A law soon to be passed in New York State would force commercial creditors, including bondholders, to provide the same relief as lender governments when developing countries restructure their sovereign debt.
The lenders say it would streamline debt rescheduling – agreements between lenders and borrowers to renegotiate terms after a default – that have been dragging on for months or years in countries like Zambia and Sri Lanka.
It would also prevent “holdout” or “vulture” creditors from pursuing lengthy lawsuits to get a better deal than other lenders.
But his opponents say the billwhich supporters hope will be passed into law before the state assembly term expires on June 8 is misleading and will have the opposite effect of its intended effect.
They say it will make it more expensive for developing countries to raise finance in international capital markets and open the door to a deluge of legal challenges.
Progress will be closely monitored in the UK where a parliamentary committee has called for legislation to enforce private creditor participation in debt restructuring. Almost all developing country government bonds are issued under New York or English law.
“This bill is badly needed. We have seen that when private creditors stood their ground and refused to come to the table during the pandemic,” said Eric LeCompte, head of Jubilee USA, an NGO campaigning for debt relief for poor countries.
Outside the state assembly in Albany, New York, LeCompte said “hundreds” of supporters were there to push the bill through before recess, against the opposition of “vulture funds pouring millions of dollars to try and kill it.”
Critics of the bill say the effort to force commercial lenders to restructure will backfire, despite the strong case for laws to prevent creditors from disrupting restructuring that could stop defaulting countries from re-entering the market for years.
They say it has two serious flaws.
First, investors, typically pension funds and other large institutions, will be less willing to buy government bonds from developing countries in both the primary and secondary markets, making it more difficult and expensive for them to finance their development.
Second, its ill-defined terms and scope will invite litigation by both the issuing countries and their creditors.
Leland Goss, general adviser to the International Capital Markets Association, said that while the bill is well-intentioned, it would “hurt the governments that the proposals are supposed to help”.
Deborah Zandstra, of law firm Clifford Chance, said the drafters of the bill need to rethink. “If I were them, I’d push it over to the next session and do some market consultation.”
She said the bill or something like it could serve a useful purpose if it made it more difficult for tenacious investors to gain an advantage over conventional bondholders.
Lawsuits brought against Argentina by holdouts after it defaulted on $80 billion in debt in 2001 were not resolved until 2016.
Several distressed debt investors earned multiples of the price they paid for the country’s bonds after more than 90 percent of creditors accepted 30 percent of their face value.
But Zandstra argues that this issue has largely been resolved through class action clauses, widely used in government bond contracts since 2014, making it difficult for a minority of creditors to block a majority-accepted deal.
An IMF working paper found that of the $1.3 trillion in foreign-law government bonds outstanding as of March 2020, only 4 percent had no class action clauses.
If the goal of the bill is to force conventional bondholders to go with developing countries in debt distress, then that problem doesn’t exist, Zandstra said. If that’s the motivation, it’s misplaced.”
Debt campaigners and many others, including David Malpass, who stepped down as World Bank president this month, have criticized bondholders and other commercial creditors for not participating in the G20 debt suspension initiative launched at the start of the pandemic.
This allowed 48 of the 73 eligible low-income countries to defer $12.9 billion in repayments to foreign governments between May 2020 and December 2021.
At least three of the 48 requested private creditors to defer payment under the scheme, two of which – Zambia and Chad – defaulted or were restructured shortly afterwards. The rest declined for fear of damaging their creditworthiness and increasing their borrowing costs or losing access to the market altogether.
The G20 follow-up initiative, known as the Common Framework, requires participating countries to seek help from private lenders similar to what they first receive from bilateral creditors.
But the initiative has gained little traction and only four countries have signed up: Zambia, Ethiopia, Chad and Ghana.
Kevin Daly, director of investment at asset manager Abrdn and a member of a committee of investors holding defaulted bonds issued by Ghana, said bondholders were quick to act.
But they were only able to do so after bilateral lenders, in many cases dominated by China, agreed on an outline agreement. The Asian nation is increasingly eclipsing the so-called Paris Club of mainly Western governments as its main source of loans.
“We’re willing to sit down, we’re willing to get a haircut, and to say we’re not is completely disingenuous,” he said.
This article has been corrected to clarify that at least three, if not none, of the 48 low-income countries that deferred repayments to foreign governments under the G20 Debt Suspension Initiative also asked private creditors to defer repayments in the framework of the scheme.