Working Paper: CEPR ID: DP4717
Authors: Richard Portes
Abstract: The Paper sets out the principles that should underlie sovereign debt restructuring. It argues for a rules-based approach to achieve private sector involvement in restructuring. The rules must operate, however, in the context of an appropriate institutional framework with appropriate incentives. The markets cannot and will not create these institutions without some official intervention. The Paper discusses why intervention in the form of a Sovereign Debt Restructuring Mechanism has been shelved. It goes on to consider a new institutional framework, with a permanent bondholders? committee and collective action clauses (CACs) in bond contracts. It stresses the need for uniformity in CACs. After interpreting the views of market participants on CACs, the Paper concludes with an argument for official intervention to make CACs universal.
Keywords: Collective Action Clauses; Financial Crises; Sovereign Debt
JEL Codes: F33; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of structured framework for sovereign debt restructuring (F34) | disorderly workouts (Y80) |
| disorderly workouts (Y80) | increased pressure on IMF and G7 for bailouts (F65) |
| absence of structured framework for sovereign debt restructuring (F34) | increased pressure on IMF and G7 for bailouts (F65) |
| rules-based approach to debt restructuring (including CACs) (F34) | facilitate private sector involvement (L33) |
| rules-based approach to debt restructuring (including CACs) (F34) | improve outcomes for debtors and creditors (G33) |
| establishment of a permanent bondholders committee (G33) | manage negotiations (C78) |
| establishment of a permanent bondholders committee (G33) | mitigate collective action problems (D70) |
| establishment of a permanent bondholders committee (G33) | more orderly debt restructurings (G33) |