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| Sunday, 7 April 2002 |
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US Treasury's Taylor calls for new debt restructuring process The international community should begin now to implement a new decentralised, market-oriented sovereign debt restructuring process, says Under Secretary of the US Treasury John Taylor. "This process is long overdue," he said on April 2 in remarks at the International Institute of Economics in Washington. He added that a more predictable process would reduce restructuring uncertainty, lead to better, more timely decisions and reduce the likelihood of future financial crises. Taylor outlined a US debt restructuring proposal based on a package of new clauses borrowers and creditors would put into debt contracts. The first, he said, would be a majority action clause, allowing a super majority of creditors to agree to the restructuring and preventing a minority from disrupting an agreement. Taylor said that this provision would add predictability to the restructuring process. Currently, many bonds require the consent of 100 per cent of the bondholders to change the financial terms, he said. Second would be a clause describing the process by which creditors and debtors would work together on the restructuring, Taylor said. This could say how the creditors would be represented, what data debtors would have to provide to a creditors' representative and within what time period. The representative, not individual bondholders, could negotiate with a debtor-country and would have the power to initiate litigation, he said. The third clause would describe how the borrowing country would initiate the restructuring, Taylor said. It would include a "cooling" off period between the time a country tells its creditors it wants to restructure and the time the process begins. Bondholders would be prevented from initiating litigation during this period, said Taylor. The Under Secretary for International Affairs said the official sector should provide incentives - preferably financial - to encourage borrowers and lenders to incorporate such clauses into debt contracts. He said that countries including these clauses, for instance, could receive International Monetary Fund (IMF) loans at lower rates. He said this approach is more "practical" than the one suggested by the IMF that would give the Fund more authority in the restructuring process. That centralised option would allow the IMF to "impose its decisions on the process," Taylor said. Taylor said the best way to incorporate the new clauses is on a loan-by-loan basis instead of for an aggregation of loans. Disputes would go through an arbitration process agreed to in the contracts, he added. Taylor noted that sovereign debt restructuring proposal is part of the Treasury Department's overall emerging market strategy, which includes preventing crises, limiting official sector support when countries reach unsustainable debt levels and containing a crisis in one country from spreading to others. "Ideally sovereign debt restructuring would never have to take place because ideally countries would never get into unsustainable debt situations, he said. "But we have a long way to go before we get to that ideal," Taylor added. |
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