Orderly Workouts for Cross-Border Private Debt

Explores proposals for developing improved procedures and institutions to facilitate orderly workouts of international private sector debt. The paper addresses the following question: How can standstills and workout arrangements be designed that would help stop a panic and an overshooting of capital withdrawals from emerging markets, and, subsequently, would provide a framework to close insolvent firms and reorganize more viable enterprises?

The paper explores the dynamics of a financial panic, and then examines the basic logic behind both domestic bankruptcy regimes and international sovereign debt workout procedures (such as the Paris Club and the London Club). It examines a variety of proposals for international versions of the three basic components of a debt workout: a debt payments standstill, provisions for new finance, and the framework for restructuring. It concludes that international financial markets would be strengthened by a credible mechanism to invoke mandatory debt payment standstills in the rare circumstances when they are necessary. It further concludes that private sector creditors should play a much larger role in providing fresh funds to countries in distress. Somewhat paradoxically, a key ingredient to establishing the stable environment needed to encourage new private sector financing is an effective payments standstill mechanism. However, new private sector financing to countries in distress should be voluntary, not mandatory, and should not be backed by government guarantees. [author]