Sovereign Debt Restructuring – is it time for new UK legislation?
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Embargoed until: 5555-01-01
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ODI Global Working Papers
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There is widespread concern that high debt burdens in many Global South countries, especially those most vulnerable to economic and climate shocks, is crowding out social and climate spending. Where countries have defaulted, there are concerns that debt relief has been neither deep enough nor quick enough. In response, there have been a number of calls, including from the UK Parliament’s International Development Committee in 2023, for the UK to pass new legislation (a ‘debt justice law’) that would influence the behaviour of private creditors during debt restructuring processes. In November 2024 a Private Members' Bill, the Debt Relief (Developing Countries) Bill 2024, was introduced to Parliament. This draws inspiration from similar proposals put before the New York state legislature, and from the fact that the UK has passed debt legislation before, in 2010, in the context of the High Indebted Poor Countries Initiative (HIPC). This paper examines the New York and UK bills and asks whether it would be desirable to draw from, or adopt, them in the current context. To do so, we start by summarising the evolution of the sovereign debt restructuring regime and how private creditors have typically participated. We then look at past legislation as well as the New York and UK bills and what they are trying to achieve. We then make a critical assessment of their potential effectiveness. We find that, while well-intentioned, the draft legislation presents a number of fundamental issues: They aim to provide legal backing for the principle of comparability of treatment. However, at present, this is a negotiated concept. Without further clarity on its definition, which official creditors have resisted providing, it is not clear how courts could enforce this. Such a lack of clarity could have negative consequences for the borrowing costs of debtor countries, and also on the UK as a key jurisdiction for the issuance of sovereign debt. They are not focused on the key problems debt restructuring processes currently display. Litigation by distressed investment funds (also referred to as vulture funds) that acquire outstanding bonds at a steep discount, and then refuse to participate in debt restructuring and seek full repayment, is frequently used to justify the need for such legislation, but this problem seems to have largely been addressed by the introduction of collective action clauses (CACs) in bond contracts. The key reason why recent debt restructurings have been slow is inter-creditor coordination, particularly between official creditors, rather than because of a lack of engagement by private creditors. Furthermore, the overall envelope for debt relief in a restructuring is conditioned by the IMF debt sustainability analysis. As debt legislation is not targeted on either issue, it is unlikely to do much to make most debt restructurings quicker or give deeper debt relief to borrowing countries. However, carefully focused legislation could enhance the current debt restructuring process, for instance by providing a temporary automatic stay on litigation. Just as important as legislation, if not more so, is the crucial role the UK can play in pushing for improvements to sovereign debt restructuring policies and processes as part of the G20 and the Global Sovereign Debt Roundtable. Such improvements include establishing a universal debt service standstill when countries enter a restructuring process; further innovations in bond contracts building on climate-resilient debt clauses (which the UK has already adopted in its official lending); and greater transparency from both lenders and borrowers. Any proposed UK legislation will require extensive consultation with other key stakeholders including the IMF, finance ministers from Global South countries, legal experts and private creditors to ensure it does not undermine the UK as having a reliable and predictable legal system for sovereign debt, or risk either raising the cost of borrowing for Global South countries or leading to creditors trying to shift bond issuance from London to other jurisdictions. For this reason, it is undesirable for the UK to act unilaterally on this matter.