Global guidelines seek to ease trauma of default

Pablo Bachelet
The Miami Herald
November 29, 2004

Washington: The heavyweights of the global finance community unveiled Monday a set of voluntary guidelines aimed at making debt defaults less traumatic for nations and investors alike.

Major debt issuers like Brazil, Mexico, Korea and Turkey worked together with the Institute of International Finance, an influential group of private banks, to put together the principles announced in a news conference at the institute’s Washington headquarters.

Its promoters hope the guidelines – the “Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets” – provide some semblance of order and predictability to emerging market financing.

“Frankly, if we had devised this instrument a few years ago, I’m pretty sure that some problems that we have observed over the past few years would be considerably attenuated,” Alexandre Schwartsman, the deputy governor of international affairs at Brazil’s central bank, said via a conference call, “and presumably some of them would not have occurred.”

The move comes as financial markets seek to close the chapter on Argentina’s massive debt default that roiled markets nearly three years ago.

Argentina’s debt default was the largest of its kind in history, capping a particularly tumultuous decade for emerging markets, which saw major crises erupt in Mexico (1994), Russia (1998) and Brazil (1999).

Governments, investors and the International Monetary Fund have been grappling for a mechanism that will make emerging market finance less of a roller coaster ride.

Many countries are already including clauses in their bond issues that regulate relations with investors in case of a default. More than $50 billion in emerging market bonds now include such provisions, known as collective action clauses.

Charles Dallara, the managing director of the IIF, said the new guidelines would complement collective action clauses by setting “a few key beacons which we believe should guide cooperative interaction between issuers and creditors.”

The principles generally avoid getting into specifics like the level of acceptance needed to make a debt restructuring offer binding for all creditors, a key issue as Argentina prepares to sell to investors its own $100 billion restructuring offer in the coming weeks.

The guidelines urge greater transparency and timely flow of information from countries to investors; close debtor-creditor dialogue and cooperation; good faith actions like respecting the sanctity of contracts; and not discriminating between creditors.

The principles urge countries to carry out “sound economic policies” to secure renewed access to markets.

The principles were endorsed this weekend by a G-20 gathering in Berlin of 20 finance ministers from industrialized and emerging market economies.

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