Targeted legal changes could help offset the damage of the debt crisis

This is a key principle of private enterprise: a business that stumbles deep into its debt demands a second chance সুযোগ a chance to “start anew” after a financial crisis. For more than a century, that policy has enabled businesses to take the financial risk they need to succeed. Today, the right to a second chance lies in the corporate bankruptcy law of most leading economies.

Yet the same consumption tendency has been denied to governments – with predictably serious consequences for the poorest citizens of the poorest countries. By the end of 2021, governments in low- and middle-income economies have estimated that $ 9.3 trillion – a record – goes to foreign lenders, mostly Private Creditors and bondholders are scattered across multiple countries. For them, there is no bankruptcy court to ensure a quick and orderly restructuring when the debt crisis is approaching. Instead, they must choose their path through a systematic maze that is governed by strange rules rather than statutes.

Governments have a compelling public interest to legislate to end this imbalance. Consider it a long-winded move to protect their own taxpayers from third-party exploitation – which national legislatures always do.

The time has come to correct imbalances. The risks of the debt crisis are increasing as global growth slows and interest rates rise — and the mechanisms currently in place to address them are deeply inadequate. There is very little time to allow large-scale statutory solutions – such as the sovereign debt restructuring system – that are often defeated by their own ambitions. But only a few legal changes can make a difference in the world, especially if they are combined with other reforms proposed by the World Bank and the International Monetary Fund.

Today, about 40 low-income economies and about half a dozen middle-income economies are either in debt or at high risk. For both types of economies, there is only one way to restructure volatile debt – the Paris Club for middle-income economies and the G-20 general framework for debt treatment for low-income economies. Both processes present a major hurdle: in exchange for debt relief from foreign government creditors, borrowing countries will have to offer equivalent discounts from foreign private creditors on whom they do not have the bargaining power.

Not surprisingly, progress has been frozen. Only three countries – Chad, Ethiopia and Zambia – have sought relief under the Common Framework. More than a year after they applied, little movement occurred. This is consistent with the experience of the G-20’s Debt Service Suspension Initiative (DSSI), which urged borrower countries to secure (but did not require) equal private concessions from private and public lenders. In DSSI, only one “private” creditor participated, but it was only a national development bank that identified itself as a private creditor.

At present in a significant number of developing economies, debt restructuring cannot take place without the full participation of foreign private lenders. Low- and middle-income governments owe more than $ 2 trillion to private creditors প্রায় about five times their debt to public creditors. Most personal loans, moreover, are owed to bondholders who often purchase the right to collect in the secondary market.

Among the bondholders, a small minority are vulture investors – who focus on the distressed debt of governments, buying their bonds at deep discounts with the aim of suing for full payment. These investors have little incentive to participate in debt relief initiatives: to maximize their returns, they hold on until other lenders make a discount এই in the hope that the discount will free up cash from others that enable holdouts to raise the largest possible amount of money. This is the kind of freeriding that hurts all other creditors.

Much of the problem will be solved by providing some legal protection to distressed governments and even to distressed businesses on a regular basis. Legislating them in just a few jurisdictions – for example, New York and London – will make a big difference, considering that almost all external sovereign debt agreements in developing economies are governed by the laws of these financial centers. The Common Framework G a debt restructuring program approved by the G-20 for the 73 poorest countries in the world পারে could be a good place to try one or more of these strategies.

First, specify that all lenders have a legal obligation to cooperate in good faith in sovereign-debt restructuring. The principle of good faith has already been embedded in the legal system of many countries, and it is also a core private-sector policy. It should be codified, noting that creditors have a responsibility to assist in restructuring a common framework when government debt is proven to be sustainable and creditors are invited to participate on comparable terms with other creditors.

The second, Limit how much a creditor can collect in a legal process outside of the Common Framework process. The goal should be to link the maximum amount allowed with the amount recovered by other creditors under the Common Framework. But restrictions should only apply to narrow situations একবার once the structure establishes a formula to ensure equal burden-distribution among lenders and once debt relief is agreed upon by a large portion of lenders.

Third, to control the power of creditors to confiscate the assets of debt-ridden governments that have acted in good faith. Some governments have already moved in this direction. France, for example, passed a law in 2016 that limits the power of French courts to authorize the confiscation of foreign state assets to pay off the debt of a country receiving foreign development assistance. Such an approach could protect sovereign assets even if the court judgment is rendered for a greater amount than is received by other general framework creditors.

Fourth, the retrofit — wherever possible — joint-action mechanism in existing loan agreements. Sovereign bond agreements issued over the last 20 years have increasingly incorporated consolidated action clauses that facilitate restructuring agreements: a decision by a large number of bondholders allows the agreement to prevail even over dissenting bondholders. But not syndicated debt — and these account for a significant portion of the sovereign debt issued by developing economies. The law for adopting such a section All Going forward the sovereign-loan agreement will help fix the problem.

For a long time, governments with the power to fix the inherently flawed global debt-restructuring system have chosen not to do so চে at the expense of their own taxpayers. In a debt crisis, governments inevitably take the back seat to get their money back to private lenders: private lenders pay first and they get about 20 percent more points of their funds back than the government.

Governments have a compelling public interest to legislate to end this imbalance. Consider it a long-winded move to protect their own taxpayers from third-party exploitation – which national legislatures always do.

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