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IIF Says Sovereign Restructurings Benefit From Early Planning

Sovereign debt issuers should start to work early with creditors if it appears a restructuring is unavoidable, the Institute of International Finance said in a report on best practices for public debt swaps.

Countries need to keep an open dialogue with their borrowers and do their best to prevent a debt crisis from emerging, said the report, presented to IIF members earlier this month and made public today. The document was compiled against the backdrop of the sovereign debt crisis in the euro area, said the IIF, a Washington-based trade group that represented creditors in Greece’s landmark restructuring earlier this year.

The IIF report, prepared in collaboration with European and North American government officials, doesn’t recommend restructuring for any particular country or region. It assembles lessons learned from the Greek debt crisis and makes recommendations for designing sovereign restructurings, including in countries that are part of currency unions.

“Many countries still suffer from high indebtedness and large deficits against a backdrop of slowing growth,” Hung Tran, the IIF’s deputy managing director, said in a telephone interview today. “It is prudent to strengthen the framework for crisis prevention and resolution.”

The report recommends that countries identify restructuring needs early, treat creditors equally and take steps to prevent holdouts from blocking a voluntary agreement. It also endorsed collective action clauses once enough investors have signed on to meet participation thresholds.

Blocking Positions

Collective action clauses, provided they are accompanied by aggregation targets, “can facilitate voluntary debt restructuring by reducing the chances of a small minority of bondholders acquiring blocking positions in a bond series and imposing demands for preferential treatment,” the report said.

The IIF committee that prepared the paper was led by Thomas Wieser, president of the Eurogroup Working Group, a panel of experts from euro-area nations that lays the groundwork for meetings of finance ministers; Jean Lemierre, senior adviser to the chairman at BNP Paribas SA; David Mulford, vice-chairman for international at Credit Suisse Group AG; and Gerardo Rodriguez, Mexico’s undersecretary of finance and public credit.

The IIF said the committee works with a trustees group that includes Mexican Central Bank Governor Agustin Carstens, Bank of France Governor Christian Noyer, People’s Bank of China Governor Zhou Xiaochuan and former Bank of Japan Governor Toshihiko Fukui.

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