A senior official at the World Bank has called for changes in sovereign debt laws so governments have more control when crises occur and they have to restructure their debt.
World Bank economists estimate that low- and middle-income economies owe a record $9.3 trillion to foreign creditors and that 40 poor countries and about half a dozen middle incomes are either in debt distress or at a high risk of it.
As global growth falls and interest rates increase, the risk of a spate of debt crises is rising - and yet the available mechanisms for dealing with them is deeply inadequate, Indermit Gill, the Bank's vice president for equitable growth, finance and institutions, and sovereign debt lawyer Lee Buchheit said in a blog https: www.brookings. They outlined four changes that would improve the effectiveness of the so-called Common Framework debt relief plan the Group of Twenty G 20 rich nations launched at the height of the COVID 19 epidemic.
The blog authors said that all creditors should have a legal duty to cooperate in good faith in sovereign-debt restructurings.
Western governments typically negotiate separately with other lenders, such as China, when countries they lend to run into trouble. Those efforts are separate from negotiations by big global investment firms such as BlackRock and Vanguard.
As long as the vast majority of bondholders have agreed, all debt contracts should limit how much a creditor can collect through law suits outside the Common Framework.
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It should be made harder for creditors to take the assets of a debt-distressed government if it has acted in good faith. A U.S. hedge fund seized one of its navel ships when it was in Ghana during one of Argentina's debt crises.
The authors said that while collective action clauses are in many bond contracts issued over the past 20 years, they are not included in syndicated loans which make up a large part of developing country debt and should be retrofitted wherever possible.
The blog said that legal centres such as New York and London would be crucial because governments have a compelling public interest to adopt legislation to end this imbalance. It is a long overdue step to protect their own taxpayers.