20 April 2002

G-7 Issues Action Plan for Sovereign Debt Restructuring

Ministers aim to reduce uncertainty about policy actions

The Group of Seven (G-7) finance ministers and central bank governors have approved a plan designed to help prevent financial crises in emerging markets by setting out new rules for restructuring the debt of overly indebted countries.

The plan would introduce "cooling-off periods" -- or standstills -- for rescheduling or restructuring debt, and new clauses in debt contracts to improve the ability of creditors to renegotiate debts. The plan also calls for G-7 officials to work with the International Monetary Fund (IMF) to improve the "quality, transparency and predictability of decision-making," the G-7 ministers said.

The officials of the G-7 countries -- the United States, Canada, Italy, France, Germany, Japan and Britain -- released the action plan following their April 19-20 meetings in Washington, held in tandem with the annual spring meetings of the World Bank and IMF.

The action plan closely tracks a U.S. proposal for a more market-oriented approach to sovereign debt restructuring.

Following is the text of the G-7 action plan as released by the U.S. Department of the Treasury:

April 20, 2002

Group of Seven (G-7) Finance Ministers and
Central Bank Governors Action Plan on Sovereign Debt

We, the G-7 Finance Ministers and Central Bank Governors, have today adopted an integrated Action Plan to increase predictability and reduce uncertainty about official policy actions in the emerging markets. The Action Plan is part of an overall endeavor whereby the sovereign debt of all countries would ultimately be investment grade, a rating that every country could eventually achieve with the right policies. The Action Plan would help prevent financial crises and better resolve them when they occur, thereby creating the conditions for sustained growth of private investment in emerging markets and helping raise living standards of the people in emerging market countries. We pledge to work together to carry out this Action Plan. The plan comprises the following elements that are complementary and reinforce each other.

We will work with emerging market countries and their creditors to implement a market-oriented approach to the sovereign debt restructuring process in which new contingency clauses would be incorporated into debt contracts. These new clauses should describe as precisely as possible what would happen in the event of a sovereign debt restructuring. The clauses should include super-majority decision-making by creditors; a process by which a sovereign would initiate a restructuring or rescheduling -- including a cooling-off, or standstill, period; and a description of how creditors would engage with borrowers. Within these parameters, we will work with borrowers and creditors to make the clauses as effective as possible, examining such issues as aggregation, new private lending, and treatment of existing debt. We will also work with the International Monetary Fund [IMF] on incentives for countries with IMF programs to adopt such clauses.

With this market-oriented approach to the sovereign debt restructuring process, we are prepared to limit official sector lending to normal access levels except when circumstances justify an exception. It is becoming clearer that official sector support is being limited. Limiting official sector lending and developing private sector lending are essential parts of our Action Plan.

We will work with the IMF to improve the quality, transparency, and predictability of official decision-making as a key means of crisis prevention. Specific actions include a more pre-emptive analysis of debt sustainability using market-based measures of credit-worthiness, a consideration of a greater degree of independence between the surveillance or analysis role and the lending role at the IMF, and a clarification of the lending into arrears policy of the IMF.

We support further work by the IMF on proposed approaches to sovereign debt restructuring that may require new international treaties, changes in national legislation, or amendments of the Articles of Agreement of the IMF. Since these changes would take time, this work should not delay the expeditious implementation of the approach described above; indeed, this work is complementary.

We emphasize that this Action Plan should increase the incentives for governments to pay their debts in full and on time. These incentives, which include the benefit of continued market access at reasonable interest rates, should remain.

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