© Reuters. FILE PHOTO: The Capitol in Albany, New York, U.S., August 6, 2021. REUTERS/Cindy Schultz/File Photo
By Rodrigo Campos
NEW YORK (Reuters) – Another attempt to streamline the resolution of sovereign debt restructurings is making its way through the New York State legislature, and Wall Street is again taking note.
Below are facts about the proposal and potential ramifications.
WHAT’S THE PROPOSAL?
The sovereign debt stability act blends two proposals that failed to get a floor vote last year and aims to “to provide effective mechanisms for restructuring sovereign and subnational debt”.
The proposal aims to rewrite New York law that covers sovereign debt contracts and is estimated to affect over $850 billion in outstanding debt from emerging markets.
Sovereign defaults could become a bigger issue this year, with principal payments of emerging markets’ sovereign Eurobonds rising to $78.4 billion from $43.6 billion last year, according to JPMorgan estimates.
For lower-rated emerging sovereigns alone, those payments will surge to over $65 billion for this year and next combined, up from just over $8 billion in 2023.
WHAT DOES IT AIM TO ACHIEVE?
Bill 5524A, sponsored by Democrat Gustavo Rivera, aims to strengthen “the role of New York State as a primary location for the issuing and trading of sovereign debt”.
It seeks to reduce systemic risk to the financial system, creditor uncertainty, and lower the social cost of sovereign debt crises.
The bill will effectively limit the return to private creditors at the same level as the United States – if it were involved as an official bilateral creditor – in a pre-established sovereign debt restructuring mechanism, like the Group of 20’s Common Framework.
Alternatively, the bill will allow for an “independent monitor” appointed by the New York Governor in consultation with the Treasury Department to streamline the process of getting creditors and debtors on the same page.
The debtor country could at any point, but only once, change from one option to the other.
WHAT IS THE BILL’S LIKELY PROGRESS?
Many voting procedures and steps lie ahead before the bill could become law.
It needs to be discussed and voted on it committees, smaller group of lawmakers in both chambers of the New York State legislature and – if approved – this process would be replicated by the full chambers. Again, depending on approval, the bill is sent to the governor who can sign or veto.
Any potential veto could be overturned by a two-thirds majority in both houses. Democrats hold such majorities, but both chambers are up for election on Nov. 5.
Neither of the two original proposals from last year made it to a full floor vote in either chamber.
THE BACKGROUND
Countries do not have the type of bankruptcy protections that corporations do, which can result in messy, lengthy restructurings when debt becomes unsustainable.
There have been many proposals to streamline sovereign default processes.
The IMF spearheaded the creation of a sovereign debt restructuring mechanism between 2001 and 2003, which was eventually scrapped.
In 2014, Collective Action Clauses (CACs) were introduced. They are widely considered to have improved the framework of restructurings by reducing the probability of holdout creditors, such as Elliot Management whose infamous 14-year battle concluded in a payday of over $2 billion from Argentina.
Most recently, the G20 pledged to streamline debt treatments through its Common Framework platform, that seeks comparable relief from bilateral creditors such as the Paris Club and China, as well as private creditors. But the initiative has so far failed to accelerate reworks, and private creditors are not formally included.
Similar laws or proposals to the New York state one have emerged in Britain, the other major hub for international debt issuance by emerging economies. However, the ruling Conservative government has rejected a legislative approach.
A law regulating the practices of private creditors dealing with sovereigns in distress is being discussed in Belgium.
THE CONCERNS
The banking trade group Institute of International Finance (IIF) said the passing of the bill could trigger litigation risks, given it would alter existing contracts.
The introduction of legal uncertainty would alter the rights of investors, who might decide to not lend to certain countries, limiting the sources of financing. That could raise borrowing costs, which would go against the spirit of the bill.
New York could also find itself losing business to other states or countries, weakening rather than strengthening its position as a hub for debt issuance. That would entail loss of revenues to the city and the state.
“Any legislation should address the potential adverse impacts on costs and access to finance for sovereign borrowers, as well as on creditor rights,” the IMF said last year of the original proposal.
