Book Review: Too Little, Too Late

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Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises. 2016. Martin Guzman, José Antonio Ocampo, and Joseph E. Stiglitz, eds.

Reviewed by William Chew


Key factors within the ebook are as follows:

  • In distinction to most developed debt markets, sovereign debt issuers haven’t any accepted restructuring regime.
  • Emerging market excellent debt is greater than $900 billion, 30% of which is due inside 10 years.
  • New forces in sovereign debt markets — distressed-debt merchants, collective-action clauses, and credit score default swap (CDS) contracts with out ample disclosure of counterparties and phrases — make restructurings tougher than prior to now.
  • The simplest restructuring regime can be a multinational framework based mostly on mutually useful long-term incentives for lenders and traders to take part in restructurings. Without this method, sovereign restructurings can be exercises in too little, too late.

For a lot funding evaluation, sovereign debt restructuring is a marginal subject, of concern primarily to distressed-debt specialists. The improve in rising market debt — to greater than $900 billion in outstandings in line with the International Monetary Fund (IMF) — nevertheless, along with the rising portion of this debt raised by bonds reasonably than official and personal financial institution loans, heightens the significance of sovereign debt restructuring. This concern impacts not solely holders of sovereign debt but additionally traders in company, monetary, and structured debt that could be uncovered to sovereign debt–restructuring threat.

In this context, Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises is especially properly timed. The ebook is a set of 15 papers on present sovereign debt–restructuring challenges and various approaches to resolving them. The editors and authors are main economists, attorneys, bankers, and traders with deep expertise in restructuring. For funding analysts, the ebook is a precious supply of systematic evaluation, insights, and information on a fancy drawback.

In explicit, the ebook makes the next factors:

  • Most main company debt markets have broadly accepted restructuring frameworks. The most absolutely developed is the US Bankruptcy Code, which covers not solely private-sector company debt beneath Chapter 11 but additionally debt issued by US states and municipalities beneath Chapter 9. Sovereign debt markets, in distinction, have to not date developed any extensively accepted restructuring regimes.
  • Attempts have been made — led by the IMF and the biggest creditor nations, the United States and United Kingdom — to handle the necessity for such regimes because the 1930s. Progress has been restricted, nevertheless, and no extensively accepted and sturdy framework has emerged. Recent makes an attempt at a framework have centered on two approaches: (1) privately negotiated revisions to contract phrases in sovereign debt devices and (2) revisions to the statutory legislation beneath which sovereign debt is issued. Any common framework will, the authors argue, want to incorporate each approaches to turn out to be extensively accepted.
  • New components within the sovereign debt market that make progress towards a common framework tough are entry of distressed-debt merchants, as within the Argentine default in 2008; rise of collective-action clauses designed to facilitate restructuring of particular debt points to fulfill personal lenders and traders; and development of CDS contracts on sovereign debt with out ample disclosure of counterparties and significant phrases.
  • The profile of present excellent sovereign debt makes the necessity for a broad restructuring framework significantly pressing. Of the $900 billion excellent, the IMF estimates 30% comes due throughout the subsequent 10 years, however these maturing points not have frequent debt-contract provisions. Therefore, ought to they default, they are going to be tough to restructure.
  • In the top, the contributing authors to Too Little, Too Late preserve, the one sturdy resolution can be a multinational framework, which is printed within the ultimate six papers within the ebook. The simplest solution to carry lenders and debtors collectively, in line with this argument, is by specializing in the mutually useful incentives they should take part in a restructuring of defaulted debt. For debtors, the motivation is the chance for a contemporary start to cut back debt and debt service to a stage adequate to allow the sustainable financial output required to assist the debt. For lenders, the motivation is the chance to extend the risk-adjusted returns on the restructured debt relative to returns on defaulted paper. Without such a framework, sovereign debt restructuring can be a seamless exercise within the too little, too late phenomenon demonstrated most not too long ago in Greece.

For many funding analysts, sovereign restructuring might not at present be a compelling space of curiosity. But with rising quantity and threat ranges in sovereign and associated debt markets, analysts — particularly these with restricted expertise in sovereign debt restructuring — will discover Too Little, Too Late a wonderful useful resource on a subject more likely to turn out to be vital within the close to future.

More book reviews can be found on the CFA Institute website or within the CFA Institute Financial Analysts Journal®.

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the writer’s employer.

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