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Sovereign Debt

20 February 2024

Dr Stephen Connelly, Dr Karina Patricio Ferreira LimaLink opens in a new window and Professor Celine Tan have published proposals for UK legislative reform to support global efforts to resolve sovereign debt crises in developing countries. These proposals were presented at a roundtable attended by Members of Parliament, lawmakers and advisors from New York, sovereign debt scholars and civil society representatives from the global north and global south.

Developing countries are facing mounting sovereign debt burdens and financial crises. Most low-income countries (LICs) are either at high risk of, or are already experiencing, debt distress. A key area of concern is the lack of appropriate mechanisms to deal with the debt owed by sovereigns to private creditors and the reluctance of private creditors to participate in debt restructuring schemes. As most debt owed by DEEs and LICs to private creditors is governed by English law, the UK is well-placed to address the sovereign debt crisis in those countries through domestic legal responses.

In their new briefing paper, the authors address the challenges of private creditor participation in sovereign debt restructurings. The absence of a mechanism to compel private sector creditors – bondholders as well as banks and other financial institutions – to participate in multilateral debt relief initiatives has compounded sovereign debt distress, leading to messy and disorderly debt restructuring processes.

This briefing outlines the challenges faced by sovereigns facing debt distress under the current international financial architecture and offers two proposals for legislative reform in the UK. The first proposal is enacting legislation based on the Debt Relief (Developing Countries) Act 2010, extending it to debt treatments under the Common Framework and other debt relief initiatives limiting the recoverable debt to the level due to a creditor had it participated in multilateral initiatives. The second proposal is to extend a form of a scheme of arrangement under Part 26 of the Companies Act 2006 to sovereigns to allow indebted states to apply for a partial or full restructuring of their debts governed by English law under the supervision of an English court, in the same way as local and foreign companies.

These two proposals aim to complement ongoing efforts to develop market-based and contractual approaches to managing sovereign debt crises in DEEs, such as majority voting provisions (MVPs) in syndicated loans and climate resilient debt clauses (CRDCs) in bilateral loans. The authors argue that these proposals ‘are designed to encourage a more effective negotiation process among creditors and to establish a more coordinated and equitable approach to debt restructuring processes, contributing to global efforts to resolve sovereign debt crises’.

12 October 2022

The sovereign debt crises is a key area of concern for countries and stakeholders coming together at the Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group in Washington DC, 10 - 16 October, Washington DC.

The following documents and articles by Dr Stephen ConnellyLink opens in a new window, Dr Karina Patricio Ferreira LimaLink opens in a new window and Professor Celine TanLink opens in a new window on issues relating to debt and development may be of interest:

2 August 2022

Dr Stephen Connelly, Professor Celine Tan and Dr Karina Patricio Ferreira Lima submitted evidence to a parliamentary inquiry on debt and development. The inquiry examines the impact of high levels of debt on development in low-income countries (LICs) and the tools and strategies employed to reduce the debt burden. Launched by the House of Commons International Development Committee (IDC), the inquiry aims to examine the high levels of sometimes unsustainable national debt in low-income countries, much of which is owed to private sector creditors in high-income countries such as the UK and impact of the debt on development. The inquiry also focuses on the tools the UK government uses or could use to help bring debt levels in low-income countries down to more sustainable levels.

In their submission, published on the IDC website here, the authors argue that ‘the existing fragmented and highly politicised regime for sovereign finance law and governance is exacerbating the sovereign debt crises in low-income countries’ and that a ‘key area of concern is the lack of appropriate mechanisms to deal with the burgeoning debt owed by sovereigns to ‘private creditors’. The authors propose ‘an opt-in statutory standstill which will place LICs in a fairer position to negotiate debt relief with creditors’. They signposted the Committee to a proposal they had developed in 2020 for a statutory stay on recovering commercial debt repayments to free up resources in indebted countries to fight the COVID-19 pandemic. The authors believe that this proposal can be adapted to the current debt initiatives, such as the G20 Common Framework for Debt Treatments beyond the DSSI.

8 October 2020

Dr Stephen Connelly, Dr Celine Tan, Karina Patricio Ferreira Lima and Chris Tassis have launched an expert comment on World Bank president David Malpass’ call for the UK and the US to make it harder for rich commercial lenders to sue poor countries for not making debt payments.

They welcomed the statement and called the UK Government to reconsider the Debt Suspension Legislation proposal presented earlier this year in tandem with Jubilee Debt Campaign and Oxfam, which allows the poorest counties to seek a moratorium on debt service.

To read the full expert opinion, click here.

29 September 2020

A translation into Spanish of both the GLOBE Centre Briefing Note and the Debt Suspension Legislation briefing is now available.

6 August 2020

Dr Stephen Connelly, Dr Celine Tan, Karina Patricio Ferreira Lima and Chris Tassis have published a blog post on Afronomicslaw based on their proposal. The article entitled 'Staying Claims: Debt Moratoria Beyond the Debt Service Suspension Initiative' can be found here.

20 July 2020

Dr Stephen Connelly and Dr Celine Tan comment on the G20's failure to deal with the sovereign debt crises in developing crisis in its recent finance ministers and central bank governors' meeting. They ccomment that this 'inaction undermines the G20’s commitment ‘to use all available policy tools to safeguard people’s lives, jobs and incomes, support economic recovery, and enhance the resilience of the financial system’.

4 June 2020
COVID-19: Suspending Debt Service for Indebted Countries

Dr Stephen Connelly (Associate Professor in Law) and Dr Celine Tan (Reader in Law), Co-Directors of the Centre for the Law, Regulation and Governance of the Global Economy (GLOBE Centre) at the Warwick Law School are supporting civil society groups, led by Jubilee Debt Campaign UK and Oxfam GB, in proposing legislation in the UK that will have the effect of suspending debt owed to private creditors of countries eligible for the G20 Debt Service Suspension Initiative (DSSI). The DSSI commits G20 and Paris Club official creditors to a time-bound suspension of debt service for eligible countries that request such forbearance in order to free up resources for low-income countries to support health, humanitarian and social and economic measures during the COVID-19 pandemic. The aim of this proposal is to give legislative effect to the commitment made by private creditors for voluntary debt service suspension that mirrors the G20 deal.

Dr Connelly and Dr Tan, are working with Karina Patricio Ferreira LimaLink opens in a new window (Durham Law School) and Chris TassisLink opens in a new window (Warwick Law School) under the auspices of the recently formed The IEL Collective Law and Finance Working GroupLink opens in a new window to develop mechanisms for managing the sovereign debt of low and middle-income countries to meet the economic and financial challenges brought on by the COVID-19 pandemic. Under this legislative proposal, private creditors holding English law bonds issued by a qualifying country will be barred from pursuing legal or arbitral proceedings, including enforcement proceedings, against that qualifying country in any court of the United Kingdom during a determinate moratorium period. The current proposal is time-bound, does not interfere with the underlying contractual rights of parties to the contract and is contingent on the country subject to such claims to make such a request of suspension to the court.

Enshrining a standstill in law will demonstrate UK’s leadership in global COVID-19 responses and reinforce its commitment to ensuring low-income countries have access to all the financial resources they need to contain COVID-19 and recover from this unprecedented health, social and economic crisis. It is recognised that the current proposal is limited in resolving the longer-term debt burden of developing countries, but it is hoped that it will serve as an emergency measure to enable breathing space for countries while more comprehensive and sustainable mechanisms are being developed.

Dr Connelly and Dr Tan have previously worked with JDCLink opens in a new window and with Juan Pablo Bohoslavsky, the former UN Independent Expert on Foreign Debt and Human RightsLink opens in a new window on issues relating to sovereign debt and financing for developing countries.

For further details on their proposal, please see the GLOBE Centre Briefing NoteLink opens in a new window and the Debt Suspension Legislation briefingLink opens in a new window.