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Decision makers in sovereign debt management
from more than 90 countries (mainly low and middle income) and more than 300
participants were in Geneva for the meetings to take part in panel discussions
on some of the main issues in debt management currently of interest to them. The
themes discussed were domestic debt, the promotion of regional capital markets,
recent developments in Paris Club debt restructuring, collective action clauses
and sovereign debt restructuring mechanisms, statistics reporting, institutional
arragements for public debt management and Basel II. Most of the international
organizations dealing with financial development were also present, including
the UN Financing for Development Secretariat, the World Bank and IMF. Panel
speakers included the Secretary-General of the Paris Club, Standard & Poor's
(creditor rating), Benin's Minister of Finance, the Treasurers of Costa Rica and
of the Philippines, the International Primary Market Association, Bank of
International Settlements, the Macroeconomic and Financial Management Institute
of Eastern and Southern Africa, the Banque de France, Stephany Griffith-Jones,
the World Bank, amongst other speakers from Brazil, Mexico, Slovenia, South
Africa, the UK, Uruguay. Conclusions of the panel discussions of the Conference: See programme of the conference for details on panelists The panel concluded that sound macroeconomic and fiscal policies are a precondition for reaching debt sustianability. There is also a need to go beyond traditional indicators and view debt sustinablity as a holistic process, which needs clearly separated but closely coordinated fiscal, monetary and debt management policies. Domestic debt markets should be developed gradually, starting with the short end of the yield curve. Longer term issues could be placed as investor confidence develops due to prudent macroeconomic management. The panel also agreed that there has to be a balance between investors' portfolio needs and the governments' objective of long term, sustainable market development. Discussion focussed on the benefits of developing regional capital markets as a means for providing an alternative financing mechanism to bank borrowing and as a mechanism that overcomes some of the constraints faced by developing countries when issuing debt instruments in international bond markets. The Latin American and South-East Asian initiatives were used as examples of the benefits of developing regional capital markets, as well as the difficulties faced by countries involved in such initiatives. The main benefits identified by participants were higher liquidity than domestic markets and greater absortive capacity for large issues. However, a number of issues need to be addressed in the future, such as higher transparency, the need for the harmonization of tax laws, improved reporting procedures, the development of new instruments, and the creation of mechanisms for enforcing creditor rights.
The main conclusion emerging from the panel was that the Evian approach, recently endorsed by the G-8 and the Paris Club creditors, represented a promising innovation in debt restructuring. The main innovations were its explicit focus on debt sustainability (i.e. long-term solvency rather than short-term liquidity problems) and the possibility of debt reduction for low and middle-income countries, which previously occured only on an ad-hoc basis. The Evian approach was driven by the demise of the SDRM proposal, the growing importance of private creditors in emerging-market lending and the progress made by the IMF and the World Bank in developing tools for analysing sustainability. The panel stressed that the Evian approach, applicable to all non-HIPC countries, did not introduce any new terms but rather introduces a new case-by-case flexibility which enables debt sustainability through a number of channels including write-offs, extended use of debt swaps, and changes to the cut-off date. Several concerns were raised, including the IMF's role as the ultimate judge of sustainability, the continuing link between the Paris Club and IMF conditionality, the difficulties in establishing a clear methodology for changing the cut-off date, the burden sharing amongst creditors of the Paris Club, and the participation of non-Paris Club creditors. Collective Action Clauses (CACs) and sovereign debt restructuring The main conclusions were that CACs are becoming increasingly common in sovereign bond issues, and that fears of higher spreads and debt costs for emerging-market bonds have not materialized. The panel outlined the work of several bodies, including the private sector, the G-8, the G-20 and the EU in encouraging the use of CACs in the member states' foreign bond issues. A presentation made by the International Primary Market Association, London, favoured this market-based contractual approach over a more statuatory approach and stressed the importance of standardization of the CACs. It addressed concerns about CACs creating multiple fragmented bondholders' committees - which leads to higher restructuring costs for emerging-market issuers. It also highlighted that in cases of restructuring of bonds with CACs, creditors will naturally come together when debtors negotiated in good faith. It was concluded that the demise of the SDRM proposal still left a number of options for sovereign debt restructuring that future research needs to address. These include the use of CACs, various Code of Conduct proposals, and changes to the IMF's access policy. The recent voluntary debt reprofiling of Uruguay was presented as a case of a innovative restructuring based closely on consultations with and best practices deriving from the market. Overall, the panelists felt that conclusions still needed to be drawn from the 80's / 90's debt crises and that more work was needed to establish clear incentives for sovereigns to deal with debt problems before a crisis, and to generate a system that ensures transparency and availability of debt data. The panellists presented the current state of play in the domain of debt reporting. The catalyst for revising debt statistics reporting was the Asian financial crisis of 1997, which revealed limitations in the existing debtor data, particularly with regard to short-term external debt. The presentations covered the following issues:
The main conclusion emerging from the panel
was that the Basel II proposal, while representing an improvement over the
existing Accord, presented several problems from a developing country
perspective. These problems include: (a) punitive capital requirements for
low-grade lenders, leading to higher financing costs for developing countries
and effectively shutting them out of lending markets; (b) the reliance of Basel
II on credit rating agencies, which were viewed as unsuitable for judging
economic conditions in developing countries, especially during crises; (c) the
continued bias towards short-term lending; (d) the need to increase
representation of developing countries on the Basel Committee; (e) the lack of
recognition in Basel II of a diversified developed/developing country portfolio
rather than one exclusively focused on OECD economies; (f) the difficulties in
implementing Basel II by the 2007 deadline given limited supervisory resources.
The points on punitively high capital requirements, credit rating agencies and
short-term lending were seen as especially problematic given their role in
recent emerging-market financial crises, the resulting sharp falls in lending to
developing countries and the need to dampen boom-and-bust cycles in the global
economy. [UNCTAD Homepage] [DMFAS Home] |