UNCTAD Chief Advocates for Permanent Sovereign Debt Restructuring System, According to Reuters

By Rodrigo Campos

NEW YORK (Reuters) – The global financial system requires the establishment of a permanent mechanism for restructuring sovereign debt, as existing measures have proven insufficient for both creditors and borrowers, stated the head of the U.N. Trade and Development agency in an interview.

Recent defaults by countries such as Zambia and Ethiopia have sparked discussions on how to ensure that nations in financial distress can undergo a prompt and effective debt restructuring process, aiding them in returning to growth and increasing investment.

"What has happened is that there are ad-hoc solutions applied only when issues arise, but there is no ongoing institution or system dedicated to handling debt restructuring," said UNCTAD Secretary-General Rebeca Grynspan during the U.N. General Assembly in New York.

Calls for a sovereign debt restructuring mechanism are not new. The International Monetary Fund (IMF) advocated for this in the early 2000s, but the initiative failed to gain significant support, according to Grynspan. "Perhaps we can generate new momentum to address this issue seriously," she suggested.

Despite the recent resilience of emerging markets in the sovereign bond market, there has not been a pressing urgency to reform the global debt infrastructure. Nevertheless, two out of five developing economies currently experience some level of debt distress. This year, debt-servicing costs are projected to reach $400 billion, and over 3 billion people reside in nations where spending on debt servicing surpasses investments in education or health.

Grynspan emphasized that debt sustainability assessments should consider not only the ability to repay but also the potential for economic growth.

NO LEARNING CURVE

Some progress has been made, especially with the introduction of collective action clauses (CACs) in 2014, which have made it more challenging for holdout investors to seek larger payouts and delay debt restructuring. This development has significantly reduced the duration of defaults for countries.

"It is crucial to uphold collective clauses and analyze their effectiveness and areas for improvement," Grynspan noted. However, she added that each case requires a tailored approach, resulting in "no learning curve."

"It will be essential for countries that have experienced debt restructuring to engage in dialogue with others that may face similar situations, as more established rules could enhance overall transparency," she mentioned.

The Common Framework, created by the Group of 20 in 2020 to facilitate debt restructurings, has frustrated both creditors and borrowers, with only four countries having opted into the initiative.

Grynspan expressed her dissatisfaction with the Common Framework, highlighting the prolonged timelines involved in securing agreements for Zambia and Ghana. "With 40% of developing countries in debt distress, a situation exacerbated by increasingly common systemic shocks, if it takes three or four years to address three countries, consider the implications if ten countries need similar assistance," she warned.