A proposal for a new international debt framework (IDF) for the prevention and resolution of debt crisis in middle-income countries

Abstract

"The present lack of a comprehensive framework for sovereign debt restructuring not only generates significant costs but also endangers the stability of the international financial system. In addition, collective action problems involved in the restructuring of sovereign bonds place an obstacle to an orderly and rapid restructuring. The case of Argentina presents a good example for difficulties of a sovereign - but also private-sector stakeholders - may face in the absence of an orderly debt-restructuring mechanism. This paper outlines a possible approach for a new International Debt Framework (IDF) that represents a middle ground between a legally binding insolvency procedure and a voluntary code of conduct. A comprehensive restructuring mechanism could be successful only if it were certain that it would meet with intergovernemental support and leadership on the part of both developed and developing countries. Since the Group of 20 (G20) meetings of finance ministers from developed and developing countries have proved to be a successful forum for analyzing and dealing with instabilities of the international financial system, we propose the G20 as the forum to initiate the establishment of the IDF. With a view to ensuring predictability for international creditors, our proposal also includes a general set of principles similar to those contained in the recent proposal for a code of conduct made by leading sovereign issuers of international bonds and leading private creditors. The IDF should have two functions: crisis prevention and crisis resolution. Permanent debtor-creditor dialogues and transparency and information on emerging-market debt markets are necessary to prevent crises. Under the new IDF this would be ensured throug the creation of a permanent IDF secretariat. All stakeholders would be entitled to nominate members for the secretariat. What is needed to resolve the situation of a financially distressed sovereign is faciliation of an orderly debt-restructuring mechanism. An IDF-Commission (IDFC) would assume this function; it would be made up of representatives from the sovereign debtor, private creditors, multilateral lenders, and sovereign creditors. In contrast to the International Monetary Fund's proposal for Sovereign Debt Resturucturing Mechanism (SDRM), the underlying framework for the IDF would not be statutory. According to the proposal, the IDF Commission would aim for a coherent and comprehensive debt restructuring, propose the amount of financial support required, and outline the economic adjustment path that could guarantee long-term debt sustainability." (author's abstract)