Book Review: Too Little, Too Late
Reviewed by William Chew
Key points in the book are as follows:
- In contrast to most developed debt markets, sovereign debt issuers have no accepted restructuring regime.
- Emerging market outstanding debt is more than $900 billion, 30% of which is due within 10 years.
- New forces in sovereign debt markets — distressed-debt traders, collective-action clauses, and credit default swap (CDS) contracts without adequate disclosure of counterparties and terms — make restructurings more difficult than in the past.
- The most effective restructuring regime will be a multinational framework based on mutually beneficial long-term incentives for lenders and investors to participate in restructurings. Without this approach, sovereign restructurings will be exercises in too little, too late.
For much investment analysis, sovereign debt restructuring is a marginal issue, of concern mainly to distressed-debt specialists. The increase in emerging market debt — to more than $900 billion in outstandings according to the International Monetary Fund (IMF) — however, together with the growing portion of this debt raised through bonds rather than official and private bank loans, heightens the importance of sovereign debt restructuring. This concern affects not only holders of sovereign debt but also investors in corporate, financial, and structured debt that may be exposed to sovereign debt–restructuring risk.
In this context, Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises is particularly well timed. The book is a collection of 15 papers on current sovereign debt–restructuring challenges and alternative approaches to resolving them. The editors and authors are leading economists, lawyers, bankers, and investors with deep experience in restructuring. For investment analysts, the book is a valuable source of systematic analysis, insights, and data on a complex problem.
In particular, the book makes the following points:
- Most major corporate debt markets have broadly accepted restructuring frameworks. The most fully developed is the US Bankruptcy Code, which covers not only private-sector corporate debt under Chapter 11 but also debt issued by US states and municipalities under Chapter 9. Sovereign debt markets, in contrast, have not to date developed any widely accepted restructuring regimes.
- Attempts have been made — led by the IMF and the largest creditor countries, the United States and United Kingdom — to address the need for such regimes since the 1930s. Progress has been limited, however, and no widely accepted and durable framework has emerged. Recent attempts at a framework have focused on two approaches: (1) privately negotiated revisions to contract terms in sovereign debt instruments and (2) revisions to the statutory law under which sovereign debt is issued. Any general framework will, the authors argue, need to include both approaches to become widely accepted.
- New factors in the sovereign debt market that make progress toward a general framework difficult are entry of distressed-debt traders, as in the Argentine default in 2008; rise of collective-action clauses designed to facilitate restructuring of specific debt issues to satisfy private lenders and investors; and growth of CDS contracts on sovereign debt without adequate disclosure of counterparties and critical terms.
- The profile of current outstanding sovereign debt makes the need for a broad restructuring framework particularly urgent. Of the $900 billion outstanding, the IMF estimates 30% comes due within the next 10 years, but these maturing issues no longer have common debt-contract provisions. Therefore, should they default, they will be difficult to restructure.
- In the end, the contributing authors to Too Little, Too Late maintain, the only durable solution will be a multinational framework, which is outlined in the final six papers in the book. The most effective way to bring lenders and borrowers together, according to this argument, is by focusing on the mutually beneficial incentives they have to participate in a restructuring of defaulted debt. For borrowers, the incentive is the opportunity for a fresh start to reduce debt and debt service to a level sufficient to permit the sustainable economic output required to support the debt. For lenders, the incentive is the opportunity to increase the risk-adjusted returns on the restructured debt relative to returns on defaulted paper. Without such a framework, sovereign debt restructuring will be a continuing exercise in the too little, too late phenomenon demonstrated most recently in Greece.
For many investment analysts, sovereign restructuring may not currently be a compelling area of interest. But with rising volume and risk levels in sovereign and related debt markets, analysts — especially those with limited experience in sovereign debt restructuring — will find Too Little, Too Late an excellent resource on a topic likely to become important in the near future.
If you liked this post, don’t forget to subscribe to the Enterprising Investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.