IMF Urges Overhaul of Sovereign Bonds Post Argentina Default Saga

An International Monetary Fund (IMF) report has urged governments to revisit the way they draft sovereign bond contracts, to prevent the so-called "vulture funds" and "holdout" creditors from blocking debt restructurings.

The report has recommended significant changes to the standard clauses listed in bond contracts, signed between governments and their creditors, to ensure holdout investors do not undermine restructurings after a country defaults.

Changes could forestall a situation like Argentina's default saga where a minority of holdout US investment funds that demanded full payment, refusing to take losses, derailed Beunos Aires' attempts to restructure its debt.

The IMF said in a statement: "...Directors recognized that recent developments, including the Argentine litigation in the US courts, underscore the importance of further strengthening the existing contractual framework."

Eric LeCompte, the Executive Director of advocacy group Jubilee USA Network said in a statement: "In the wake of debt restructurings in Argentina and Greece, the IMF is incredibly concerned about vulture funds

"The IMF is advocating a market approach, but we also need a statutory approach. We need to change both the contracts and the laws."

"It's important that the IMF acknowledges a market approach might not be enough. This suggested approach would need to be comprehensive and won't have an impact for decades," said LeCompte, who serves on United Nations expert groups that seek to tackle these problems.

Recommendations

The IMF staff paper "proposes a modification to the pari passu clause [or equal treatment clause] in international sovereign bonds to make clear that it does not require the issuer to pay creditors on an equal or ratable basis.

"Second, the paper discusses the inclusion of an enhanced collective action clause (CAC) that includes a more robust 'aggregation' feature to address collective action problems more effectively.

"Third, the paper considers the role that the Fund can play in promoting the use of these modified provisions in future issuances of international sovereign bonds, while noting the transitional risks created by the existing stock of bonds that do not contain such modified provisions."

The paper follows a similar August proposal by the International Capital Market Association (ICMA), to prevent disruptive predatory and holdout behaviour.

The principal difference between the two proposals is that the IMF paper does not promote establishing creditor committees to reach agreements in the event of disputes.