Politics of Poverty

Sovereign Debt Fan Fiction

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None Ben Grossman-Cohen

When it comes to sovereign debt restructuring, the truth is scarier than fiction.

The Financial Times recently published a new fictionalized account of what Zambia’s debt restructuring process may have looked like if New York’s proposed Sovereign Debt Stability Act had been on the books.

It’s a clever ploy meant to bring more color to industry critiques of the proposed law. But critics needn’t resort to “alternative…dimensions” to lament the hypothetical complications Zambia may have faced if New York State had reformed its governance of sovereign debt. The plain facts of our current reality are much scarier, and infinitely more complex and troubling than the authors’ imaginations.

Zambia’s multi-year saga to restructure its debts under current laws were all too real and if the authors had tried to write them down in the same format and tone as employed in “Reimagining Zambia’s restructuring in an alternative New York dimension,” it would be unpublishable because readers wouldn’t possibly believe the Kafkaesque tale was plausible. In fact, some of the worrying speedbumps the authors speculate could occur in an alternate dimension are just descriptions of events that did occur under current laws. In this light, any legal regime, however imperfect, might seem better than the status quo.

Perhaps more troubling, however, is that not only do the authors rely on a fictional scenario to tell their story, they also rely on fictional descriptions of New York’s proposed reforms. The authors falsely claim that a failure of the New York Governor and the US Treasury to “come to an agreement” on who to appoint as independent monitor overseeing Zambia’s restructuring could create delays until a new President is elected. But the proposed law does not require any such agreement, only consultation. Power to appoint the monitor is given squarely to the Governor with approval by the debtor and creditors alone. This is either a willful distortion of what the bill says or an honest mistake, but the authors' description of the bill's text is unquestionably wrong.

It was earth all along:

But the most ironic beat of the story is a section titled “Oh wait . . . what about Comparability of Treatment?”

“OK, so while Zambia was going through the process in respect of the New York legislation, it also had to negotiate with all of its other creditors, creditors whose obligations are not subject to the New York legislation. These are other governments, like France, the US, or China….

...Then the [Official Creditor Community], which (for reasons too tedious, complicated and annoying to discuss here) only reached its own deal with Zambia in June 2023, also declares that the bondholder deal isn’t compatible with its own agreement. Everything appears to be unravelling and quickly.”

Comparability of treatment may be a genuine concern for countries undergoing a reformed restructuring process. The problem is, this is exactly what did occur to Zambia under the current process. This is no fiction; it’s ripped from the headlines. The authors lead readers to believe this scenario would be a direct consequence of the proposed reforms, but they leave out that it’s just a description of the current system and the reforms have nothing to do with it. If anything, this is a great argument for reforms that enforce the comparability of treatment, which is exactly what section 230 of the Sovereign Debt Stability Act does.

It may be fair to point out that — although countries will have powerful new protections available to them to avoid fights between public and private creditors over comparability of treatment (Section 230) — the reforms are not a panacea. But that would make for a boring article because you’d also have to acknowledge that the reforms are a VAST improvement over the status quo. The article leaves readers with the exact opposite impression.

Changing laws can lead to uncertainty. It is fair to ask the question: “what would have happened in real life had this law been in place already?” But if you can’t treat that question honestly and fairly, then you’re not trying to illuminate, you’re trying to obfuscate.

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