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Sovereign Debt Restructuring in the New Financial World

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Belize: State of Denial. Ecuador: Drowning in Shallow Water. Zambia: A Rogue by any Other Name ... Belize: State of Denial. 3. Belize: Willing but unable ... – PowerPoint PPT presentation

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Title: Sovereign Debt Restructuring in the New Financial World


1
Sovereign Debt Restructuring in the New Financial
World Richard Segal March 2007
2
Table of Contents
Belize State of Denial Ecuador
Drowning in Shallow Water Zambia A Rogue by any
Other Name Sovereign Debt Restructuring
Frameworks Investor Relations Programs Paris
Club-Private Sector Issues Multilateral
Development Bank Issues
2
3
Belize State of Denial
  • External debt climbed unsustainably
  • The Government overlooked negative signals for
    two years
  • The Government resisted an IMF program
  • Authorities were wary of disturbing the BZD/USD
    currency peg
  • Officials eventually came to their senses
  • The restructuring was successful and valuable
    lessons were learned
  • Conclusion Its never too late to make amends

3
4
Ecuador Drowning in Shallow Water
  • Belize Willing but unable Ecuador Able but
    unwilling
  • Presidential campaign focused on debt issues
  • Politicians did not understand the economic
    repercussions of tough talk
  • Tough love from foreign investors could hurt
    the economy eg, capital flight, fewer trade
    lines
  • Competing priorities imply delay in debt
    decision
  • Conclusion Policy stubbornness can damage
    economic prospects

4
5
Zambia v DAI A Rogue by any Other Name
  • DAI, a US company, purchased Romanian claims
    against Zambia in the late 1990s
  • Negotiations lasted about seven years but
    ultimately failed
  • Reasons DAIs tactics, Zambias internal
    politics
  • DAI ultimately litigated and received a
    favorable court judgment
  • Debt relief campaigners are aghast
  • Some facts GDP in USD terms has more than
    doubled in four years, private investment is 20
    of GDP, external debt is less than 15 of GDP
  • Conclusion Rogueness is in the eye of the
    beholder

5
6
Sovereign Debt Restructuring Frameworks
  • Sovereign Debt Restructuring Mechanism (IMF)
  • Collective Action Clauses (various private
    sector umbrella organizations)
  • Two-stage process (JP Morgan)
  • Muddle Through (pre-existing)

6
7
Investor Relations Programs (IRPs)
  • IRPs arose in the wake of the Mexican peso
    crisis
  • Data transparency has improved tremendously
  • Best practices/league tables for both are
    published
  • Data transparency is essential for any capital
    market participant
  • The value of IRPs is overstated

7
8
Paris Club-Private Sector Issues
  • Comparability should be revisited
  • Better/more creditor coordination is advisable
  • Paris Club accounting practices are opaque
  • The Paris Clubs mission may need to evolve
    further
  • The Paris Club should take more items in-house
  • The Paris Club should not subsidize new borrowing

8
9
Multilateral Development Bank Issues
  • Private Sector Involvement (PSI) is heavy handed
    and lacks accountability
  • The IMFs signalling approach should be debated
  • Evidence of new initiatives is mixed (FSI v
    GDDS)
  • The IMF/World Bank preferred creditor status
    should be reviewed
  • Restructuring processes suffer from the lack of
    an information clearing house

FSI Financial Soundness Indicators
GDDS General Data Dissemination System
9
10
Conclusions
  • Debt restructuring frameworks have improved
  • Borrowers and creditors have become more
    transparent
  • Information asymmetries still exist, and
    creditor coordination is still imperfect
  • The roles of the IMF, World Bank and Paris Club
    should be further reviewed
  • The system is not broken, but complacency is a
    risk

10
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