Sovereign Debt Crises and Restructurings: Is There a Better Way? - - PowerPoint PPT Presentation

Sovereign Debt Crises and Restructurings: Is There a Better Way?

Kenneth Rogoff, Harvard University Presentation to United Nations General Assembly New York City, October 25, 2012

Since advent of debt, sovereign debt crises have been a recurring problem

Kenneth Rogoff, Harvard University

Kenneth Rogoff Harvard 3

Sovereign Default Cycles 1800‐2009

Sove vereign E Exte ternal D Debt: 1800-2006 1800-2006 Coun untries i in D Defaul ult Wei Weighted ed by by Th Thei eir Sh r Share o are of Wo Worl rld Inco Income

5 10 15 20 25 30 35 40 45 1 8 1 8 7 1 8 1 4 1 8 2 1 1 8 2 8 1 8 3 5 1 8 4 2 1 8 4 9 1 8 5 6 1 8 6 3 1 8 7 1 8 7 7 1 8 8 4 1 8 9 1 1 8 9 8 1 9 5 1 9 1 2 1 9 1 9 1 9 2 6 1 9 3 3 1 9 4 1 9 4 7 1 9 5 4 1 9 6 1 1 9 6 8 1 9 7 5 1 9 8 2 1 9 8 9 1 9 9 6 2 3

Ye Year

Perc rcent o

• f w

world I rld Income

All countries in sample Excluding China Reinhart-Rogoff, THIS TIME IS DIFFERENT

Is this time different?

The UN has long played a significant role in sovereign debt proposals

• 1979: “International Debt Commission”

proposal by Group of 77 in preparation for UNCTAD

• meeting. (see ROGOFF and ZETTELMEYER, 2002)

– Would consist of “eminent figures” with recognized knowledge of debt and development – Examine debt and development problems of requesting country – Make recommendations in broader context of development INLUDING debt reorganization and additional finance

Kenneth Rogoff, Harvard University

Later Proposals Added Private Debt

• Oeschli (1981) was the pioneering proposal,

and many others followed for an international bankruptcy regime.

• Sachs (1995) proposal particularly influential,

arguing that IMF would be more effective

• perating like an international bankruptcy

court

• IMF Sovereign Debt Restructuring Mechanism

(2001) is the next milestone

Kenneth Rogoff, Harvard University

What problems do an international bankruptcy regimes aim to solve?

• Holdout problem (most recently seen in

creditor instigated internment of Argentine ship in Ghana

• Idea of Establishing Seniority (Sachs, Bolton‐

Skeel) and others.

Kenneth Rogoff, Harvard University

But holdout problem can be inventively managed

• Outside Argentine case, holdout problem has

not proved that severe in recent bankruptcies

• Other approaches have been developed,

including incorporating collective action clauses into bonds

• Holdouts most likely to be successful when

they are small “nuisance” players that are cheaper to pay off than to fight.

• Ergo, not always a first‐order problem

Kenneth Rogoff, Harvard University

Seniority very hard to establish

• In a corporate debt restructuring, there are

assets that the senior creditors can possess

• No parallel in sovereign debt, making seniority

very difficult to establish (Bulow and Rogoff, 1988)

• IMF claims seniority but is helped by small size
• Europe is case in point. As official creditors

become large, they become vulnerable

• “PIGS GET FED, HOGS GET SLAUGHTERED”

Kenneth Rogoff, Harvard University

EUROPE IS A GOOD CASE STUDY

• There are proposals for a European SDRM
• If it cannot be done in Europe, then it seems

unlikely to succeed on a global basis

• Europe’s problems underscore the important
• f strengthening global governance as an

extremely important component of making any new international bankruptcy regime successful.

Kenneth Rogoff, Harvard University

What about United States, Japan or Germany?

• Mechanisms for resolving sovereign debt

workouts has largely been envisioned as problem for improving management of developing country debt problems.

• But as unlikely as a default in one of the

largest countries might seem, it would be folly to build a mechanism that cannot handle a default in one of the world’s largest economies

Kenneth Rogoff, Harvard University

Finally, A Deeper Question

• Why is such a large percentage of international

flows channeled through debt?

• Equity and direct foreign investment are arguably

somewhat more robust than debt

• Thus an international bankruptcy regimes that

weakens creditors rights is not necessarily inefficient

• Perhaps ideal regime is one with strong creditor

rights but extensive indexation of debt to GDP, commodity prices, etc., depending on country circumstance.

Kenneth Rogoff, Harvard University

Kenneth Rogoff Harvard