedenen Schuldnerklassen vor und während einer Verschuldungskrise zu koordinieren." (Textauszug

Scaling up Sustainable Finance to Enable Sustainable Economic Recoveries

To enable sustainable recoveries from Covid-19 and meet the goals set out in the Paris agreement and in the Agenda 2030 for Sustainable Development, the global financial system needs to be rewired. Finance needs to properly account for sustainability risks and impacts, and it needs to be aligned with internationally agreed sustainability goals. To scale up sustainable finance and align all financial flows with climate and sustainability goals, this policy brief makes ten recommendations for the G7: (1) Intensify efforts to develop, align and implement science-based sustainable finance taxonomies across the G7. (2) Make disclosures of climate-related risks and opportunities mandatory for all publicly quoted companies, large private companies, and supervised financial institutions and introduce a harmonised standard across the G7. (3) Make the publication of net-zero transition plans mandatory for all publicly quoted companies, large private companies, and supervised financial institutions. (4) Introduce and advance mandatory climate stress testing. (5) Adjust prudential frameworks to account for climate-related and other environmental risks. (6) Decarbonise the portfolios and operations of all public financial institutions and central banks. (7) Enhance the role of national development banks (NDBs) and explore options for creating new NDBs to scale up financing for the SDGs. (8) Harness the potential of digital finance to scale up sustainable finance and investment and strengthen citizen-centric finance. (9) Promote the issuance of sustainability-linked and just transition bonds. (10) Scale-up sustainable and climate finance for developing countries

Addressing the Debt Crisis in the Global South: Debt Relief for Sustainable Recoveries

A debt crisis is looming in the Global South. High levels of public debt service and insufficient fiscal and monetary space are threating recoveries and impeding much-needed investments in climate resilience and the Agenda 2030. This policy brief makes seven recommendations for the G7 to address the debt crisis in the Global South and provide all countries with the opportunity to invest in sustainable recoveries: (1) Reinforce efforts to increase transparency of public and private sovereign debt. (2) Push a reform of the International Monetary Fund (IMF) and World Bank’s Debt Sustainability Analysis (DSA) to fully include climate and sustainability risks and investment needs. (3) Encourage the IMF to create an option for all sovereign debtors to request an updated DSA as a basis for negotiations with its public and private creditors. (4) Create legal safeguards for debt restructurings and limiting opportunities for holdouts to derail negotiation processes and outcomes. (5) Increase incentives for private creditor participation in debt reprofiling and restructuring, respecting the principle of comparable treatment of creditors. (6) Initiate a dialogue with sovereign debtor groups representing climate-vulnerable nations. (7) Assure policy coherence by fostering the alignment of new debt issuance with the climate and sustainability targets

Developing Local Currency Bond Markets for Long-term Development Financing in Sub-Saharan Africa

This article discusses the role that local currency bond markets (LCBMs) can play in the long-term financing of sustainable development of Sub-Saharan African (SSA) economies and presents an empirical analysis of the factors which may hinder or promote the development of such markets in SSA. Using a new dataset for 27 SSA countries, our findings support earlier research on SSA and other regions, showing that LCBM development is related to country size, larger banking systems, greater trade openness and better regulatory frameworks and the rule of law. Foreign investor participation broadens the investor base and can give a boost to LCBM development, yet it may also increase volatility of international capital flows. Hence, with view to the experience of emerging economies in other regions, capital market liberalisation should be pursued only very cautiously and in pace with solid financial and institutional development