World Bank calls for sovereign debt changes before looming crises

Banknotes in different currencies, including the euro, US dollar, Turkish lira, or Brazilian real, are depicted in Frankfurt, Germany, in this illustration taken on May 7, 2017. The photo was taken on May 7, 2017. Reuters / Kai Fafenbach / Clarification

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LONDON (Reuters) – A senior World Bank official has stepped up calls for changes to sovereign debt laws so that governments have more control when crises hit and must restructure their debt.

World Bank economists estimate that low- and middle-income economies owe a record $9.3 trillion to foreign creditors and that 40 poor countries, and about half a dozen middle-income countries, are either in debt distress or at high risk.

Endermit Gill, Bank Vice President for Equitable Growth, Finance, Institutional and Sovereignty: “With global growth slowing and interest rates rising, the risk of a wave of debt crises is growing – yet the mechanisms available to address them are sorely inadequate.” Debt attorney Lee Buchet said in a blog post.

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They identified four major changes that would improve the effectiveness of the so-called debt relief plan for the G20 Joint Framework launched at the height of the COVID-19 pandemic.

First, the blog’s authors said government bond contracts should state that all creditors have a legal duty to cooperate “in good faith” in the restructuring of sovereign debt.

Western governments traditionally negotiate separately with other lenders such as China when the countries they both lend to have problems. These efforts are also separate from negotiations being conducted by major global investment firms such as BlackRock and Vanguard.

Second, all sovereign debt contracts must specify how much a creditor can collect through litigation outside the common framework, as well as include “class action clauses” that mean all bonds can be restructured as long as the vast majority of bondholders agree.

This in turn would clip the wings of the so-called vulture funds that are trying to hold out and then take governments to court for greater compensation for themselves.

Third, it should be difficult for creditors to seize debt-laden government assets if they acted in good faith. During one of Argentina’s debt crises, one of its navy ships was seized by an American hedge fund while it was in Ghana.

Finally, the authors said that although CACs have been present in many bond contracts issued over the past 20 years, they are not included in syndicated loans that make up a significant portion of developing country debt and such mechanisms should be modified where possible.

“Governments have an urgent public interest in adopting legislation to end this imbalance,” the blog said, noting that legal centers such as New York and London would be critical. “I consider it a long-overdue step to protect their own taxpayers.”

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Mark Jones reports. Editing by David Clark

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