Bank notes of different currencies, including Euro, U.S. Dollar, Turkish Lira or Brazilian Reais, are photographed in Frankfurt, Germany, in this illustration picture taken May 7, 2017. Picture taken May 7, 2017.
Bank notes of different currencies, including Euro, U.S. Dollar, Turkish Lira or Brazilian Reais, are photographed in Frankfurt, Germany, in this illustration picture taken May 7, 2017. Picture taken May 7, 2017. Reuters / Kai Pfaffenbach

A senior official at the World Bank has ramped up its calls for changes in sovereign debt laws so governments have more control when crises strike and they have to restructure their debt.

World Bank economists estimate that low- and middle-income economies owe a record $9.3 trillion to foreign creditors and that 40 poor countries, and about half a dozen middle income ones, are either in debt distress or at a high risk of it.

"As global growth fizzles and interest rates surge, the risk of a spate of debt crises is rising - and yet the available mechanisms for tackling them are deeply inadequate," Indermit Gill, the Bank's vice president for equitable growth, finance and institutions and sovereign debt lawyer Lee Buchheit said in a blog https://www.brookings.edu/blog/future-development/2022/06/27/targeted-legislative-tweaks-can-help-contain-the-harm-of-debt-crises.

They outlined four key changes that would improve the effectiveness of the so-called Common Framework debt relief plan the Group of Twenty (G20) rich nations launched at the height of COVID-19 pandemic.

First, the blog authors said government bond contracts should stipulate that all creditors have a legal duty to cooperate "in good faith" in sovereign-debt restructurings.

Western governments traditionally negotiate separately to other lenders such as China when countries they both lend to run into trouble. Those efforts are also separate from negotiations by big global investment firms such BlackRock and Vanguard.

Second, all sovereign debt contracts should limit how much a creditor can collect through law suits outside the Common Framework and, in addition, include "Collective Action Clauses" which mean all bonds can be restructured as long as the vast majority of bondholders have agreed.

That in turn would clip the wings of so-called vulture https://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/african-legal-support-facility/vulture-funds-in-the-sovereign-debt-context funds that try to hold out and then take governments to court to score a bigger payout for themselves.

Third, it should be made harder for creditors to seize the assets of a debt-distressed government if it has acted in good faith. During one of Argentina's debt crises, a U.S. hedge fund seized one of its navel ships when it was in Ghana.

Finally, the authors said that while collective action clauses are in many bond contracts issued over the past 20 years, they are not included in syndicated loans which make up a large part of developing country debt and such mechanisms should be retrofitted wherever feasible.

"Governments have a compelling public interest to adopt legislation to end this imbalance," the blog said, saying legal centres such New York and London would be crucial. "Consider it a long-overdue step to protect their own taxpayers".