Emmanuel Tumusiime-Mutebile: Global perspectives on sovereign debt
restructuring
Comments by Mr Emmanuel Tumusiime-Mutebile, Governor of the Bank of Uganda,
Kampala, 7 August 2014.
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I would like to thank Mr. Otieno for a very insightful and thought provoking paper. As
Mr. Otieno noted, the HIPC and MDRI debt relief initiatives had brought down external public
debt levels substantially by the mid-2000s in those African countries which had access to
debt relief. At that time, the recipients of external debt relief agreed to curtail future external
borrowing, especially on non-concessional terms, usually under the auspices of an IMF
programme. However, as pointed out by Mr. Otieno, since the mid-2000s, sovereign
borrowing has accelerated, and now includes borrowing on semi concessional and even fully
commercial terms. Three factors lie behind the increase in external borrowing by African
countries. First, many countries have large needs for public investment which cannot be
financed without increased borrowing. Secondly, in real terms, the economies of SSA were
more than twice as large on average in 2013 than they were in 2000, because of annual real
growth of GDP averaging 5.6 over this period. This growth has raised the capacity of African
economies to service debts and thus raised the amount of public debt that they can safely
contract without risking running into problems of debt sustainability. Finally, because of
developments within global capital markets, notably the very low interest rates and abundant
liquidity, some African countries are now able to access commercial debt at reasonably
attractive rates.
Nevertheless, we should not be complacent about the dangers of too large and rapid a
buildup of sovereign debt. It would be unwise to ignore the possibility that African countries will
never again have to seek debt relief in the future. As such we need to think very carefully
about the modalities through which sovereign debt relief might be applied in circumstances
where sovereign debt is very heterogeneous, comprising traditional concessional debt from
multilateral financial institutions, semi concessional debt from official bilateral and multilateral
lenders, and commercial debt which includes both borrowing from banks and sovereign bond
issues.
As the recent dispute between the Argentine Government and vulture funds which had
purchased Argentine sovereign debt at a discount but now demand repayment in full, has
reminded us, the world lacks an effective framework for ensuring that, in cases where
Governments cannot realistically service their debt in full, their sovereign debt can be written
down in a comprehensive and equitable manner which applies to all creditors. This lack of an
effective debt restructuring system at the international level encourages free riders such as
vulture funds to exploit the generosity of other creditors who provide debt relief, which in turn
reduces the incentives on all creditors to accept a reduction in their claims on the sovereign.
Because of the growing diversity in the creditor base of African sovereign borrowers,
coordinating debt relief among creditors and enforcing compliance will become ever more
difficult.
Mr. Otieno discusses the two alternative approaches which have been put forward to
restructure sovereign debt in an orderly manner in the event that the debtor faces debt
distress: the Statutory Approach and the Contractual Approach.
I concur with Mr. Otieno that the Statutory Approach, such as the Sovereign Debt
Restructuring Mechanism (SDRM) which was proposed for the IMF in 2001 has many
advantages. The SFRM would have been a form of international bankruptcy regime. In
principle it would meet the needs of developing countries for a comprehensive mechanism
for restructuring their debt in an orderly manner if the need arises. I think the concerns
expressed by some opponents of the SDRM, that it will encourage moral hazard among
debtors, are overblown. Sovereign borrowers do not lightly seek debt relief, because they
understand the consequences for their reputation and thus for future access to, and cost of,
finance. Moreover, the fact that the terms of any debt relief provided under the SDRM would
be determined by a Sovereign Debt Dispute Forum comprising reputable and independent
arbitrators should ensure that debt restructuring is fair to both creditors and debtors.
Unfortunately, it appears unlikely that the SDRM or anything like it which has statutory
authority will ever get off the ground, because it would require changes to the IMF's Articles
of Agreement. There is entrenched opposition to such changes from major shareholders of
the IMF such as the United States.
The Contractual Approach, such as that embodied in collective action clauses (CAC)
inserted into bond contracts is more practical. It is decentralized and market based and does
not require political agreement at the international level for statutory changes. As Mr. Otieno
notes, bonds with collective action clauses have already been issued by some emerging
markets. CACs can solve the collective action problem for those bonds to which they apply,
but the mere fact that a bond contains a CAC does not necessarily mean that a majority of
bondholders will vote to offer sufficient debt relief to ensure that the debtor can return to debt
sustainability.
Moreover, the relevance of bonds which include CACs for African sovereign borrowers may
be rather limited. International sovereign bond issues are still a relatively minor component of
the public debt of most African countries, and many countries on the country have yet to
issue any sovereign bonds on international markets. The majority of African sovereign debt is
still held by multilateral financial institutions. As such the multilateral financial institutions will
have to take the lead in offering debt relief, but this then gives the private sector bond
holders less of an incentive to agree collectively to offer any substantial debt relief. In effect,
the smaller is the share of sovereign bonds in total public debt, the greater is the incentives
facing private sector bond holders to free ride on the generosity of the multilateral financial
institutions which hold the bulk of the debt.
I agree, therefore, with Mr. Otieno that the CACs cannot be seen as a substitute for a
coherent and comprehensive international debt restructuring framework, however distant the
prospect of such a framework is. One possible advance on the CAC which maintains the
Contractual Approach to the problem might be to issue Contingent Convertible debt;
sometimes called sovereign cocos. These are bonds which include a clause to allow for the
automatic rescheduling of debt repayments in the event that the debtor seeks official
assistance (e.g. from the IMF) because of debt problems. The drawback with sovereign
cocos is that they would only allow for a rescheduling of debt repayments rather than a
reduction in debt, and so may not provide sufficient debt relief to bring about a permanent
resolution of the debt problem.
Mr. Otieno concludes by asking the question "Which Way for Africa?". He argues that the
natural choice for Africa should be the statutory approach, given that multilateral and bilateral
creditors hold most of Africa's sovereign debt. I agree that a statutory approach is preferable,
but as I have already explained, I doubt whether a comprehensive international framework,
which can cover all classes of creditor and enforce compliance by them all, will ever be put in
place, given the obstacles it would face from major powers. The way forward will thus
probably involve innovations at the global level for coordinating debt relief among multiple
types of creditors which fall short of having full statutory authority throughout the world
- such as the proposed Sovereign Debt Adjustment Facility in the IMF - combined with the
more widespread adoption of contractual mechanisms to provide contingent debt relief linked
to the provision of official assistance.