/ 1 January 2002

Group hammers out emerging market debt plan

A group of private sector financial players on Tuesday laid out a new plan to combat Argentina-style meltdowns in emerging economies, calling for an increased use of bond clauses designed to ease the debt restructuring process.

The plan, signed by a broad group of financial institutions, including the Emerging Markets Creditors Association and The Bond Market Association, also said improved financial data and early, ongoing dialogue between debtors and creditors could help streamline the management of crises.

While the plan was largely in line with a proposal made by the Group of Seven industrialised nations in April, the private sector group sided against the G7’s efforts to create an authority to oversee the details of sovereign debt restructurings.

”We think it would create huge uncertainties and very significant market disruptions and it may create perverse incentives — and it would be terribly difficult to price,” said Mark Siegel, EMCA vice chairman and an emerging market fund manager at DB Babson & Co.

The group said in a statement that it prefers voluntary approaches aimed at restoring investor confidence and renewed market access.

At the same time, it said so-called collective action clauses could add a ”useful element of suppleness” to the system. Collective action clauses would mean a majority of creditors holding a bond would dictate the terms of a restructuring.

US Treasury Undersecretary for International Affairs John Taylor said this week he is keen to get collective action clauses in place as quickly as possible.

Still, the private sector group warned that an across-the-board implementation of supermajority in all outstanding debt — instead of instrument by instrument — would likely make restructuring more cumbersome.

On the transparency issue, the group said creditors should be given information on a country’s possible claims on its international reserves as part of the restructuring process.

The group also said that early talks between a debtor and key creditors could lead to measures that would avert full-blown debt defaults.

”In fact, successful efforts at this stage can address most crises in an efficient manner and reduce significantly the number of cases requiring comprehensive sovereign debt restructuring,” it said.

The topic of emerging market crisis prevention has gained traction in recent months as Argentina continues to reel from its disastrous currency devaluation and default.

The private sector group also includes the Institute of International Finance, an umbrella group of international financial institutions; the International Primary Market Association; the Securities Industry Association; and EMTA, a trade group for the emerging markets investment community. – Reuters