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1、SOVEREIGN DEBT RESTRUCTURINGSearch for an Optimum Voting ThresholdJoy DeyAugust 2008ABSTRACTSovereigns have been defaulting on their debts over decades now. A sovereign debt default necessitates a restructuring of the debt instrument in order to reduce the size of the debt or lengthen the maturity p
2、eriod. One of the methods of debt restructuring is an exchange offer where the old debt instrument, for example the bond, is exchanged for new debt instruments with altered term and conditions, particularly the payment terms. Whereas some investors may agree to such restructuring and accept the exch
3、ange offer, others might have different aspirations for their investments. A successful sovereign debt restructuring takes place when the debtor has acquired the consent of a pre-determined number of creditors, or the restructuring threshold. The restructuring threshold is, however, a function of tw
4、o critical variables (i) investor confidence: low threshold percentage reflects low investor confidence in the issuer; (ii) success of the restructuring: high threshold percentage makes it difficult to achieve the required number of consenting investors. Thus, maintaining a balance between the two b
5、ecomes crucial for the debtor country. In this article, previous sovereign debt restructuring episodes have been analyzed to study the different threshold levels prescribed by different countries, and an attempt has been made to study whether there is a possibility of an optimum threshold level that
6、 can be prescribed as a supra-national code for all sovereign debt restructurings.INTRODUCTIONI. Why Sovereigns Borrow！Borrowing of money has remained a universal phenomenon throughout the history of mankind, and can be traced back to about 9000 years ago when man invented counting tokens to keep tr
7、ack of trades and obligations. With the advancement of trade and commerce, features of debt and credit have become exponentially widespread and complex. Now borrowing is not limited to only individuals or commercial entities, but even sovereign states resort to commercial borrowing to fulfil their f
8、inancial requirements. Until about the 20th century, borrowing by sovereigns was limited to emergency measures for a short-term to cover particular large expenditures (such as natural calamities, war, etc.). Borrowing has become a perpetual feature for most governments, where new loans are also used
9、 to repay old loans. As long as governments are able to keep the countrys level of indebtedness in check, borrowing to service old loans is considered sustainable. This essay is limited only to the study of sovereign borrowings. With the vision to develop and grow, the developing countries have been
10、 in constant need to borrow, and during the last half a century, the largest source of capital flow has been Debt. Due to the frenzy of modernisation and major railroad and industrial projects, there were drastic lending by commercial banks in the 1970s and 1980s. Most lending was by way of syndicat
11、ed bank loans, until the debt crisis of 1980s, when there was a shift from syndicated loans to bonds. Since the outset of the Brady Plan in 1989, Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Ivory Coast (Cote dIvoire), Jordan, Mexico, Nigeria, Panama, Peru, the Philippin
12、es, Poland, Russia, Uruguay, Venezuela and Vietnam were able to restructure their unsustainable debt mostly in syndicated loans by the issuance of Brady bonds, which has also been the genesis of an era of sovereign bond defaults and restructuring. “In general terms a bond is a loan by one party (an
13、investor or holder) to another party (the issuer)”. The issuer normally undertakes to pay the investor a fixed interest on the loan on a periodical basis, and at the end of a specified time (term), repay the loan amount (principal). Depending on the terms of the loan agreement, a failure to pay any
14、amount of interest or principal on time could be considered an event of default, triggering strict financial and legal penalties, one of them could be bankruptcy of the borrower. One of the worlds leading financial research and analysis firm - Moodys Investors Service defines a sovereign default whe
15、n one or more of the following situations happen:1. There is a missed or delayed disbursement of interest and/or principal, even if the delayed payment is made within the grace period, if any.2. A distressed exchange occurs, where: a. The issuer offers bondholders a new security or package of securi
16、ties that amount to a diminished financial obligation such as new debt instruments with lower coupon or par value. b. The exchange had the apparent purpose of helping the borrower avoid a “stronger” event of default (such as a missed interest or principal payment).Sovereign defaults results in huge costs to both the debtor country and its creditors, in terms of lost economic activities and lost value of claims. The sovereign debtors inability to service its deb
