Friday, September 5, 2014

A sovereign debt resolution mechanism should begin by looking at how sovereign credits originate

Joseph Stiglitz in company of many others has recently sent a letter to United Nation’s Secretary General Ban Ki-moon, requesting him to support the implementation of a Convention for the restructuring of sovereign debt.

Of course one cannot but wish for orderly sovereign debt resolution mechanisms, but one needs always to fear the law of unintended consequences… like that the expected benefits of any such mechanism, would just end up being transferred as additional costs to other sovereign borrowers.

Nor would one want lenders who lent to the sovereign at low rates, or acquired sovereign debt when no repayment problems were envisaged, bona fide lenders, to receive the same treatment as those lenders who lending at high speculative rates, perhaps even helped to create the crisis that demands a debt resolution.

Thinking along these lines and reflecting on how often we have seen sovereign debts contracted in an unsustainable ways, perhaps in order to benefit a selected few, it should be clear that any debt resolution mechanism must simultaneously consider the origination of sovereign credits. And, in its simplest form, create a clear distinction between bona fide and speculative sovereign debts.

And, nothing discloses the frontiers between bona fide and speculative debts like the risk premiums charged or implied in the markets. And in this respect, for a starter, I would like to put forward the following definition.

Any sovereign debt that reflects a risk premium that exceeds for instance in 4 percent the lowest interest rate paid for similar debt by other sovereigns, the speculative threshold rate, STR, should be classified as speculative sovereign debt, SSD.

And in the case of a restructuring of a sovereign debt, I propose that any creditor who entered in possession of his credit in conditions that would deem it to be a SSD, should have all interest received in excess of the allowed STR, automatically deducted from the principal.

The basic principle that lies behind this is that if, and only if, a sovereign debt is restructured, a speculative creditor should not have the right to eat the cake and have it too… which translated means should not have the right to obtain the high risk-premiums and 100 percent of the capital too.

And, in presenting this proposal, I am not acting as a creditor, nor as a sovereign borrower, but only as a citizen who wants to avoid governments to mortgage our future on unreasonable terms.

There is currently way too much thinking of what to do if a sovereign credit must be restructured, compared with the thinking of how to avoid unreasonable sovereign debt… or in other words too much talking about odious debts, and too little about odious credit and odious borrowings.

Why for instance is there so much insistence in credit-repayment worthiness ratings, and almost none in ethic ratings which could better show credit-receiving worthiness?