A number of former heads of state and policy makers have urged New York State lawmakers to push ahead with a bill that would alter the legal landscape governing over $800 billion in sovereign bonds from emerging markets ahead of the May 6 return of the state’s legislature.
The Sovereign Debt Stability Act, opens new tab aims to provide a sovereign debt restructuring mechanism by changing the state law governing about half of emerging market international bond contracts. If enacted, the bill would empower countries eligible for debt relief initiatives such as the G20’s Common Framework to opt between a set mechanism for restructuring or a process that would limit bondholders’ claims to those the United States would receive if it were a bilateral lender.
“We rise in support of a transformative initiative on which only New York has the power to act, with the potential to relieve the hardship of millions, help stabilize the global economy, and promote justice on a scale that reverberates far beyond the boundaries of the Empire State,” reads the letter, opens new tabwhose signers include Britain’s former Prime Minister Gordon Brown, ex-OECD Secretary General Angel Gurria and New Zealand’s ex-Prime Minister Helen Clark.
The bill could “unlock vital resources for critical areas such as health, hunger, climate action, and education in poor nations, and protect its own taxpayers from vulture funds,” the letter, distributed by campaign group Oxfam, read.
The bill blends two proposals that failed to get a floor vote in Albany last year.
Its critics say collective action clauses, introduced in 2014, have improved the restructuring framework by reducing the probability of holdout creditors – referred to as vulture funds – by forcing all bondholders to participate if a majority, typically 75%, agree on restructuring terms.
Targeted proposals, like lowering the interest rate that debts accumulate during litigation, are seen as discouraging holdouts.
Investors have blamed China, the world’s largest bilateral lender to the poorest nations, for delays in recent restructuring instances involving Zambia and Sri Lanka.
Last week, the International Monetary Fund (IMF) agreed to alter its rules to allow it to support countries even while they are in debt rework talks with creditor countries.
Some point the finger at private lenders.
“The (Global Sovereign Debt) Roundtable isn’t working, the G20’s common framework isn’t working, and one of the big reasons why they’re not working is because private lenders refused to come voluntarily to the table,” said Jayati Ghosh, professor of economics at the University of Massachusetts, Amherst, and a signatory to the support letter.
However well-intentioned, the bill “fails to address the larger and more significant challenges that typically delay and impede sovereign restructurings today,” said law firm Cleary Gottlieb, pointing to diverging views of bilateral and multilateral lenders.
The bill could prompt considerable legal challenges and lead to the migration of sovereign debt away from New York to other jurisdictions, said Cleary, which has advised both sovereigns and bondholders in restructurings, in a public memo, opens new tab.
A separate open letter, opens new tab from finance industry groups criticized the bill as “undermining years of work by the U.S. Treasury Department, the IMF, and market participants to build a robust international framework for sovereign debt”, and warned financing costs for countries to issue under New York law would rise.
The bill has a number of steps to pass in the legislature before it arrives on the New York Governor’s desk to sign or veto. The last session of the current legislature is on June 6.
Without saying whether Governor Kathy Hochul supports the bill, her office said she “will review all legislation that passes both houses of the legislature.”