Wall Street Slams NY Lawmakers Over Sovereign Debt Bill

(Bloomberg) -- Tension is rising between Wall Street and New York lawmakers over a state bill meant to overhaul the process of re-negotiating defaulted government debt.

Most Read from Bloomberg

Lawmakers in Albany unveiled the Sovereign Debt Stability Act on Wednesday, a bill that stands to ramp up oversight on how debt from defaulted nations is restructured with creditors. Just minutes before the official announcement, though, a cohort of trade organizations came out strongly opposing the proposal.

The disagreement comes down to legislation that seeks to impose a new oversight mechanism or limit private bondholders’ recoveries when restructuring sovereign debt governed by New York law.

If passed, the new rules stand to impact roughly $800 billion of sovereign debt, according to data compiled by Bloomberg.

To New York state lawmakers, the aim is to help defaulted nations embark on faster recoveries — and prevent bondholders from causing delays in order to win better terms. The process of restructuring sovereign bonds has long been plagued with setbacks, leaving nations including Zambia, Sri Lanka and Ghana cut off from international markets for years.

“This is an international issue that is destroying the people of other countries,” said the state Senate Finance Chair Liz Krueger. “And too many of these story lines start and end with New York and New Yorkers.”

But the effort is spurring controversy among investor trade organizations, which warn these changes would have unintended consequences. In a joint statement, the Institute of International Finance, Credit Roundtable and other groups urged legislators to pause consideration on the proposal, saying such changes warrant wide-ranging consultations.

If the bill passes, they say, investors would need to be compensated with higher interest rates in order to offset the potential risk tied to new restructuring processes.

“Developing countries that are already struggling with higher interest rates and tighter global financial conditions could be pushed toward debt distress,” according to the statement. “The proposed bill would also be a major blow to New York law’s position as the gold standard for large, global financing transactions.”

Read More: NY Politicians Renew Push to Solve Sovereign Debt Crises

Progress in Albany

The proposal is the latest iteration of Albany’s efforts to solve sovereign debt crises, pulling some elements from bills that failed to go to a vote in 2023.

Proponents aim to pass the bill before the last scheduled day of the 2024 legislative session on June 6, though Senate and Assembly leaders could theoretically reconvene their chambers later in the year.

The Assembly bill has been introduced to the ways and means committee and could end up on the floor for a vote. The Senate bill is in the banks committee.

Sponsors of the proposals, including state Senator Gustavo Rivera and Assembly Member Patricia Fahy, said they are focused on moving the twin bills forward after the April 1 deadline for state lawmakers to pass an annual budget plan.

“It will be one of my priorities for the rest of the year,” said Rivera.

(Recasts throughout after official announcement in Albany.)

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.