Sovereign Debt Restructuring
A Reply By Kunibert Raffer *
Congratulations on your very interesting paper on sovereign debt restructuring in the Journal of Restructuring Finance,
which I have just read. I am fully agreed with most points you make, such as that the problem of disruptive litigation has been exaggerated. In my view this was an attempt to
support the argument that a change of the Articles of Agreement would be necessary, a proposal reflecting institutional self-interest in an inelegant way. Like you I think
that shelving the SDRM was a decision one should agree with as the SDRM was unfair to nearly anyone but the IMF.
I am also fully agreed that any analogy between sovereigns
and firms has its limits. Thus, I am all the more surprised to see that you only discuss Chapter 11 (of Title 11 USC) , but not Chapter 9 (municipal insolvency), which would be much
more readily applicable to sovereign debtors. I feel that you might be interested in a Conference at UNCTAD’s DMFAS last year http://r0.unctad.org/dmfas/meetings1103.htm that also deals with the present state of the discussion on reforming debt restructuring. Please allow me to refer to my paper there as a source for my Chapter 9 proposal, as well as to my own
homepage, small as it is in comparison with the famous and useful Roubini homepage. For your convenience I am also attaching this paper.
Where I strongly disagree is the role of the IMF. Its
assessments of sustainability have not been helpful so far – to put it politely – and I doubt that “realistic expectations” and realistic agreements are to be expected, as you hope.
Over decades too optimistic forecasts have inflicted damages on member countries, rendering strategies based on such forecasts, especially debt reductions, useless. Recently even
the IMF (in a document authored jointly with IDA: "Debt Sustainability in Low-Income Countries - Proposal for an Operational Framework and Policy Implications", February 3, 2004) admitted:
"past experience suggesting a systematic tendency toward
excessive optimism ... a common theme behind the historical rise in low-income countries’ debt ratios was that borrowing decisions were predicated on growth projections
that never materialized ... analysis of projections made by Fund staff over the period 1990-2001 suggests a bias toward over-optimism of about 1 percentage point a year in
forecasts of low-income country real GDP growth. The bias in projecting GDP growth in U.S. dollar terms, however, was considerably larger, at almost 5 percentage points a year."
Findings by the GAO corroborate this scepticism. Therefore
there is a need to change – sustainability should be estimated differently, during sovereign insolvency procedures, as my paper suggests.
I also fear that the more active role of the public sector you advocate might lead to unfair treatment of private creditors
who would then be expected to take larger haircuts to bail-out multilaterals. This was one of my main arguments against the SDRM as well (please see my paper for the G24,
link via my homepage. I am not attaching this one to avoid flooding you out of the blue).
Let me repeat that I enjoyed reading your paper very much
and that I found it very stimulating – both the many parts I agree and the few, yet important points, where I do not. Last but not least I should like to take this opportunity to thank
Mr Roubini for his very useful homepage, which I visited repeatedly in the past.
With best regards
Department of Economics, University of Vienna
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