NY Politicians Renew Push to Solve Sovereign Debt Crises

Zijia Song and Nicolle Yapur
·5-min read

(Bloomberg) -- New York state lawmakers are renewing the push to overhaul the protracted and painful process of solving sovereign debt crises.

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State senator Gustavo Rivera and assembly member Patricia Fahy are sponsoring amended legislation that stands to ramp up oversight on how defaulted government debt is restructured with creditors. It could also potentially limit how much investors are allowed to recoup when countries restructure their debts — a concept that’s riled up Wall Street in the past.

If passed, the new rules stand to impact nearly half of all emerging-market government bonds, or some $870 billion, that are governed by New York law.

The revamped bill marks a renewed effort by New York lawmakers, activists, labor unions and charities to bring greater legal oversight to negotiations between insolvent nations and their creditors. The process has been plagued with setbacks, leaving nations including Zambia, Sri Lanka and Ghana stuck in default for years, cut off from international financing markets.

“Poor African countries are struggling to get back into the market, while the Group of 20 is struggling with getting the Common Framework to function more efficiently,” said Gregory Makoff, a senior fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School. “If New York is going to do anything, it should be simple, additive and done in a consultative fashion.”

The latest legislation pulls inspiration from bills that failed to go to a vote in 2023. While similar proposals have failed to gain traction in the past, the latest iteration is a testament to the need for faster, smoother agreements between creditors and defaulted countries.

Under the amended terms, a defaulted nation’s government officials would choose from two avenues as they embark on a debt restructuring. In one option, government officials would negotiate with creditors under the eye of an independent monitor, which is appointed by the New York governor.

In the other, officials would opt for an existing mechanism for debt restructuring, such as the Group of 20’s Common Framework. The legislation would ensure that private bondholders get no better treatment than the US, or other government-based or multilateral lenders such as the International Monetary Fund.

“The merged legislation is critical as it gives countries options to get out of debt crisis and restructure debts back to profitability for investors,” said Eric LeCompte, executive director at Jubilee USA Network, a nonprofit group that advocates for debt relief for smaller economies.

Read More: The Frantic Push to Solve Sovereign Debt Crises Irks Wall Street

On Wall Street, though, the amended bill stands to cause further angst. Major investors including Pacific Investment Management Co. and Fidelity Investments last year pushed back against similar efforts, warning that new rules could result in higher borrowing costs for emerging-market governments — and potentially cripple the sovereign bond market.

Such “top-down, unilateral” solutions to sovereign debt restructuring often stoke uncertainty in markets, resulting in high borrowing costs for vulnerable economies, said Sonja Gibbs, managing director and head of sustainable finance at the Institute of International Finance.

“The level of concern has clearly risen” across Wall Street, compared to last year, Gibbs said. “One of the biggest problems with this whole initiative is the lack of clarity in any of the previous bills or in the newer package where they’ve been bundled together.”

The amended bill was introduced in the assembly’s ways and means committee on Wednesday, where the original proposal — also sponsored by Fahy — stalled in 2023. It’s unclear whether the bill will go through the previous legislative process again.

To Makoff, author of Default: The Landmark Court Battle over Argentina’s $100 Billion Debt Restructuring, a new law could win more support if it’s developed in an “open and consultative fashion.”

“Hearings should be held, inviting borrowers, investors and experts to testify,” he said. “A sovereign bankruptcy law would have to be implemented at an international or national level.”

Suriname’s recent restructuring deal — which came after a three-year default — offered an early indication of how Wall Street could react to the efforts of New York legislators. Tucked in the bond documents is a clause that makes it easier for creditors to move jurisdictions away from New York state in the event of a breach of debt covenants, according to people with direct knowledge of the matter.

Some on Wall Street have also pointed to a recent decision by the New York Court of Appeals, which last month said it was up to Venezuelan law to determine whether a series of bonds issued by the national oil company Petroleos de Venezuela SA is valid. The notes defaulted in 2020, resulting in a legal dispute over which jurisdiction would weigh in on their validity. The case was kicked back to the district court to determine the potential consequences for bondholders.

READ: Venezuela Law Determines If PDVSA Bonds Valid, NY Court Says

While the case is unique in many ways, it’s still a red flag for investors, said Claudio Zampa, founder of Switzerland-based Mangart Capital Management. That’s especially as lawmakers in Albany tie specific restructuring rules to debts’ governing law.

“If you introduce more concerns, we are going to invest in other markets or instruments,” he said. “They think they are protecting the country, but in fact they are damaging the country.”

(Updates assembly sponsor of the bill and legislative process in second and 13th paragraphs.)

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