Collective Action Clauses: Recent Developments and Issues
March 25, 2003

Documents Related to the International Monetary and Financial Committee (IMFC) Meeting
October 2, 2004

Progress Report to the International Monetary and Financial Committee on Crisis Resolution
April 20, 2004



Progress Report to the International Monetary and Financial Committee on Crisis Resolution

September 28, 2004

I.   Introduction
II.   Collective Action Clauses
  A. Developments in Market Practice
  B. Design of CACs in Recent Issues
  C. Encouraging the Use of CACs
III.   Code of Conduct
IV.   Recent Application of the Lending Into Arrears Policy
V.   Update on The Evian Approach
VI.   Update on Sovereign Debt Litigation by Private Creditors
VII.   Conclusions
Tables
1.   Emerging Markets Sovereign Bond Issuance by Jurisdiction
2.   Emerging Market Sovereign Bonds Outstanding Stock by Governing Law
3.   Collective Action Clauses: G-10 Recommendations and New York Law Governed Bonds Issued Since March 2004
Boxes
1.   The IIF's Principles for Emerging Markets' Crisis Management and Debt Restructuring


I. Introduction

1. In its recent Communiqué, the International Financial and Monetary Committee (IMFC) welcomed the inclusion by an increasing number of countries of collective action clauses (CACs) in their international sovereign bonds and the convergence toward a market standard.1 It called on the Fund to continue to promote progress in this area, and encouraged sovereign debtors and private creditors to continue their work on a voluntary Code of Conduct. The IMFC looked forward to reviewing further work on issues of general relevance to the orderly resolution of financial crises, and called on the Fund to continue reviewing the implementation of its lending into arrears (LIA) policy.

2. Against this background, this report focuses on crisis resolution initiatives under the existing legal framework. Section II describes progress in the use and design of CACs and efforts being undertaken by the Fund and others to encourage the use of CACs in international sovereign bonds.2 Section III reports on recent efforts by sovereign debtors and their creditors to develop a voluntary Code of Conduct (the "Code") applicable to both. Section IV reviews the application of the Fund's LIA policy in some recent cases. Section V provides an update of progress in the Paris Club's Evian Approach. Section VI presents a brief update of issues relating to litigation against sovereign debtors, and Section VII concludes.

II. Collective Action Clauses

A. Developments in Market Practice

3. Since March 2004, when the last progress report was finalized, sovereign issues containing CACs increased. They currently represent more than 90 percent of total value of bonds issued since that date, and 41 percent of the value of the outstanding stock of bonds from emerging market countries as of September 23, 2004 (Tables 1 and 2). This largely reflects the increasing number of sovereign bonds issued under New York law that contain CACs, including a large exchange offer by Mexico in April 2004, which replaced several outstanding series without CACs with new bonds containing such provisions.

4. Since March 2004, several emerging and mature market countries have continued to include CACs in their international sovereign bonds.

  • Ten emerging market countries, Brazil, Colombia, Korea, Lebanon3, Mexico, Peru, The Philippines, South Africa, Turkey and Uruguay included CACs in their bonds issued under New York law. Among mature market countries, only Italy issued under New York law and continued to include CACs in such issues. In contrast, Jamaica did not include CACs in its New York law issues, largely because this was a reopening of an old issue launched in 2002.4

  • Several issues under English and Japanese law included CACs, as is the market practice in those jurisdictions. Brazil, Croatia, Cyprus, the Czech Republic, Hungary, the Slovak Republic, The Philippines, Thailand, Turkey and Ukraine are among the emerging market countries, and Austria, Greece, New Zealand and Sweden among mature market countries that issued under English law. Hungary and Poland both issued under Japanese law.

  • Jamaica made the only issuance under German law. This bond did not include CACs. This is in line with the practice under German law bond issuances, pending ongoing legislative clarification on the effectiveness of CACs in that jurisdiction.5

5. Market acceptance of CACs has continued with no observable impact on pricing even after international liquidity conditions toward emerging market debt gradually tightened in the second quarter of 2004. As has been the case during the past year, market reports on new sovereign bond issues are not focusing on the inclusion of CACs in bonds issued under New York law, reflecting the broad acceptance of CACs as market practice.

Table 1. Emerging Markets Sovereign Bond Issuance by Jurisdiction1
    2002
2003
2004
    Q1 Q24 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q35,6
   


With CACs2                      
  Number of issuance 6    5    2    4    9    31    10    5    25    19    16   
    of which: New York law         1    22    5    4    14    12    9   
  Volume of issuance 2.6 1.9 0.9 1.4 5.6    18.0 6.4 4.3 18.5 14.4 9.1
    of which: New York law         1.0    12.8 3.6 4.0 10.6 8.0 4.9
Without CACs3                      
  Number of issuance 17    12    5    10    14    4    7    7   2    2    2   
  Volume of issuance 11.6 6.4 3.3 4.4 8.1 2.5 3.5 4.2 1.5 1.9 1.5

Source: Capital Data.
1Number of issuance is in number. Volume of issuance is in billions of U.S. dollars.
2English and Japanese laws, and New York law where relevant.
3German and New York laws.
4Includes issues of resturctured bonds by Uruguay.
5Data for 2004-Q3 are as of September 23, 2004.
6Includes the issue by Hong Kong SAR.


Table 2. Emerging Market Sovereign Bonds Outstanding Issuance by Governing Law
  Number of Issuance
Value of Issuance
    (in percent) (in billions of US $) (in percent)
New York1 412 58 263 62
English 190 27 114 27
German 64 9 30 7
Japan 49 7 14 4
Total 715 100 425 100
  of which with CACs 306 43 176 41

Source: Capital Data; and IMF staff estimates (as of September 23, 2004).
1Includes the issue by Hong Kong SAR.

B. Design of CACs in Recent Issues

6. Since mid-2002, the Executive Board has repeatedly encouraged the inclusion of CACs in international sovereign bonds and, in particular, in those governed by New York law. While recognizing that any decision concerning the design of CACs will ultimately be made by the issuer and its creditors, Directors considered it appropriate to continue existing practice in the London market and encouraged the use in New York law bonds of CACs that are broadly in line with the provisions recommended by the G-10 Working Group.6 They recognized, however, that it was too early to reach a definitive view on the degree of standardization in terms of the design of CACs within and across jurisdictions. Table 3 contains a summary of the CACs contained in New York law bonds issued since March 2004 and a comparison of these provisions with the G-10 recommendations.7

  • Regarding majority restructuring provisions, all recent New York law bonds utilized a 75 percent voting threshold.8 After a relatively brief period of uncertainty regarding the degree of standardization between investment and non-investment grade countries, it now appears that market practice for bonds issued under New York law has rapidly converged to a 75 percent voting threshold (based on outstanding principal) for majority restructuring provisions, in line with the G-10 recommendations. In particular, Brazil lowered the voting threshold in its recent sovereign issues to 75 percent from 85 percent, reflecting the practice followed by a number of non-investment grade countries. Almost all of these bond issues contain an expanded disenfranchisement provision that excludes bonds that are held by public sector instrumentalities, in addition to those held by the sovereign issuer, for quorum and voting purposes, which is consistent with the G-10 recommendations.

  • With respect to majority enforcement provisions, all recent bond issues governed by New York law, except those of Lebanon, adopted a 25 percent threshold for acceleration.9 They differ, however, on the threshold for de-acceleration. While the bond issuances of Brazil, Italy, and Turkey included a 66⅔ percent threshold for de-acceleration, the others relied upon a threshold of more than 50 percent of outstanding principal. The Lebanon bonds do not contain any majority enforcement provisions. Finally, all the recent New York law bond issues utilized a fiscal agency structure.10

  • Continuing its practice since the debt restructuring in May 2003, Uruguay's recent bond included a limited form of aggregation provision which gives Uruguay the option to amend payment terms on the basis of aggregate voting across affected bond series issued under the same trust instrument.11 It also contains a transparency provision which requires Uruguay to provide certain types of information to investors before any future modification of the bonds is sought.

  • The English law bonds recently issued by Latvia contain an engagement clause that allows the bondholders with at least 50 percent of outstanding principal to appoint any person or a committee to represent their interests in the event of a default or if a restructuring is publicly announced, provided that no appointment would become effective over the objection of the holders of more than 25 percent of outstanding principal.12 This clause is consistent with the G-10 recommendations.

C. Encouraging the Use of CACs

7. Staff has continued to take a proactive role in promoting the inclusion of CACs in international sovereign bonds encouraging their adoption both in the context of the use of Fund resources and Article IV consultation discussions. Staff continues to maintain an active dialogue with private market participants and debt managers from a number of emerging market countries to further discuss the design of CACs and promote their use, including through the Forum for Public Debt Managers.

8. The G-10 Deputies Group has continued its efforts to promote and monitor developments in the use of CACs. Most recently, the Group discussed a report prepared by the Bank of England reviewing the progress that has been made in introducing CACs in international sovereign bonds and the scope for further engagement with issuers and market participants.13 The G-10 Deputies intend to report on their stocktaking in the meeting of the G-10 Ministers and Governors on October 3. Staff will inform the Executive Board of the deliberations of the G-10 Ministers and Governors on this matter.

Table 3. Collective Action Clauses: G-10 Recommendations and New York Law Governed Bonds Issued Since March 2004
Provisions
G-10 recommendations
Brazil, Colombia, Korea, Italy, Lebanon, Mexico, Peru, Philippines, South Africa, Turkey and Uruguay
Amendment of Key Terms 75 percent based on either outstanding principal or duly convened meeting.
  • Brazil, Colombia, Korea, Italy, Mexico, Peru, Philippines, South Africa, Turkey and Uruguay: 75 percent based on outstanding principal (including governing law and submission to jurisdiction).

  • Lebanon: 75 percent based on duly convened meeting.

  • Uruguay: option to amend on the basis of aggregate voting across affected bond series issued under the same trust instrument - 85 percent of the aggregate outstanding principal of all issues proposed to be affected and 66⅔ percent of the outstanding principal of each affected series
Disenfranchisement
    Bonds owned or controlled directly or indirectly by the issuer or its public sector instrumentalities.
Generally bonds owned directly or indirectly by the issuer or its public sector instrumentalities.
Acceleration
    25 percent of outstanding principal.
25 percent based on outstanding principal (except the Lebanon bond, where each bondholder has the right to accelerate upon default).
De-acceleration
    Between 50 and 66⅔ percent of outstanding principal.
  • Colombia, Korea, Mexico, Peru, Philippines, and South Africa: more than 50 percent based on outstanding principal.

  • Brazil, Italy, Turkey and Uruguay: 66⅔ percent.

  • Lebanon: none.
Initiation of Proceedings
  • Mandate the use of a trust or an equivalent legal structure where the trustee can be instructed by 25 percent to initiate lawsuits.

  • Pro rata distribution of recovered proceeds under trust or equivalent structure.
Any bondholder.
EngagementProvision
  • A bondholder representative be appointed for the life of the bond.

  • 66⅔ percent to appoint at any time any person to represent all holders in negotiation with the issuer or other creditors.
None.
Information Provision
    A covenant requiring the issuer to provide certain types of information over the life of the bond and following an event of default.
Uruguay bond requiring Uruguay to provide certain types of information to investors before any future modification of the bonds is sought..
Documentation
    Trust or an equivalent legal structure.
Fiscal agency agreement (except the Uruguay bond which is issued under a trust indenture)

9. The International Primary Market Association (IPMA), a group of market participants, together with six other trade associations, are leading an effort to define a market standard for CACs that reflects current best practice and is mutually acceptable to issuers, investment banks, and investors. Staff will provide the Board with a commentary should such a standard be agreed.

III. Code of Conduct

10. In its recent Communiqué, the IMFC encouraged sovereign debtors and their private creditors to continue their work toward developing a voluntary Code of Conduct. Recent experience in crisis countries suggests that debtor-creditor dialogue is critical to the success of the debt restructuring process. A Code could, in principle, facilitate dialogue between creditors and debtors, promote corrective policy action to reduce the frequency and severity of crises, and improve the prospects for an orderly and expeditious resolution of crises. For this reason and because the effectiveness of voluntary rules of conduct hinges on its acceptability to those most affected, this effort is best led by sovereign debtors and their private creditors. In this context, the experience with the introduction of CACs, which followed the same approach, is encouraging.

11. Building on work undertaken in the spring, efforts to develop a Code are continuing in both the G-20 and the Institute of International Finance (IIF).14,15 The IIF, with a view to moving the process forward, has continued to develop draft Principles-rather than a detailed Code-predicated on enhanced debtor-creditor cooperation that are based on four pillars-information sharing and transparency, close debtor-creditor dialogue and cooperation, good faith actions during debt restructuring, and fair treatment of all parties (Box 1). Based on recent multi-party discussions, there appears to be an increasing consensus within the investor community and among selected emerging market issuers on the draft Principles. While work continues to fine tune the draft and to widen the spectrum of sovereign issuers involved, the IIF expects to circulate the draft Principles to the G-20 in October 2004 for possible endorsement. Notwithstanding the progress on the draft Principles, challenges still remain in devising a tangible Code that is detailed enough to provide practical guidance, while at the same time being sufficiently flexible to be applied to a diverse set of country circumstances. Staff will continue to monitor progress and will provide the Executive Board with a commentary should the Principles be agreed.

Box 1. The IIF's Principles for Emerging Markets' Crisis Management and Debt Restructuring

The IIF's draft Principles highlight their voluntary nature and offer guidelines for actions by debtors and creditors to enhance creditor-debtor cooperation in the context of both crisis prevention and crisis resolution. The draft Principles delineate actions by creditors and debtors, and are to be applied flexibly and on a case-by-case basis.

  • Information sharing and transparency-it is underscored that investors need access to more data from debtors in a timely manner, and that debtors should aim to find more effective ways to communicate their policy intentions.
  • Close debtor-creditor dialogue and cooperation-high priority is assigned to dialogue and cooperation to ensure the sharing of information on a range of issues to contain crises. In contrast to previous proposals, there is no presumption that a standing committee or advisory panel of key creditors be formed in the context of crisis resolution.
  • Good faith action during debt restructuring-the consultation vehicle between debtors and creditors is expected to build on Investor Relations Programs, with the specific format of consultations depending on circumstances. In the event of a default, the draft Principles suggests that early negotiations with a creditor committee should take place, but indicates that the appropriate format and role of negotiation vehicles should be determined flexibly and on a case-by-case basis.
  • Fair treatment of all parties-the draft Principles underscore that debtors should avoid discriminating among creditors, subject to common practices such as exclusion of trade credits from restructurings. In the case of official bilateral debt, it is noted that debtors would seek to avoid discriminating among creditors, including seeking rescheduling from official bilateral creditors.

The draft Principles addresses a number of issues contained in previous proposals that could have been problematic from the Fund's perspective. In particular, the revised draft makes no attempt to create leverage by making Fund lending decisions dependent on creditor assessments of debtors' behavior. Rather, debtors and creditors would agree to encourage the Fund to take key actions-including implementing fully its lending into arrears policy and relying on it to support the debtor's reasonable efforts to avoid default-but the Fund would not be required to commit to the actions. Similarly, earlier proposals to effectively eliminate the use of exit consents have been eliminated.

Notwithstanding the progress, some issues remain. In particular:

  • Greater clarity is needed regarding creditors' agreement to maintain trade credit and inter-bank advances. Creditors are encouraged to maintain trade credit and inter-bank advances in support of the debtor's efforts to avoid a broad debt restructuring, but the modalities for this are undefined.
  • The draft principles contain a presumption that debtors would bear the reasonable cost of the creditor committee. While this has been accepted practice in past restructurings, there is no consensus on this among sovereign issuers.
  • The draft does not include a provision in which creditors represented on a creditor committee would agree to a voluntary standstill on litigation during the restructuring process that is being conducted in conformity with the Principles. This omission can be interpreted as at variance with the expectations set forth in the Fund's lending into arrears policy-which the IIF draft Principles urge the Fund to implement fully-wherein a formal negotiating framework, should one be warranted, would include a voluntary standstill on litigation by creditors represented on the committee.

IV. Recent Application of the Lending Into Arrears Policy

12. The core objective of Fund financing-to assist effective balance of payments adjustment, without recourse to measures destructive to national and international prosperity and while safeguarding the Fund's resources-underpins the Fund's LIA policy.

13. Under the LIA policy, the Fund lends into sovereign arrears to private creditors on a case-by-case basis and only where (i) prompt Fund support is considered essential for the successful implementation of the member's adjustment program, and (ii) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors.16 In 2002, the Board reviewed the application of the good-faith criterion of the LIA policy and added procedural clarity about the nature and modalities of good-faith efforts expected of debtors during the restructuring process in order to reach a collaborative agreement with creditors.17

14. Financing assurances reviews remain a fundamental requirement of the LIA policy. In particular, after approval of a Fund arrangement involving lending into arrears, financing assurances reviews are required for each purchase until outstanding debt arrears to private creditors have been "cleared" (e.g., through a rescheduling agreement or actual payment). These reviews allow the Board to assess whether developments in creditor-debtor relations have not undermined program implementation and, more specifically, that the member's capacity to repay the Fund has remained intact. The policy applies to all Fund arrangements.18

15. When first formulated in the context of the Brady initiative in 1989, the LIA policy was designed to facilitate the approval of a Fund arrangement before foreign commercial banks had provided assurances regarding their willingness to support a restructuring consistent with the assumptions of the program.19 Since its inception, the policy has evolved with changes in the financial environment of sovereign debtors and their creditors. Most significantly, in 1999, the scope of the policy was broadened to encompass sovereign debt to all private creditors, including holders of international sovereign bonds, recognizing that bonded debt raised particular challenges for restructuring and the provision of Fund financing in that context.20 This section identifies the cases where the LIA policy has been applied in Fund-supported programs over the past two years involving sovereign arrears to private creditors, including in the context of a sovereign debt restructuring.21

GRA cases

  • Argentina-the current and the previous stand-by arrangements have applied the Fund's LIA policy. The number of outstanding debt instruments, the diversity of the private creditor base to which arrears have been incurred (including foreign, domestic, institutional and retail bondholders), and the total size of arrears have contributed to the complexity of the case. The Global Committee of Argentine Bondholders (GCAB) has been recognized by the Argentine authorities and the Fund as a representative creditor group with whom good-faith negotiations should be conducted. Purchases under these stand-by arrangements have been, or are, subject to financing assurances reviews. The letters of intent for these arrangements have included explicit steps the government would undertake to meet the "good faith" criterion under the LIA policy.

  • Serbia and Montenegro-the current extended arrangement was approved in the context of arrears to foreign commercial bank creditors. The negotiations between Serbia and Montenegro and the commercial banks have been conducted through the London Club. Financing assurance reviews have been completed in light of progress in these negotiations. Negotiations were protracted, inter alia, by the need to achieve comparability of treatment with Paris Club terms, but were successfully concluded in July 2004.

  • Gabon-arrears to external private creditors existed when the Board approved the current stand-by arrangement. The authorities committed to seek a rescheduling with private creditors-on terms comparable with the rescheduling from official bilateral creditors-in order to fill the financing gap. A review of financing assurances will be conducted in conjunction with the first program review, currently scheduled for September 27.

Non-HIPC PRGF cases

16. In the context of PRGF arrangements for non-HIPCs, the LIA policy was applied in only two cases.

  • Albania-the PRGF-supported program recognized the need to regularize long-standing arrears to external private creditors, but progress has been complicated by problems of debt reconciliation. Financing assurance reviews have been completed on this basis.

  • Dominica-the current PRGF arrangement was approved while arrears to external private creditors were outstanding. A financing assurances review was completed at the time of the first program review against a backdrop of negotiations for a comprehensive debt restructuring. At the time of the second program review, the LIA policy did not apply as the relevant arrears to private creditors had been eliminated.

HIPC PRGF cases

17. The application of the LIA policy appears to have been less rigorous in the context of PRGF arrangements for HIPC cases.22 The objective of achieving broad participation in the HIPC Initiative has led to programs designed on the assumption that private creditors will provide the full debt relief envisioned in the HIPC Initiative. However, PRGF arrangements for HIPC countries have generally not included explicit financing assurances reviews requiring an assessment that the member was making a good faith effort to reach a collaborative agreement with its private creditors.23

  • Nicaragua is one HIPC country where the PRGF arrangement has involved an explicit application of the LIA policy. Nicaragua's PRGF-supported program has been implemented in the context of arrears to commercial creditors whose original claims were not tendered in a 1995 IDA-sponsored buyback. Litigation by one of these commercial creditors led to an initial Belgian court order restricting payments by Nicaragua through Euroclear to holders of "indemnity bonds" and thus resulted in Nicaragua incurring arrears at the end of 2003 on these bonds.24 Nicaragua's negotiation with commercial creditors have been framed by seeking agreement comparable to Paris Club and HIPC terms and the "good-faith" criterion has been judged in that context. Until the clearance of the arrears (which occurred once the court order restricting payment to the indemnity bondholders had been removed), Nicaragua established a good faith posture with respect to the indemnity bondholders by placing payments amounts in an escrow account.

V. Update on The Evian Approach

18. The Evian Approach-a new, flexible, approach adopted by the Paris Club for addressing debt sustainability concerns of non-HIPC countries-is continuing to evolve.25 To date, however, experience with the Evian Approach has been limited.

  • Since March 2004, the Paris Club has provided flow reschedulings to the Dominican Republic, Gabon, and Georgia under the Evian approach after considering the issue of debt sustainability on the basis of staff projections and analysis of their balance of payments. The agreed minutes for the latter two include goodwill clauses indicating that the Paris Club would consider further treatment of maturities, with the clause for Georgia specifically noting that the Club would be ready to examine the country's debt situation under the Evian Approach at the end of the program period.

  • In the context of existing procedures to secure financing assurances from official bilateral creditors, Fund staff has provided-consistent with the Evian approach in cases where solvency has been identified as an issue-balance of payments projections, including debt sustainability analyses, for Argentina and Iraq to Paris Club creditors. These projections have included various debt reduction scenarios based on assumptions provided by the Club. The Paris Club has not yet come to a view on whether Argentina will benefit from debt reduction by the Club. No agreement on debt reduction for Iraq has been reached by the Club as yet.

19. Staff will continue to update the Board on developments in the Evian Approach.

VI. Update on Sovereign Debt Litigation by Private Creditors

20. As recently noted, sovereign debt litigation continues to pose some challenges to the orderly resolution of sovereign debt crises.26 Among the interesting developments in this area are:

  • LNC's appeal against the decision of the Brussels Court of Appeal in the LNC vs. Nicaragua case which rejected the claim that the contractual pari passu clause provided a legal basis to interrupt payments between a sovereign debtor and its other creditors.

  • Although enforcement proceedings against Argentina have diminished, additional class actions have been filed raising novel and potentially far-reaching legal arguments.

Continuing litigation over pari passu clause

21. LNC's appeal to the Belgian Supreme Court (Cour de Cassation) in the LNC v. Nicaragua case attempts to reopen the argument that the pari passu clause provides a creditor with a right to proportionate payment.27 This appeal focuses on the narrow ground of the Brussels Court of Appeal's ruling that, irrespective of the construction of the contractual pari passu clause, such clause could not be invoked against Euroclear, the settlement agent under the Nicaragua's indemnity bonds, since Euroclear was not a party to the contract in which the pari passu clause arose. LNC argues that this conclusion was erroneous as a matter of Belgian law. Consequently, LNC seeks to preserve the ruling in the Elliott/Peru case that accorded the judgment creditor with the right to interrupt payments made in apparent violation of the pari passu clause. The Belgian Supreme Court is expected to rule on LNC's appeal within the next year.

22. The revival of the LNC vs. Nicaragua case indicates that the legal effect of the pari passu clause has not yet been definitively settled in the Belgian courts (nor New York courts).28 Meanwhile, the legislative process is continuing in Belgium to adopt a law that would prevent a judgment creditor from obtaining a court order that would preclude Euroclear from channeling payments from a sovereign debtor to its bondholders. The draft law has already been approved in the legislative Chamber and is now in the final process of formal adoption.

Developments in litigation against Argentina

23. The lull in enforcement activity by judgment creditors against Argentina is notable. Judgment creditors may feel somewhat frustrated by the inability to find assets available for attachment. In the New York proceedings, the extensive time spent contesting the scope of information that Argentina should provide on the location of its commercial assets, yielded rather limited information to the judgment creditors. However, it remains to be seen whether the judgment creditors will re-embark on aggressive enforcement proceedings.

24. Notwithstanding the apparent difficulty in enforcing court judgments against Argentina, five additional class actions have been filed in New York court since February, 2004, bringing the pending class actions to fifteen. Only one class action has been certified to date (a procedural step necessary for continuation of the actions) and that action appears to have been stalled by the ruling that bondholders would need to affirmatively opt-in the litigation in order to recover in the class action.

25. However, one of the recently filed class actions, the so-called "Lavaggi class action", raises some novel legal issues.29 In addition to the standard breach of contract claim for non-payment of principal and interest on the bonds, the class action seeks redress for (i) breach of duty of good faith and fair dealing and (ii) unjust enrichment (alleged on the basis that Argentina used the funds available in payment under the bonds "for its own purposes"). Based upon these allegations, the class action seeks punitive damages in excess of US$100 billion from Argentina. A claim for punitive damages in relation to a sovereign debt default is novel and is yet another example of aggressive strategies intended to raise the stakes in sovereign debt litigation.

VII. Conclusions

26. The trend toward the use of CACs in international sovereign bonds issued under New York law has gained momentum. Market acceptance of CACs has continued, with sovereign issues containing CACs growing to represent more than 90 percent of total value of bonds issued. Staff continues to maintain an active dialogue with private market participants and debt managers from a number of emerging market countries to promote the use of CACs. Building on work undertaken in the spring, efforts to develop a Code are continuing in both the G-20 and the Institute of International Finance (IIF). While challenges remain in devising a detailed and tangible Code, the draft general Principles formulated by the IIF could form a basis for further discussions in the G-20 and the wider investor community, and a broad agreement on the Principles could be reached later in the year. As requested by the IMFC, the implementation of the Fund's lending into arrears policy will continue to be reviewed. The Evian Approach-a new, flexible, approach adopted by the Paris Club for addressing debt sustainability concerns in non-HIPC countries-continues to evolve, but experience, to date, with the approach has been limited.


1Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund, Washington, April 24, 2004 http://0-www-imf-org.library.svsu.edu/external/np/cm/2004/042404.htm.
2In this paper, the term "collective action clauses" (CACs) is used to refer to clauses that include both majority restructuring and majority enforcement provisions. The term "international sovereign bonds" comprise bonds issued or guaranteed by the government or central bank that are governed by a foreign law or subject to the jurisdiction of a foreign court.
3The Lebanon bonds include only majority restructuring provisions.
4Israel did not include CACs in its April 2004 bond issued under New York law which is fully guaranteed by the United States with respect to principal and interest. Hong Kong SAR, which issued its first international bond under New York law, did not include majority restructuring provisions, but it did include majority enforcement provisions.
5See Progress Report on Crisis Resolution (SM/04/108, 3/31/04).
6Review of the G-10 Working Group on Contractual Clauses, 9/26/02, www.bis.org/publ/gten08.htm. In particular, Directors expressed the view that it would be reasonable to set the voting threshold at 75 percent of outstanding principal with respect to majority restructuring provisions contained in New York law bonds. Directors generally considered as reasonable the thresholds for majority enforcement provisions that have already been generally accepted in New York law bonds, namely a vote of 25 percent of outstanding principal to accelerate the claims following a default and a vote of more than 50 percent and up to 66⅔ percent of outstanding principal to rescind an acceleration of these claims. See Acting Chair's Summing Up: Collective Action Clauses - Recent Developments and Issues (BUFF/03/52, 4/10/03).
7See Collective Action Clauses - Recent Developments and Issues (SM/03/102, 03/25/03) for a detailed comparison of the design of CACs recommended by the G-10 Working Group and those contained in certain recent New York law bonds.
8While the voting threshold in the Lebanon bond is calculated on the basis of the claims of bondholders present at a duly convened meeting, the threshold in other bond issues is based on the outstanding principal of the bond.
9The Lebanon bond allows individual bondholders to accelerate their claims upon default.
10See Collective Action Clauses - Recent Developments and Issues (SM/03/102, 03/25/03) for a detailed discussion of the differences between a fiscal agency structure and a trust structure.
11
See Box 1 in The Restructuring of Sovereign Debt-Assessing the Benefits, Risks and Feasibility of Aggregating Claims (SM/03/308, 9/4/03) for a detailed discussion of the aggregation feature in Uruguay's bond issue. Uruguay included the aggregation clause in its June 2003, October 2003 and March 2004 bond issues.
12Republic of Latvia Offering Circular dated April 1, 2004 for €400,000,000 4.25 percent Notes due 2014.
13The meeting was held on July 22 in London.
14The IIF's views are presented in an April 2004 press release IIF Calls for Debtor-Creditor Principles for Emerging Markets' Crisis Management and Debt Restructuring, available on its website: http://www.iif.com/.
15Earlier efforts to develop a Code are described in Progress Report to the International Monetary and Financial Committee on Crisis Resolution (IMFC/Doc/9/04/7, 4/21/2004).
16
The LIA policy applies similarly with respect to non-sovereign arrears stemming from the imposition of exchange controls, as outlined in Summing Up by the Acting Chairman on Fund Policy on Arrears to Private Creditors-Further Considerations (BUFF/99/71, 6/18/99).
17 Fund Policy on Lending into Arrears to Private Creditors-Further Consideration of the Good Faith Criterion (SM/02/248, 7/31/02) and The Acting Chair's Summing Up on Fund Policy on Lending into Arrears to Private Creditors-Further Consideration of the Good Faith Criterion (BUFF/02/142, 9/9/02).
18The 2002 Conditionality Guidelines (SM/02/276 Rev. 1, 9/23/02) effectively clarified that the requirement for financing assurances reviews where there were external payments arrears was not limited to Fund purchases (i.e., under the GRA), but includes Fund disbursements (i.e., under the PRGF) as well.
19See Financing Assurances in Fund-Supported Programs (EBS/87/266), The Fund's Policy on Financing Assurances (EBS/89/79), and EBM/89/61; Concluding Remarks by the Chairman on Fund Policy on Sovereign Arrears to Private Creditors (BUFF/98/25) and Fund Policy on Sovereign Arrears to Private Creditors (SM/98/8). Prior to the 1989 modification, arrears to private creditors were encompassed by the Fund's policy on non-toleration of arrears, wherein Fund-supported programs required the elimination of existing arrears and the non-accumulation of arrears during the program period. During the 1980s debt crisis, the policy of non-toleration of arrears was applied with the convention that the acceptance of a term sheet by banks holding a critical mass of principal was treated, for program purposes, as eliminating arrears and providing adequate assurances regarding commercial bank financing.
20See Summing Up by the Acting Chairman on Fund Policy on Arrears to Private Creditors-Further Considerations (BUFF/99/71) and Fund Policy on Arrears to Private Creditors-Further Considerations (EBS/99/64).
21As Bolivia and Uruguay did not accumulate arrears to private creditors, the LIA policy was not applied for these Fund arrangements.
22In some of these cases, representation by the member that the underlying private creditors claims were in dispute resulted in the Fund treating the putative arrears as outside of the purview of the program, consistent with the Fund's general policy on disputed claims; see The Role of the Fund in Settlement of Disputes Between Members Relating to External Financial Obligations (SM/84/89, 4/25/84).
23These and other related issues relating to the role of private creditors in the HIPC cases have been discussed in current and past HIPC progress reports, which have kept the Board apprised of developments (see SM/04/300, 8/2304; EBS/04/96, 7/8/04).
24This decision was reversed on appeal and the litigation is ongoing (see paragraphs 20 and 21, below).
25The Evian Approach is described in Progress Report to the International Monetary and Financial Committee on Crisis Resolution (IMFC/Doc/9/04/7, 4/21/2004). Additional information on the Evian Approach is available on the Paris Club's website: www.clubdeparis.org/en/index.php.
26These issues are discussed at length in Recent Developments in Sovereign Debt Litigation and Implications for Debt Restructuring and Debt Relief Processes (SM/04/98, 3/24/04).
27The case is discussed in paragraph 37 and Annex IV of the Board paper referenced in footnote 21 above.
28Similarly, the ruling in January 2004 of the New York federal court in the litigation between EML and Argentina that a decision on the legal effect of the pari passu clause was not ripe for determination, leaves this legal debate open.
29The proposed class is broad, attempting to cover all bondholders with bonds issued by Argentina since December 23, 2001 "who have been injured by Argentina's default," but excluding plaintiffs in other cases involving bond defaults by Argentina.