Recent experience illustrates the severe challenges in restructuring external sovereign debt after a default, especially given the multiplicity of creditors. Private creditors accounting for more than 60 per cent of public and publicly guaranteed (PPG) external debt of low and middle income countries (LMICs) have been unwilling to settle for restructuring terms negotiated with bilateral creditors. And even when the possibility of such a settlement arises, the process can be scuttled by one or more hold-out vulture funds that want repayment in full. This is surprising because 96 per cent of the $1.3 trillion worth of sovereign bond debt outstanding at the end of March 2020 included collective action clauses (CACs) in contracts meant to force creditors to the table. The inadequacy of these CACs has triggered efforts to find alternative ways of enforcing debt renegotiation terms. Since almost all developing country sovereign bonds are subject to New York or English law, changes in the relevant laws in these two contexts may assist successful restructuring within a reasonable timeframe. A law currently under discussion in the legislature ofNew York, if passed, would force private creditors to accept the same terms as negotiated with creditor governments. Similarly, in the UK, a House of Commons Committee report has made a case for legislation that would force private creditors to join negotiations over and participate in debt workouts. However, these legislative reforms are facing opposition from private creditors, who argue that such laws would force a retreat of creditors from developing country sovereign bonds as well as raise the cost of any debt that may be provided. This brief examines the legislative changes proposed, assess their adequacy and the obstacles to implementation, and recommend measures and means that would help put in place a framework of law to facilitate and accelerate restructuring in jurisdictions that cover much of developing country debt.
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