Towards a voluntary Code of good conduct for Sovereign Debt Restructuring

The experience of sovereign debt crises in the 1980s and the 1990s has shown that the resolution of crises involved co-operative efforts in which all parties concerned actively participated. With the globalisation of economies, the sophistication of financial techniques, the generalisation of marketable debt instruments and the large diversification of various classes of creditors, an appropriate reshuffling of the overall debt crisis framework appears increasingly necessary. In addition to the strengthening of the International Monetary Fund (IMF) crisis management procedures (e.g. enhancing limits to IMF financing), the international debate has first focused on two approaches for facilitating debt restructuring: the so-called “contractual approach” – based on the generalised inclusion of Collective Action Clauses (CAC) in bond contracts – and the “statutory approach”, i.e. the proposal of a legal international sovereign debt restructuring mechanism (SDRM). While important progress has been achieved in promoting CACs, including their incorporation in recent bond issues of major emerging market countries, the 2003 IMF Spring Meetings concluded that it was not feasible at this stage to move forward to establish the SDRM, while recognising that work should continue on issues that are of general relevance to the orderly resolution of crises. Against this background, the international community and the private sector have expressed interest in developing a non-statutory framework for addressing debt-servicing problems, based on a proposal of a voluntary “Code of Good Conduct” put forward by Governor Trichet. This Code would lay down general principles to be complied with by all stakeholders, provide creditors and debtors with a « roadmap » of the debt renegotiation process and a “tool kit” consisting of a range of instruments (primarily CAC), and procedures regarded by the international community as best practices. The G7 officials are expected to prepare a report on the Code, in consultation with issuers and the private sector by autumn 2003.