In order to give countries greater authority when crises occur and they must restructure their debt, a senior official at the World Bank has increased calls for reforms to the laws governing sovereign debt.
According to World Bank researchers, low- and middle-income nations owe foreign creditors a record $9.3 trillion, and 40 poor countries and roughly six middle-income ones are either in debt trouble or are highly likely to enter it.
“As global growth fizzles and interest rates surge, the risk of a spate of debt crises is rising – and yet the available mechanisms for tackling them are deeply inadequate,”
They outlined four key changes that would improve the effectiveness of the so-called Common Framework debt relief plan the Group of Twenty (G20) rich nations launched at the height of the COVID-19 pandemic.
Western governments traditionally negotiate separately with other lenders such as China when countries they both lend to run into trouble. Those efforts are also separate from negotiations by big global investment firms such as BlackRock and Vanguard.
Second, all sovereign debt contracts should limit how much a creditor can collect through lawsuits outside the Common Framework and, in addition, include “Collective Action Clauses” which mean all bonds can be restructured as long as the vast majority of bondholders have agreed.
That in turn would clip the wings of so-called vulture funds that try to hold out and then take governments to court to score a bigger payout for themselves.
Third, it should be made harder for creditors to seize the assets of a debt-distressed government if it has acted in good faith. During one of Argentina’s debt crises, a U.S. hedge fund seized one of its naval ships when it was in Ghana.
“Governments have a compelling public interest to adopt legislation to end this imbalance”
