After nearly two decades of relative calm, a storm of sovereign debt default looms. Mozambique, Lebanon, Ecuador, Sri Lanka, Suriname, Belize, Russia, Ukraine and Zambia have defaulted or restructured in the past few years, and other countries have identified Already a high risk of restructuring this year and next.
Sovereign debt can be defined as “the bonds that the state issues in foreign currency, such as that Egypt issues bonds in dollars or euros to finance national projects.”
The American Financial Times reported that the basic assumption of almost all sovereign debt these days is that the loans will not be paid in full but will be rescheduled;
As the nominal balance of debt tends to increase over time, and quick loans are replaced by new ones as they mature, so a crisis can quickly arise, and it is impossible to borrow new money.
Suppose a country runs out of money, but wants to remain part of the global financial system, it will need to restructure its obligations, and it may already have defaulted on a coupon, and even if it does not default contractually, it will do so under the pressure of the bad debt exchange, and it will be classified The outcome is defined as a sovereign debt default regardless of the type of default or the severity of the outcome.
Defining the problem
The paper talked about debt restructuring that mainly revolves around allocating the economic costs to a person, while countries want the burden of adjustment to fall on external creditors, and creditors want to burden taxpayers with this burden, and the problem lies in allocating resources and determining why the debt is unsustainable and to any degree.
The first step in fixing the debt dilemma is to identify the problem:
Chronic low growth
Commodity prices drop
No export sector
bankrupt financial sector
debt maturity structure
Having a large stock of debt
Undisclosed hidden religion
Debt is manageable at low interest rates but interest rates are high now and loan servicing is a financial issue
The second step is to find out the type of debt that the state will bear
:
Is the debt external?
And what kind?
What is the share of domestic debt?
If the debt is governed by local law, it is easier to restructure legally, but if all the sovereign debts are owned by the financial system, the restructuring may cause a local financial crisis that makes everything worse, and most of the obligations may not be directly in the books of the government but are guaranteed state-owned companies that need To be part of the restructuring, any preliminary analysis has to answer these questions.
IMF and restructuring
According to the paper, the IMF can do debt sustainability analysis and lend credibility to the macroeconomic figures;
The fund performs balance-of-payments and stock-debt analysis, among other things, and can provide temporary financing if there is a reliable way to make debt sustainable.
The downside is that IMF programs often come with conditions such as “reforms” that a country may not find attractive as there is no specific process for sovereign debt restructuring, but the actors are usually similar and so are the tools involved. The debt to be restructured and the debt to be disposed of.
The process depends - according to the newspaper - on the type of debt borne by the state and its creditors;
It is a good idea to start where the best deal can be obtained and negotiations with bilateral creditors can occur between politicians or at bureaucratic levels.
There are generally two ways of dealing with trade creditors:
Either consult the creditor through an advisor who will report to the country or the International Monetary Fund.
Or negotiate with creditor committees made up of the biggest lenders, and that may make other creditors comfortable because it's the best deal on the table.
The newspaper pointed out that the first perpetrators:
The borrower, the sovereign country is a unique debtor, it is very difficult to force a country to do anything, there is no sovereign bankruptcy law, there is no way to solve the problem of bad debts, seizing state assets is very difficult, what the state enjoys is its reputation and desire to Be part of the global community, and countries are supposed to pay their debts to remain part of this global community.
Creditors, whose importance lies in the fact that they lend money but on the other hand they do not vote.
So creditors are already facing each other if one or more classes of debt are excluded from a potential restructuring, so it is a zero-sum game, and oftentimes the main opponent of the creditor is not so much the debtor as the other creditors are.
There are also major creditors, usually multilateral institutions, such as the International Monetary Fund, the World Bank and some development banks, which often have a favorable creditor status.
Creditors can be bilateral lenders, banks, bondholders, business creditors, households or state entities, and each creditor tries to talk about the capital structure.
Legal aspects
The newspaper pointed out the need for legal analysis to know the tactical approach;
International law is difficult to apply, but legal analysis still plays an important role in the world of sovereign debt today, mainly because most debt contracts are governed by New York law or English law.
The first step is to know the amount of debt that represents the domestic law that is easy to deal with and the amount of debt that is dealt with according to foreign law.
Then, it can be seen how many bonds contain outdated equivalent clauses, what type of class action clauses govern the bonds, if some loans contain exotic clauses, and if the total debt is litigious.