Crisis? What Crisis? Orderly Workouts for Sovereign Debtors
The Mexican Crisis of 1994/5 came as a rude surprise to the international policy-making community. It revealed serious confusion over how markets, governments, and multilateral institutions like the International Monetary Fund should deal with financial crises in heavily-indebted developing economies. It laid bare a remarkable lack of planning for financial crises in today�s world of globalized bond and equity markets.
This report analyses various approaches to coping better with Mexico-style crises. These include changes in the provisions of loan contracts and bond covenants, the creation of bondholders� steering committees, establishment of a venue for bilateral negotiations between bondholders� representatives and the government of the indebted country, and closing the courts of creditor countries to dissident creditors by statute or treaty. One particularly prominent proposal is for a bankruptcy procedure for developing countries analogous to Chapter 11 of the US bankruptcy code.
The authors provide a detailed critique of each of these schemes for institutional reform. Although they identify problems with each approach, including the idea of an international bankruptcy court, they also conclude that the status quo is not tenable. They therefore offer an agenda for reform that draws elements from each of the alternative approaches. It includes organizing a bondholders� representative council; specific changes to bond covenants; creating an independent arbitral tribunal to help coordinate negotiations across the London and Paris Clubs and the new Bondholders Council and to consider the claims of dissident creditors; and having the IMF take a more active role in sanctioning temporary payments standstills and providing information to all parties negotiating workouts for a sovereign debtor.
