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Prof. Lee Buchheit addressing the Daily FT-ICC Sri Lanka webinar on Saturday
By Nisthar Cassim
World-renowned expert Prof. Lee Buchheit on Saturday advised the Sri Lankan Government to stay the course on the external debt restructuring even though the exercise is most challenging and called for transparency and professionalism to be successful and minimise the pain on the citizens.
Speaking at the Daily FT-ICC Sri Lanka organised webinar on ‘Options for debt restructuring in Sri Lanka’ Prof. Buchheit said: “All sovereign debt restructurings are always and everywhere painful. It is not a pleasant undertaking but it can be gotten through and the country can return to a position of normalcy.”
“I would tell the Government not to give up hope. It is a difficult and disagreeable process but there is light on the other side,” said Prof. Buchheit, widely considered as a veteran having worked on over two dozen sovereign debt restructurings during his 43-year legal career.
He led the legal teams advising Greece in the 2012 restructuring of Government bonds totalling over 206 billion euros (the largest sovereign-debt workout in history). He also advised the Republic of Iraq in the 2004-08 restructuring of $ 140 billion of debt accumulated by the Saddam regime.
When asked for any specific advice to the President and Prime Minister and the politicians involved in this exercise, Prof. Buchheit said: “My advice would be to stay the course. Every country at this stage of the process is looking down a pretty dark tunnel but countries do get through them.
“If a debt restructuring can be handled in a professional way, its temporal scope will be limited and the damage that it will inflict on the country's economy, on its credit reputation and on its citizens can be minimised.”
Noting that the deeper the debt relief that the sovereign must request from its creditors the longer it typically takes to persuade those creditors, Prof. Buchheit also called for transparency. “Each of these creditor groups, if they're being asked to give debt relief, have a right to know the terms of the loans of the other creditor groups and the treatment that they'll be given to them,” he said.
In that context, he said the challenge for Sri Lanka is that China has in the past shown a predilection for bespoke sovereign debt restructurings and they have been reluctant to release the terms of those settlements.
Prof. Buchheit also cautioned Sri Lanka not to turn external debt restructuring into domestic political advantage.
“The mistake I have seen governments make most often is to try to turn the external debt restructuring into domestic political advantage. So, one demonises the foreign creditors and tries to extract a political advantage. That frankly is all atmospheric and rarely helps,” he pointed out.
He also said the IMF must assess how the pain of the restructuring will be shared. “All sovereign debt restructurings in the end come down to a simple burden-sharing decision,” he said, adding how much of the pain of the economic adjustment is to be borne by the citizens in the form of what the economist calls fiscal adjustment – increased taxes and reduced pensions and so forth. “How much is to be borne by the creditors in the form of debt relief?”
This, he said, was not simply an arithmetic decision but must take into account social and political and even moral issues as to how much burden can be placed upon the citizens. The safest approach would be to say that among the creditor groups a comparable contribution will be sought from each other, Prof. Buchheit added.
He noted that there are significant challenges facing the Sri Lankan Government but there is every reason to believe that this operation can be conducted in a satisfactory way to return Sri Lanka to a sustainable debt position. He noted that the Government has identified very able and experienced advisors and everyone involved in the process is perfectly aware of the need to alleviate the hardships that the Sri Lankan citizens are currently facing.
The sovereign debt restructuring veteran predicted that historians will look back on this time and conclude that Sri Lanka was the first major sovereign debt restructuring undertaken in the post-COVID era.
“It will be undertaken in an environment of global financial distress. Sovereign debt stocks around the world are at historically high levels, interest rates are rising, the major central banks of the world are weaning themselves from their quantitative easing programs that have injected massive amounts of liquidity into the markets over the last few years. In addition, we see precipitous rises in commodity prices and shocks to the tourism industry,” he added.
According to Prof. Buchheit, who serves as Honorary Professor of the University of Edinburgh Law School and a visiting professor at the Centre for Commercial Law Studies in London, the principal challenge Sri Lanka will face in conducting this debt restructuring in this difficult environment will be to coordinate the various creditor groups and to coordinate the individual creditors within those groups.
Following are some excerpts from Prof. Buchheit’s presentation at the webinar.
There are four major creditor groups that will be involved. The first are the bondholders, second the traditional Government creditors so-called bilateral creditors. These are the OECD countries that since 1956 have renegotiated their loans to emerging markets sovereign borrowers jointly under the auspices of the French Treasury and that group of creditors is called the Paris Club. The largest Paris Club lender to Sri Lanka is Japan.
Quite apart from traditional Paris Club lenders are non-Paris Club bilateral creditors, the largest of which is now China. But this group would include India for example.
Finally, there are the multilateral lenders. The IMF, the World Bank, the Asian Development Bank and so forth. The multilateral lenders let's put aside for a moment. They enjoy nearly universal acceptance preferred creditor status meaning that their loans would not be subject to any debt treatment. They will however be expected to be net new lenders to Sri Lanka during the process.
When it comes to the other three – the bondholders the Paris Club and the non-Paris Club bilateral creditors any settlement of the debts owed to one of those groups that is preferential to the settlements with the others will probably proportionally disadvantage the other. So, they view each other with a degree of suspicion.
I suspect each of them secretly hopes that they can negotiate a preferential settlement of their exposure. But in the public, each of them will embrace the principle of inter-creditor equity by which they mean that the terms of debt relief agreed by any one group ought to be comparable to that asked from the other groups. Not necessarily in how it is implemented but at least in a net present value effect on the debt stock. The challenge will be how to coordinate those groups.
In November of 2020 in the middle of the COVID pandemic, the G20 countries announced a new initiative called the Common Framework. For the first time it contemplated that Paris Club bilateral creditors and non-Paris Club bilateral creditors – principally China, would sit at the same negotiating table and would renegotiate their claims against the poorest countries jointly. There were 73 countries eligible for the Common Framework. Sri Lanka is not one of them. Sri Lanka is not classified as a low-income country for this purpose.
I cannot see any policy reason why a Common Framework approach to the bilateral debt stock might not be possible. To create an ad hoc joint bilateral creditors committee in which the traditional Paris Club creditors would sit as well as China and India and any other non-Paris Club bilateral creditors.
The answer to how quickly can all of this be done will turn to a very large extent on the IMF’s assessment of what is needed to return Sri Lanka to a sustainable debt position. The IMF is working on that assessment now. Until we see it, it will be difficult to predict the timing of this for obvious reasons. The deeper the debt relief that the sovereign must request from its creditors the longer it typically takes to persuade those creditors. That is something that they should participate in.
On the bondholder side there is some good news. Sri Lanka has borrowed its international sovereign bonds using a trust structure and that will centralise enforcement in a Trustee for any bond that has not matured and those bonds have collective action clauses.
During the Q&A, to the question what type of debt sustainability plan would fly with China and IMF, Prof. Buchheit said the IMF is the organisation that in the first instance will do the so-called debt sustainability analysis. They will try to determine what package of fiscal adjustments and debt relief would return Sri Lanka in a reasonable period of time to a position in which it has a sustainable debt profile and can re-access the private capital markets.
Everyone will be looking to the IMF for that basic assessment. Once they give it, then the debt restructurers can begin their work to implement a program that will achieve those objectives on the debt relief side.
The webinar also featured Sovereign Debt Specialist University of London Prof. Ulrich Volz, Hector Capital Partners Singapore Managing Partner Dr. Manoj Jain, Keio University – Tokyo Japan Professor Emeritus/Asian Development Bank Institute former Dean and CEO Naoyuki Yoshino, Investor and Insurance Industry Specialist from India R. Ramakrishna, SJB MP and former State Minister of Finance Eran Wickramaratne, Ceylon Chamber of Commerce former Chairman and veteran banker Rajendra Theagaraja.
Sri Lanka Institute of Directors, AICPA and CIMA were the other partners of the webinar sponsored by First Capital. The session will be moderated by Daily FT Editor Nisthar Cassim, and ICC Sri Lanka Immediate Past Chairman and SLID Vice Chairman Dinesh Weerakkody.
