World Bank calls for sovereign debt changes ahead of looming crises

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Banknotes of different currencies including euro, US dollar, Turkish lira or Brazilian reais are pictured in Frankfurt, Germany in this illustration photo taken May 7, 2017. Picture taken May 7 2017. REUTERS/Kai Pfaffenbach/Illustration

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LONDON, June 28 (Reuters) – A senior World Bank official has stepped up calls for changes to sovereign debt laws so that governments have more control in a crisis 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 over-indebtedness, i.e. at high risk.

“As global growth falters and interest rates rise, the risk of a series of debt crises increases – and yet the mechanisms available to deal with them are deeply inadequate,” said Indermit Gill, Vice President of the Bank for Equitable Growth, Finance and Institutions and Sovereign Debt. said debt lawyer Lee Buchheit in a blog post.

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They outlined four key changes that would improve the effectiveness of the so-called Common Framework debt relief plan that the Group of Twenty (G20) launched at the height of the COVID-19 pandemic.

First, the blog’s authors said government bond contracts should stipulate that all creditors have a legal obligation to cooperate “in good faith” with sovereign debt restructurings.

Western governments traditionally negotiate separately with other lenders such as China when the countries they both lend to run into difficulties. These efforts are also separate from trading conducted by large global investment firms such as BlackRock and Vanguard.

Second, all sovereign debt contracts should limit the amount a creditor can recover through legal action outside the common framework and, in addition, include “collective action clauses” which mean that all bonds can be restructured as long as the vast majority of bondholders agree.

This in turn would clip the wings of so-called vulture funds that try to hold on and then sue governments to get a bigger payout for themselves.

Third, it should be more difficult for creditors to seize the assets of an over-indebted government if it acted in good faith. During one of Argentina’s debt crises, a US hedge fund seized one of its navel ships while in Ghana.

Finally, the authors stated that while collective action clauses feature in many bond contracts issued over the past 20 years, they are not included in the syndicated loans that constitute a large part of the debt of developing countries and that these mechanisms should be adapted to the extent possible.

“Governments have a compelling public interest in passing legislation to end this imbalance,” the blog said, saying legal hubs such as New York and London would be crucial. “Consider this a long overdue step to protect their own taxpayers.”

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Reporting by Marc Jones; Editing by David Clarke

Our standards: The Thomson Reuters Trust Principles.

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