——— FINANCIAL POLICY FORUM ———
DERIVATIVES STUDY CENTER
www.financialpolicy.org 1660 L Street, NW, Suite 1200
email@example.com Washington, D.C. 20036
SPECIAL POLICY REPORT 3
Derivatives Study Center
New Rules for Global Finance
September 29, 2001
This paper will be an analysis of how certain hedge funds have attempted to exploit some of the shortcomings of the process of restructuring and forgiving emerging market debt. After having bought this debt on the secondary market at steep discounts, hedge funds have attempted to attain favorable debt-servicing treatment through litigation and free-riding in the restructuring process. By pursuing litigation instead of participating in the debt restructuring process, hedge funds sue the sovereign debtor in the hopes of attaining full principal and interest. Hedge funds have acted as free-riders by not agreeing to restructure their debt while other creditors and the debtor share the burden of debt restructuring (which may, for example, be fiscal tightening and economic austerity for the sovereign debtor, and debt forgiveness and longer maturities for the creditors). In order to illustrate this, I shall be looking at specific cases. In Peru, a hedge fund was effectively able to use litigation to gain more favorable debt-servicing treatment; while in Ecuador, recalcitrant creditors were effectively bailed-into the restructuring process. The analysis will be driven by specific cases (particularly that of Ecuador), but it will also include the broader topic of the developments and evolution of emerging debt markets.
In the world of emerging market debt, the need of debtors and creditors to restructure debts has been and likely always will be an inveterate and persistent feature. The economic performance of emerging market economies tends to be volatile — beyond the effectiveness of the fiscal and monetary policies that these developing nations pursue, their economies are often subject to the vicissitudes of such external factors as world commodity prices and the monetary policies of the developed world. A previously sustainable debt profile may be rendered unsustainable for an emerging market nation for a whole host of economic, political and even “natural” reasons.
Thus, the debt restructuring process has become an integral part of the emerging debt market. This process is best if it is orderly and in the best interest of both debtors and creditors. Attempts by rogue creditors or vulture hedge funds to capture extra profits by free-riding on the restructuring process lead to economic inefficiency as the process is disrupted or sabotaged, and the costs are disproportionately incurred by debtor and the other creditors alike. Recent attempts to involve the private-sector (PSI) in the restructuring process and to effectively bail-in dissenting creditors have constituted a much-needed policy response to the harmful behavior of maverick creditors.
The current state of the debt restructuring process is conditioned by historical events. I shall therefore begin by relating how emerging market financing has experienced extraordinary flux over the past twenty-five years.
Part 2: The Evolution of Debt Restructuring in Developing Countries
1970s Commercial Bank Loans
During the 1970s, commercial banks began to lend to developing countries. This was unprecedented in the sense that it was the first time in history that the main part of development finance was coming from commercial banks — and not from investors in bonds or projects or from exporters to the region. This movement towards commercial bank lending in developing countries was extremely significant. In the case of defaults on the debt-holdings, only a small group of commercial banks would be directly hurt; but because of the importance of these banks in the international financial system, defaults could create externalities and repercussions that would eventually jeopardize the viability of the entire international financial system.
There are numerous possible reasons for the commercial bank lending to developing or lesser-developed countries (LDCs) that emerged during the 1970s. One involves the oil price shock of 1973. This event caused a dramatic increase in the oil revenues of OPEC (the Organization of Petroleum Exporting Countries); OPEC deposited much of its funds in Eurodollar deposits with major commercial banks (these became known as “petrodollars”). A combination of high real interest rates and a recession (in part due to the oil price shock) in the industrialized world made investment of the petrodollar funds there unviable. Instead, the petrodollars were invested (or “recycled”) in the form of commercial bank loans to the LDCs. The purpose for the LDCs was to finance their balance of payments adjustment (i.e. their widening current account deficit, which was in part goaded by the rise of oil prices).
The commercial banks lent to the LDCs under a syndicated loan structure. A syndicated loan is essentially a large loan that is made by a consortium of banks and financial institutions. However, what makes a syndicated loan distinct as a form of multibank lending is the high level of coordination between the lending banks in making such a loan: “A syndicated loan is made to a single borrower by two or more direct lending institutions, on similar terms and conditions, using common documentation and administered by a common agent bank or separate agent banks.”
The implications of using the syndicated loan structure of financing are extremely important. By using loans as opposed to other forms of financing, the banks had relatively illiquid assets on the banks’ balance sheets. Unlike bonds, which are securitized and are generally liquid assets, loans tend to be difficult to trade or unload. With the banks’ high loan exposures to the LDCs (particularly with respect to their levels of capital), they essentially became tied to the economic fates of these countries. Should the LDCs not be able to pay back their debts, the effects would be devastating (because of their massive loan exposures, many banks would become insolvent). And this situation was not just extremely dangerous for the banks themselves, it was also dangerous for the entire international financial system. The implication of the failure of major commercial banks extended way beyond the banks and their depositors. Massive bank failures posed a systemic risk with far-reaching external effects — i.e. bank failures would indeed lead to international financial crisis.
There are a number of possible reasons why the banks “chose” the syndicated loan structure as opposed to other forms of financing structures (namely bonds). One is that the historical experience of the bond crises during the 1930s put strict controls on international securities markets, which also helped in perpetuating the notion that institutional investors had better access to information than individual investors.
Another possible reason was associated with the pecuniary advantages the banks had to lend to the LDCs. The loan structure allowed the banks to lock in a profitable spread between their assets (loans to the LDCs) and their liabilities (the petrodollar deposits). This was particularly true given that the commercial banks were able to shift both the interest rate and currency risk on to the LDCs. Additionally, the major lead banks were able to generate sizeable fees for the syndication of the commercial bank debt.
Syndication also limited the amount and type of creditors that could be involved. This feature of syndication had the advantage of interlinking the interests of the banks. A bond offering, for example, would have been less likely to do this, as a bond offering would have allowed a more heterogeneous and a larger group of creditors with different interests to become involved. The unification and interlinking of interests that syndication provided had the potential of being an asset in the instance of debt negotiations.
Finally, and perhaps most importantly, there was tacit support by the U.S. government for the bank lending to the LDCs. Lax regulation by the U.S. government allowed the banks to accumulate significant sovereign risk. The banks ostensibly held the belief that they would receive assistance from the official sector should they incur losses on their loans. The commercial banks were widely held to be ‘too big to fail’ — governments were obliged to intervene and save potentially insolvent banks in order to stave off a financial crisis. The U.S. government’s rationale for bank lending apparently stemmed from its desire to see official sector funds to developing countries scaled back. The U.S. government and the governments of industrialized countries wanted to see the petrodollars recycled, but they didn’t want public organizations to do it. Since the commercial banks were the recipients of the oil deposits — and were sophisticated financial institutions with the ability to lend these deposits —, they seemed the most logical actors to recycle the funds.
However, the potential benefits of this lending-borrowing relationship were not limited to the banks. The lenders (i.e. the LDCs) also needed and wanted the commercial bank loans. With the bank loans, the LDCs were able to fund their import consumption (which, as alluded to before, was increasing in part due to the rise of oil prices). The LDCs could have done possibly done this through other sources, but bank financing held distinct advantages.
During the 1950s and 1960s, financing for developing nations came primarily from official institutions such as the World Bank and the Inter-American Development Bank. Unlike these funds from official sources, the bank loans had no conditions attached to them (the official sector generally promulgated that a particular LDC instituted specific economic and political policies before monetary assistance was disbursed).
Nevertheless, there were potential drawbacks to the loans that the LDCs borrowed from the commercial banks. The petrodollar loans were variable-rate and were almost exclusively dollar-denominated. This meant that the LDCs bore the interest-rate and exchange risk. During much of the 1970s, this circumstance didn’t really hurt the LDCs since they were paying low real interest rates on their debts (this was due to relatively low nominal interest rates and high rates of inflation). During the late 1970s, these circumstances changed. The U.S. Federal Reserve began to tighten its monetary policy — thus driving up nominal interest rates and lowering inflation rates. This left the LDCs paying exorbitantly high real interest rates. By the early 1980s, it became increasingly clear that the debt profiles of the LDCs were unsustainable.
And with the U.S. Federal Reserve’s monetary tightening and an economic recession in the industrialized countries (thus limiting their appetite for imports from the LDCs), the LDCs began to have rising interest payments on their external debt with floundering export revenues. With these conditions, the LDCs were in perilous waters. The first emerging market debt crisis of the 1980s occurred in Mexico (which was the largest debtor in the developing world — the biggest recipient of the petrodollar flows). After the Mexico crisis, commercial banks were highly reluctant to extend any new financing, although eventually they would be persuaded — through the subsequent debt restructurings — to provide additional funds to avoid having their loans designated as non-performing. As the capital flow to the developing world dried up, it became increasingly clear that the debt portfolios of the LDCs were unsustainable. Throughout the 1980s, exorbitant external debt burdens strangled economic growth in these economies. IMF austerity programs, which were implemented to mitigate the problems of the debt-saddled LDCs, provided short-term aid but caused long-term economic stagnancy (as the name implies, the IMF austerity plans imposed fiscal and monetary tightening on the recipients). The decade of the 1980s has thus been referred to by commentators as “the lost decade” for emerging market economies. The debt restructurings during this era did little to alleviate these problems. They provided short-term, ad hoc “solutions” for a persistent and long-term problem.
The Resolution of the Debt Crisis: The Brady Plan & Economic Liberalization
In the early 1990s, a major step was made towards the mitigation of the developing world’s debt problems through the Brady Plan. The Brady Plan called for a writedown of the bank debt under the voluntary conversion of the commercial bank loans to an LDC into collateralized bonds (they would be collateralized by U.S. Treasury debt). Through this securitization, “the bank loans owed by a sovereign debtor are repackaged as bonds, which are offered to the public. The proceeds of the bond offering are then used to retire the country’s outstanding bank loan indebtedness.” The Brady Plan was a flexible plan that offered options to the commercial bank loan holders: these holders could choose from “a menu of Brady bond options to receive in exchange for their sovereign loan assets.” The most popular choices were the par and discount bonds. By having different types of bond instruments, the Brady bonds became enticing investment choices for new groups and types of investors. These bonds were securitized and thus were much more liquid assets than the commercial bank loans. The Brady restructurings helped expand the base of investors in emerging market debt, which facilitated the expansion of the secondary market for emerging market sovereign debt.
The Brady Plan: “not only allowed the dissemination of risk across a heterogeneous pool of agents, but it also allowed economic agents to price the debt according to market, economic, and political conditions, without overburdening any particular organization. The use of market mechanisms also provided investors with rewards in return for the assumption of risk.” The Brady-style restructurings were also an important step for the LDCs because under the restructurings, the debt was written down, the interest-rate risk exposure moved from the debtor nations to the creditors (because the new Brady bonds were primarily fixed-rate instruments), and the debtor nations had the ability to retire some of their sovereign debt by buying their Brady bonds on the secondary market at a discounted price. Nevertheless, despite the definite merits of it, the Brady Plan — precisely by expanding the market — created potential problems for future restructurings.
While the Brady Plan fundamentally altered the dynamics of the sovereign debt market, other innovations and developments fundamentally altered the dynamics of international capital markets, in general. International financial markets evolved, reaching unprecedented levels of sophistication during the 1990s. Many emerging market countries liberalized their economies during the late 1980s and early 1990s. This attracted capital flows from international private investors (particularly portfolio investors). This influx of foreign capital helped foster further sophistication of many emerging capital markets. This capital flow into emerging markets was much different from the capital flow into the emerging markets during the 1970s. These capital flows were no longer heavily concentrated in commercial bank loans to sovereign debtors. During the 1990s, private firms in emerging market economies were selling securitized assets (i.e. stocks and bonds) to a heterogeneous group of investors; a sophisticated international interbank loan and swap market also developed to facilitate financing in developing countries; finally, much external financing in emerging market economies came in the form of relatively stable foreign direct investment.
The liberalization and sophistication of international capital markets, like the Brady Plan, represented progress for the developing world and the developed world alike. But also like the Brady Plan, this progress came with its share of tribulation. The capital flows that swept through the developing world proved to be fickle. Pre-liberalization business and government structures also persisted despite movements towards liberalization. For economies just learning their gait in the midst of new capital market structures, these exigencies proved to be hazardous. And thus, throughout the latter part of the 1990s, a whole slew of financial crises developed in emerging market economies.
Despite the obvious importance of these financial crises, they are not the primary emphasis of this paper. For the developments in international capital markets have produced two different types of crises. The first is the type of financial crisis alluded to in the last paragraph. The second, which is the primary focus of this paper, is with regard to sovereign debt. This type of crisis is distinguished from the sovereign debt crises of the 1980s because it involves bond debt, and not commercial bank loans. This breed of crisis that tends to occur in countries that are small and that don’t have advanced capital markets (and thus still rely primarily on lending at the sovereign level). It also tends to involve questions of insolvency (meaning that fundamentally the country cannot service its debt without a restructuring involving substantial debt forgiveness). These are the sovereign debt crises developing in the developing in the post Brady Plan environment.
The circumstances surrounding sovereign debt drastically changed in the wake of the Brady Plan. The development of secondary markets in emerging-market bond debt and the Brady-style restructurings of the early 1990s changed the dynamics of sovereign debt restructurings. When commercial bank syndicated loans conditioned sovereign debt lending, the restructuring of the debt tended to proceed in a relatively orderly process. The restructuring of official-sector and private-sector debt to emerging-market sovereign debtors was traditionally contingent upon the acceptance of an IMF structural adjustment program. The traditional restructuring process usually began with bilateral debt negotiations between the sovereign debtor and its Paris Club lenders. The second stage was usually a restructuring of commercial bank loans (the collective group of commercial banks is commonly referred to as the London Club of commercial banks).
The lending banks had vested interests in seeing an orderly restructuring. The banks rolled over the debt to avoid declaring default on the debt (because they did not want to have bad or non-performing loans on their balance sheet). They also generally had long-term interests in emerging market economies and were thus inextricably tied to the economic well-being of the countries they lent to; it was thus undoubtedly within their interests to cooperate.
Besides the banks’ self-interest in restructuring, there were also external pressures exerted upon them. During the days of a homogeneous group of creditors, there was a systematic mechanism of hegemonic influence. The commercial banks involved in the syndicated loans (and thus the financing of the debt) were subject to regulatory oversight in their home countries: the governments of developed countries were able to exert due influence upon the banks when it became necessary. Furthermore, the IMF also exerted influence on the commercial banks; the IMF only extended bridge loans to sovereign debtors on the condition that all of the country’s creditors provided bridge loans as well. The banks needed continuing interest payments and time to build up loan-loss reserves; and these conditions would only be borne out by IMF involvement. In addition to the external pressure, the bank creditors would also exert influence upon one another. In most defaults, a bank advisory committee (BAC) would be created, headed by twelve to fourteen of the largest bank creditors, to represent creditor interests. Regulatory pressures were imposed upon maverick bank creditors that sought to abstain or hold-out from the negotiations; these pressures basically forced any dissenting banks to agree with the restructuring.
All parties were thus dependent upon one another: the banks deemed it essential that the debtor countries implement austerity programs; the debtor countries would not implement austerity programs unless the IMF extended loans; the IMF would not make loans unless the commercial banks extended bridge loans. The result of this triangular dependency was [that] action was either taken collectively or not at all.
Notwithstanding the problems associated with commercial bank lending to sovereign debtors and the ultimate effectiveness of this traditional restructuring process of sovereign debt, the Brady bond restructurings altered and indeed undermined this orderly and predictable restructuring process. In 1989, the Brady Plan initiated the securitization of the defaulted loans. Banks were thus compelled to agree to a negotiated settlement; this required them to take losses on the debt due to principal write-downs or loss of interest. Subsequent to the Brady restructurings, banks found it much easier to unload the bond debt, in comparison to loans, on the secondary market. Bond obligations were bought on the secondary market by a much more decentralized group of creditors. Even though a secondary market had already been developed for sovereign loans after the first wave of debt restructurings, much of the secondary market trading in the loan market was inter-bank trading; it was the Brady negotiations that truly altered the market by broadening the base of investors.
Free-Ridership and Collective Action Problems in Bond Restructurings and Exchanges
The Brady Plan solved many problems in emerging market debt as it provided liquidity and new financing, but it created a different problem — it created a potential barrier to the restructuring process. The restructuring process of bonds and loans is subject to the problems of “collective representation” and “collective action.” These problems are heightened with the movement from loans to bonds, because bondholders tend to be widely dispersed and heterogeneous. Collective representation problems refer to the procedural difficulties in organizing dialogue between the debtor and group(s) of creditors. The more pernicious problems are associated with the collective action problems. These problems arise from the “difference between the individual (private) and collective (social) returns related to a given course of action.”
The collective action problems are much more pervasive in the restructuring of bonds than in the restructuring of commercial bank loans. As previously mentioned, sovereign loans had commonly been financed by a syndicate of banks. The syndicate arrangement tended to foster cooperation between banks because under this arrangement there was usually a small group of banks with relatively compatible and similar interests for making a restructuring work. The commercial banks generally had very compelling interest for supporting a restructuring for the purpose of resuming the service of the debt. They did not want to declare default because this would trigger the acceleration of defaults on other debt through cross-default provisions — and thus harm their chances for recovery of the debt. Banks didn’t want to have a whole portfolio of non-performing loans on their balance sheets, and were thus very hesitant about invoking defaults. Furthermore, if these reasons were not compelling enough, banks also had external pressures (from the IMF and their national governments in particular) exerted upon them during restructuring processes.
Because bondholders are widely scattered, heterogeneous and autonomous, it has been seen as being difficult to compel them into participating in debt restructurings. However, the view that bondholders are immune to restructuring (because bonds may be considered legally senior to other forms of that debt because of their status as secuitized assets) and that bonds are too difficult to structure has quickly eroded over the past few years. Whether under the monikers of “bail-ins” or “burden sharing,” the official community (particularly the Paris Club, the IMF, and the World Bank) has demanded that bondholders and other private investors bear the cost of financial and economic crises in emerging market nations. These official organizations (or International Financial Institutions (IFIs)) have sought to condition their assistance upon the alacrity of private investors to bear the “costs of adjustment”; these costs can come in the form of roll-overs on maturing loans, new loans, and debt restructuring. Burden sharing itself has been described as: “the notion that if debt relief is requested from any one creditor group such as official lenders and private bondholders, proportional relief should also be sought by other creditor groups.” The refrain from the official lenders is that bondholders should not be privileged relative to other investors; they say that taxpayers (represented by the Paris Club) should not be obliged to compensate bondholders when their risky investments don’t pan out. Despite the merits of this line of thought and despite the blustery force of this rhetoric, burden sharing in bond restructurings may still prove logistically difficult to apply or implement.
The reason once again lies in the fundamental differences in the dynamics of restructuring commercial bank loans and in the dynamics of restructuring bonds held by a heterogeneous group of bondholders. The considerations that mattered to the commercial banks in the restructurings of sovereign loans no longer do in the epoch of liquid secondary markets for emerging market sovereign bonds. Unlike in commercial bank loan markets, there is very little peer pressure in bond markets, since these actors are generally not “repeat players” and thus generally have no regard for the interests of other players in the market or for the overall systemic well-being of the market itself. “The new creditor class consists largely of pension and mutual funds, insurance companies, investment firms and sophisticated individual investors.” And since these Brady bondholders generally do not constitute lending organizations, they are not obliged to give bridge loans or any additional financing.
Individual bondholders thus have great incentives to free-ride during the bond restructuring process. Individual investors can buy bond obligations on the secondary market at a fraction of the full cost of the debt and then sue the sovereign in order to enforce the entire debt. These investors of bond debt on the secondary market are more likely to pursue their claims by attaching the sovereign’s limited U.S. assets following a default; they are also generally not subject to the political pressures that commercial banks face to participate in a restructuring, and they may thus have great incentives to pursue the road of litigation. Emerging-market sovereign bonds are usually bought at a substantial discount on the secondary market (the bonds are priced at steep discounts to reflect the bonds’ credit risk). Because of the steep price discounts individual investor may benefit substantially in the instance of a default. A default gives the secondary-market investor the opportunity to use litigation as a means to achieving debt service. Before a default, the chances that the sovereign will be able to pay the face value at maturity is slim; after a default, though, the investors gain the right to accelerate the debt and to act against the sovereign’s assets in the United States through litigation (the one wrinkle to this is that under the Brady Plan, creditors can only receive service of the principal at maturity).
This free-riding by individual rogue creditors undermines the debt restructuring process. It is economically inefficient because it can potentially delay, preclude or increase the costs of a debt restructuring between a sovereign debtor and its private creditors. For even if a debt restructuring is reached in the midst of this free-riding, the participants in the restructuring (both creditors and debtor alike) are forced to bear the cost of those recalcitrant creditors who do not participate. This paper looks at cases of successful and unsuccessful actions on the part of rogue creditors in attempting to undermine the restructuring process of sovereign debt. In doing so, this analysis locates mechanisms that effectively limit or prevent this pernicious free-riding.
As sovereign emerging market debt became more liquid and tradable through the development and evolution of the secondary market, precedents of recalcitrant creditors running to the courts began to emerge. There have been a few cases in which certain creditors have refused to participate in a restructuring — and instead seek their ends through litigation; among the relevant case law are: CIBC v. Banco Central de Brasil; and Pravin Banker Associates v. Banco Popular del Peru; and Elliott Associates de la Banco de la Nacion.
Consider first the case of CIBC v. Banco Central de Brasil. In 1988, after a series of prior debt restructurings, Brazil and its creditors entered into a Multi-Year Debt Facility Agreement (MYDFA). This restructuring covered the vast majority of Brazil’s debt to commercial bank creditors. Brazil announced — only a year later — that it would not be able to service its debt under the MYDFA. In 1992, Brazil announced a Brady Plan securitization of MYFDA debt (called “the 1992 Accord”). Brazil’s creditors were given different options of bonds, for which they would exchange their existing debt. Most creditors chose collateralized par bonds, which had full service of principal but had an interest-payment write-down. After receiving the creditors’ commitments to the proposed restructuring, Brazil decided to alter the terms of the restructuring. Brazil wanted its creditors to convert at least 35% of their debt to collateralized bonds that had huge reduction in principal.
In 1993, all of Brazil’s MYDFA creditors accepted these terms — all except the Dart family of Florida (known for being manufacturers of Styrofoam cups). The Dart family had been quietly accumulating Brazilian debt from creditor banks on the secondary market at discounts of 60% or more since 1991. By 1993, they accumulated $1.4 billion in Brazilian debt obligations, making them the fourth largest holder of Brazilian debt. The Darts decided not to participate in the 1993 amendment to the 1992 Accord. They instead wanted to free-ride the debt restructuring by holding out for better payment terms.
When all of the other creditors agreed to restructure their MYDFA debt under the 1993 restructuring, the Darts should have been left with 100% of the existing MYFDA debt. With this status, the Darts would have been able to accelerate the debt in order to receive repayment of principal and interest (under the terms of the MYDFA, 50% of creditors was needed — in the event of a default — in order to accelerate the debt). However, Brazil saw the disruptive actions of the Darts, and coordinated a response with its central bank to combat the Darts. The Banco Central de Brasil (BDB) converted all of its MYDFA debt, except for $1.6 billion of it. This was a critical amount because it precluded the Dart family from accelerating the debt (since with this action, BDB — and not the Darts Family — became the majority holder of the old MYFDA debt).
In 1994, the Darts proceeded to sue (with the Canadian Imperial Bank of Commerce (CIBC) acting as the holder of record of the debt) the central bank of Brazil. They wanted the accrued but unpaid interest (pursuant to the terms of the MYDFA) and the right to accelerate the entire principal owed. U.S. government officials filed an amicus curiae brief urging the court to dismiss the Darts’ suit because of the harmful repercussions and undermining effects that such litigation has on the restructuring process of sovereign debt. The court blocked the Darts’ claim for the right to accelerate the principal of the MYDFA debt but it did not dismiss their right to have the $60 million in overdue interest serviced. The case was later settled in March of 1994 as Brazil agreed to pay $25.3 million in cash on the interest that was due in October of 1994 and $52.3 million in bonds to cover the past-due interest that accrued from 1988 to 1994 on the Darts’ debt holdings.
Although, the Darts’ motion to accelerate the principal was blocked, the decision ultimately worked to the Darts’ favor. The implication of the decision was that the Darts would still have their interest payments serviced and could still recover the $1.4 billion in principal upon the debt’s maturity. However, the Darts did not have to wait until maturity to retrieve the principal amount. In October of 1996, the Darts cashed out of their position of Brazilian sovereign debt by issuing $1.28 billion in Eurobonds that were secured by the MYDFA debt.
Thus, the Darts emerged as the victorious party. The Darts were able to achieve their ends — free-ride the debt restructuring and hold out for a better deal. They were able to accumulate Brazilian sovereign debt on the secondary market at substantial discounts. By not entering into the Brady restructuring, they were able to avoid a write-down of the principal on the Brazilian debt that they held (unlike all other creditors). Through litigation, they were able to retrieve all past-due interest payments. Through their Eurobond offering, they were able to cash out of their position in Brazilian debt with a substantial profit.
Pravin Banker Associates v. Banco Popular del Peru
The next case to consider is Pravin Banker Associates v. Banco Popular del Peru. Ever since 1984, Peru had been in technical default on its debt. Peru had not paid a payment of debt principal, and was instead merely making payments on the interest of its debt. In 1990, Pravin Banker Associates acquired $9 million in Peruvian debt (a very small amount of Peru’s foreign debt) on the secondary market at a steeply discounted price (27 cents on the dollar). They then resold all but $1.4 million of it on the secondary market. A state-owned commercial bank (Banco Popular) made interest payments directly to Pravin Banker Associates through February of 1992, at which time Pravin served the bank with a notice of default and requested full payment of principal on its debt. In December of 1992, the Peruvian government liquidated Banco Popular. Instead of participating in the liquidation procedures, Pravin Banker Associates sued Banco Popular for full principal.
Not long before Pravin Banker Associates’ motion to sue Banco Popular, a Bank Advisory Committee (BAC) had been formed to restructure $8 billion of Peru’s sovereign debt under Brady Plan negotiations. The lawsuit threatened to undermine and disrupt the debt restructuring. Additionally, Peru argued that “because Pravin had purchased Peru’s debt at a substantial discount, face value recovery upon default was not contemplated by either party, would constitute unjust enrichment, and would permit Pravin to reap a windfall profit from Peru’s economic misfortune.” Pravin, on the other hand, argued that it was completely within its legal rights to seek the full-servicing of its principal — regardless of what the price it paid for the debt on the secondary market.
In this case, the court had to balance between two competing policy interests: one was that ‘the U.S. encourages participation in, and advocates the success of, IMF foreign debt resolutions under the Brady plan’; the other interest was that “the U.S. has a strong interest in ensuring the enforceability of valid debts under contract law.” On January 19th, 1996, the court rendered its decision. It sided with the latter interest: it ruled in favor of Pravin Banker Associates since it would otherwise be denying them of their rights to enforce the underlying debt; according to the court, Pravin Banker Associates did not have to enter into the Brady negotiations because by their very nature, they were voluntary. The court awarded Pravin approximately $2.16 million, in addition to accrued interest (from October 26, 1995), as well as any post-judgment interest that might accrue.
The court also tried to extricate the case of Darts from that of Pravin, claiming that “the Darts had attempted to use litigation to amend the terms of their loan agreement. Pravin, in contrast, sought merely to enforce the terms of its agreement as written.” More to the point, there were important qualitative differences between the two cases. In the Darts case, the Darts family owned $1.4 billion in Brazilian sovereign debt, whereas in this case, Pravin Banker Associates only owned $1.4 million; completely successful litigation for principal would have probably crippled Brazil’s Brady negotiations, whereas in this case, Peru’s Brady restructuring was successful despite Pravin’s success (the Pravin case represents one of nuisance litigation). Undoubtedly, these circumstances were considered by the two courts in weighing the merits of their respective cases.
Despite the court’s decision to award Pravin over $2 million for full payment of principal and interest, Pravin still needed to successfully attach to Peru’s assets, pursuant to the decision. In doing so, Pravin (on June 21st, 1996) made a motion to attach the property of Conade (a Peruvian state-owned enterprise). The court, however, rejected Pravin’s motion. The court felt that Conade was a “separate and distinct legal entity” from Peru, and thus Pravin could not attach its claim against Peru to Conade’s assets. After a series of negotiations, Pravin and Peru eventually reached a settlement for an undisclosed amount; ostensibly, it was for a lower amount than what Pravin was litigating for in its motion to attach to Conade’s assets.
Elliott Associates, LP v. Banco de la Nacion of Peru
The final case is that of Elliott Associates, LP v. Banco de la Nacion of Peru. Under the context of an IMF supported program, Peru announced a Brady Plan restructuring of commercial bank loans in October of 1995. Under the program, Peru would use IMF funding for the purpose of securitizing their debt (i.e. Peru would use IMF funds to buy U.S. Treasury debt securities to use as collateral for the Brady restructuring). There was widespread participation in the Brady bond exchange for the defaulted commercial bank loans. However, there was a group of creditors who refused to participate in the Brady restructuring, and instead decided to hold out for better terms.
This group of investors was Elliot Associates. Elliot Associates is an investment
fund that specializes in “distressed debt” (i.e. debt that has been defaulted upon by the debtor to its creditors). Between January and March of 1996, the investment fund had purchased $20.7 million of Peruvian debt, at a discounted price of $11.4 million. Elliott began purchasing this debt only after the decision of the case of Pravin Bankers v. Banco Popular del Peru, in which Pravin was able to successfully litigate against Peru. This suggested that Elliott made its purchases of Peruvian sovereign debt with the intent to sue, particularly since Elliott officials admitted to following the Pravin case (although they stated that the timing of their purchases were coincidental).
On October 8th 1996, Elliott Associates filed suit against Peru for full principal and interest on the loans it possessed. The fund did not seek alternatives to suing: it did not participate in the Brady reorganization, did not offer to renegotiate, and waited until ten days before the Brady exchange was to be signed before filing suit. In its suit, Elliott wanted to attach Peru’s assets to its claim. More specifically, Elliott probably wanted to attach to the US Treasury securities that Peru had purchased to use as collateral for the Brady restructuring.
This case was not the first time that Elliott had tried to litigate to receive full payments on its sovereign debt claims. During 1995, Panama restructured much of its external debt under the aegis of the Brady Plan. Elliott had acquired $28.75 million (face value amount) of Panamanian sovereign loans on the secondary market for $17.5 million prior to the restructuring. Elliott refused to participate in the restructuring and instead made a motion to sue Panama for full payment on its debt. Elliott was successful in its litigation. As payment on the $17.5 of debt that Elliott had purchased, the fund received $57 million (which covered principal and accrued interest, as well as legal costs).
Elliott’s case against Peru was brought to the U.S. District Court. It ruled against Elliott Associates because it felt that Elliott violated Section 489 of New York Judiciary Law (NY’s champerty law). Elliott’s suit violated this law because the fund had ‘purchased the debt with the intent and purpose to sue’ (which the champerty law expressly forbids). The court felt that Elliott never seriously considered any alternatives to suing (such as entering into the Brady restructuring, selling the debt on the secondary market, or engaging in bilateral debt negotiations with Peru) when it bought its stock of Peruvian sovereign loans.
However, Peru’s success at blocking the investment fund’s claim was only temporary as Elliott appealed the decision of the district court. The Second Circuit Court of Appeals reversed the decision of the district court on October 20th, 1999 (more than a year after the federal district court’s dismissal of Elliott’s claim, which was on August 6th, 1998). The court stated that the investor was not in violation because its primary purpose was collecting the debt, not litigation (i.e. when Elliott Associates purchased the debt, their primary purpose was to enforce the debt, as the decision to litigate was ancillary). In this court’s mind, the decision to litigate came only after the debtor’s “decision” not to pay. Despite the circumstantial evidence that supported the claim that Elliott purchased with the direct intent to sue (such evidence as Elliott’s history of such litigation, the timing of its decision to Peruvian debt with respect the decision of the Pravin Bankers case, and the unwillingness to seriously entertain options in lieu of suing to achieve debt service or payment), the Circuit Court remained unconvinced that Elliott’s primary intent was to sue.
The court expressed concern over the enforceability of the champerty law since it felt that this law’s application in such cases would essentially make the non-restructured debt instruments completely unenforceable after a debt restructuring. And like the court in the Pravin case, this one felt that a creditor should not be effectively forced to participate in a Brady restructuring, because this would undermine the inherently voluntary nature of Brady restructurings.
In deciding the case, the court also looked at the dimensions of the over-arching policy implications at stake. On the one hand, “the enforceability of sovereign debt owed to citizens of the U.S. limits the U.S. policy in the success of IMF-backed reorganizations,” while on the other hand, “not holding the debts enforceable will dramatically reduce New York’s attractiveness as a global financial center;” the court evidently sided with the latter policy consideration.
Although the overturning of the District Court’s opinion was a success for Elliott, it still needed successfully attach its claims to specific assets of Peru’s to effectively have their debt holdings paid. In cases of sovereign debt this can be difficult because sovereigns have few, if any, assets that can be attached. The reason for this is that only assets used for commercial activity in question within the jurisdiction where the suit is brought may be attached; since most sovereign assets related to borrowing are within the sovereign’s own boundaries, there are few assets to which the creditor can attach.
In its attempt to successfully attach to Peru’s assets, Elliott Associates once again made recourse to the courts. Elliott Associates essentially tried to intercept the interest payment being made on Peru’s Brady bonds. The investment fund first did this by attempting to attach this payment by obtaining a restraining order from a New York court (on November 2nd, 1999) against Peru’s fiscal agent (Chase Manhattan Bank) who was responsible for disbursing the payments. Elliott was making the argument that since the fiscal agent is the agent of the debtor — unlike the trustee, who is the agent of the creditors — these funds were still the property of Peru (and were thus attachable). When Peru received word of this, the country temporarily circumvented Elliott’s attempt by stopping the transfer of funds to its fiscal agent.
Once again, Elliott responded with litigation. Elliott argued in Brussels Commercial court for a restraining order to be issued against Euroclear (an international settlement system) to preclude it from either accepting funds from Peru (for the Brady bond interest payment) or from disbursing the interest payment to Peru’s creditors. Elliott was basically arguing that the restraining order on the fiscal agent, should — as a corollary — also apply to the fiscal agent’s bank branches (including foreign ones) at the level of the clearing house (Euroclear). This argument was rejected by the Brussels commercial court, which felt that one order of attachment cannot be applied to any transfers through a bank’s branch offices.
Elliott, however, once again demonstrated its persistence in arguing for its claims in the legal arena. On June 22nd 2000, Elliott won a decision against Peru in a New York court. The fund won a $55.7 million judgment from for principal and past due interest under the court’s decision. Despite this victory, Elliott still had to attach Peru’s assets.
To do this, Elliott appealed the decision of the lower Brussels court, and the case was brought to the Court of Appeals of Brussels. On September 22nd 2000, the Court of Appeals granted the restraining orders against both the fiscal agent (Chase) and Euroclear — which the lower court in Brussells would not grant. With this decision, Peru’s hands were tied: with the restraining order, Peru effectively could not pay its Brady bondholders their interest payments without first paying Elliott its claim. Because of the Belgian court’s injunction, the financial institutions that clear their transactions under Euroclear would face stiff fines if they accepted money from Peru for the payment of interest to the Brady bondholders.
Peru tried to circumvent the decision of the Brussels court by making the interest payment on its Brady bonds through the Bank of International Settlements. However, it is not exactly clear how Peru could have done this. By diverting the interest payment through a foreign bank, Peru would be violating the fiscal agency agreement and the bond covenants. Peru’s changing of the payment procedure (e.g. a change in the time, currency or place of payment) would be a breach of its legal contracts. Thus, this route was ultimately unsuccessful for Peru.
Furthermore, in the wake of the September 22nd decision, Peru did not have time for elaborate action. Because of the restraining order on its fiscal agent (Chase), Peru did not make the $80 million Brady bond interest payment that was to occur on September 7th 2000. Peru had a thirty-day grace period in which to make the payment; if Peru did not make payment by the expiration of the grace period, it would be in technical default on its entire stock of Brady debt. With time running out on this grace period and mounting political problems, Peru decided to reach a settlement with Elliott for $58.4 million on October 4th 2000 (which would allow Peru to make its interest payment before the October 7th deadline). Minus legal fees, Elliott made profits of $46.7 million on its original $11.7 million investment (equivalent to about a 400% return).
The decisions in Elliott show that sovereigns have little protection from maverick creditors under the NY champerty statute (based upon the narrow judicial interpretation of it). They also show that it certainly is possible for a recalcitrant creditor to attach to a coupon payment being made on an existing bond. Before Elliott’s success, it had been perceived by many legal experts that it would be nearly impossible for a maverick creditor successfully seize the assets of a sovereign debtor. The decision by the Brussels Court of Appeals severely undermined this perception of the sovereign’s safety.
However, it is not at all clear that the Brussels decision was based upon sound legal reasoning. In this case, Elliott made the argument that “Peru was contractually barred from paying one group of creditor (here the creditors that had agreed to the restructuring) before paying it (the holdout).” Elliott argued this claim by invoking the pari passu clause (which is a standard clause in most bond indentures). Elliott essentially argued that under the mandate of the pari passu, all creditors are to rank equally in priority of payments; and that if there is not enough money to pay all creditors, “all the pari passu creditors get paid pro rata out of whatever funds are available.” The Brussels appeals court accepted this argument.
However, two legal scholars (Gulati and Klee) argue that this is an invalid interpretation of the pari passu clause; in doing so, they invoke the support of a number of other scholars as well as case law. Gulati and Klee make the point that the Brussels court’s decision is not consistent with traditional understanding of the pari passu clause in corporate bond law. Additionally, in the sovereign context, it is implicit that a country having trouble servicing its debts will not want to pay all of its unsecured creditors —under the pari passu clause — on a pro rata basis; instead, as Gulati and Klee illustrate, the debtor nation will want to pay its more important unsecured creditors (namely the IMF and the World Bank) first.
Beyond the inconsistency in the Brussels court’s legal interpretation, these commentators make note of the fact that the court’s decision exacerbates the holdout problem for sovereign debtor nations. The decision legitimizes and actually promotes the behavior of free riders. Speculators are provided incentives to hold out from debt restructurings and to litigate for full payment. Indeed, if other courts accept the validity of the Brussels decision, there could indeed be a proliferation of these problems in the future of sovereign debt restructurings.
To avoid the pitfalls ever present in the Elliott case, adjustments have been made and will need to be made. To limit the maverick creditor’s ability to attach to payments being made to other creditors, a sovereign’s first line of defense is using a trustee rather than a fiscal agent. Since a trustee is the agent of the creditor, a litigant will have a tougher time arguing his right to attach to the funds of the trustee (by saying that these are de facto assets of the sovereign.
With regard to limiting the pitfalls latent in the pari passu clause, Gulati and Klee recommend a number of possible remedies for the sovereign and the majority of its creditors. These include: altering the pari passu clause to say ‘pari passu with respect to priority but not payment’; using exit consents (discussed in greater detail later in the paper) to amend the pari passu clause on existing bonds; and using English Law governed bonds that have majority action clauses (which may result in a loss of business in sovereign bond underwritings for New York).
The above three cases are all ones that involve litigation by recalcitrant creditors who sought to free-ride upon the debt restructurings being negotiated by the sovereign debtor and its creditors. In the Darts case, the court blocked the Darts’ claim for immediate servicing of the debt’s principal; ultimately, however, the Darts reaped a substantial profit — and effectively dodged the principal write-downs of the Brady Plan restructuring — through their litigation and subsequent Eurobond offering for the debt that they were holding. In the cases of Pravin Banker Associates and Elliot Associates, the courts ruled in favor of the maverick investors who were suing for full repayment of principal (despite having bought their debt holdings at substantial discounts on the secondary market). However, it is the Elliott case that truly represents a dangerous precedent, since Elliott was able to successfully attach to Peru’s assets to achieve a windfall profit. Nevertheless, despite the added virulence of the Elliott case, all three cases represent economic inefficiencies in which hold-out creditors were able to use litigation as a means to achieving better payoffs — at the cost of the sovereign debtor and its other creditors.
The recent cases of sovereign debt exchanges and restructurings have sought to limit, constrain and eliminate pernicious litigation by dissenting creditors. The cases that I shall look at involve the restructuring of the sovereign debt of Pakistan, the Ukraine, and Ecuador. These cases were able to achieve a debt exchange that bailed in private investors and that avoided litigation by recalcitrant creditors. They are effective applications of the official sector’s demands for burden-sharing in the debt restructuring process during the era of bond financing to emerging market debtors. Ecuador is the crucial case for the purposes of this discussion, because it involves the restructuring of Brady bond debt. Brady bond debt, governed by U.S. law, does not have collective action clauses. The sovereign bonds of Pakistan and the Ukraine, which were governed by United Kingdom and Luxembourg law respectively, had these clauses. Nevertheless, these cases all bear important similarities and provide important examples of successful sovereign bond restructurings.
The first case that I shall look at is Pakistan. On November 15th 1999, Pakistan announced an offer to exchange three outstanding dollar-denominated Eurobonds due in December 1999 and February 2002, with a total face value of approximately $610 million, for a six-year amortizing Eurobond, with a face value $623 million, paying a 10% coupon. Pakistan had been under pressure from the official sector to enter into a bond exchange with its private creditors. In January of 1999, Pakistan entered into an agreement with the Paris Club to reschedule $3.3 billion in official-sector, bilateral debt. The Paris Club has a ‘comparability’ rule, which requires equal treatment for official and private sector debt. After the restructuring of its debt with Pakistan, the Paris Club also wanted Pakistan’s private creditors to restructure their debt. This comparability rule had been applied to bank loans during the 1980s, but this was the first time that it was applied to bonds.
The Pakistani bonds were held predominately by financial institutions and retail investors in the Middle East. Prior to the announcement of the bond exchange, Pakistani officials and their financial and legal advisors had been able to conduct informal discussions with a group of primary creditors. Through these meetings, an offer that would be favorable and acceptable to most bondholders was created. Because Pakistan’s creditors constituted a relatively small and homogeneous group, the communication between Pakistani officials and its major creditors proved to be a good litmus test. The response to the offer was extremely favorable as over 99% of all bondholders tendered their bonds. The reasons why Pakistan’s creditors agreed to the exchange are clear:
the threat of default was credible; the terms offered a sweetener compared to the market price, making it a “no-brainer” to tender the bonds, according to some market participants, as spreads were likely to narrow after the exchange had closed; the new bond would be more liquid than the old bonds; the new government following the military coup made it possible to restart creditor relations afresh; the comfort letter from the IMF was widely seen as a guarantee that the official community would stay engaged; and a five-notch upgrade by S&P from its first ever D-rating for a sovereign to a single B-minus rating surprised positively. 
Furthermore, since Pakistan had not defaulted on its debt at the time of the bond exchange offering, its bondholders had little recourse to action against the sovereign: e.g., the “bondholders could not require the trustee to accelerate the issue or to take legal action against the debtor.” Without these this possible barrier to restructuring, Pakistan and its advisors were able to engage in a dialogue with key creditors and construct a bond exchange that would be reasonably acceptable to virtually all of its creditors.
Pakistan also had the benefit of potentially helpful (with regard to facilitating the debt restructuring) legal clauses in its bonds, but these clauses were not invoked. More specifically, the three Pakistani Eurobonds had collective action clauses (CACs) embedded in the indenture. Collective action clauses are embedded in most sovereign bonds underwritten in the U.K. and Luxembourg (among a limited number of other nations where sovereign bonds are underwritten); the Pakistani Eurobonds were underwritten in the U.K. These clauses can be very effective, since they can bind dissenting creditors into a debt restructuring that has been approved by a majority or a super-majority of creditors.
Only about a quarter of sovereign emerging-market bonds have collective action clauses. The term collective action clause is not a precise legal term, and broadly refers to the following clauses: “majority action clauses,” “sharing clauses,” and “collective representation clauses.” The majority action clauses — referred to above — bind a dissenting minority into a restructuring that is approved by a majority of bondholders. Sharing clauses make litigation less attractive for a maverick bondholder, since these clauses require that any funds secured by a bondholder through litigation have to be shared proportionately (to their respective bond holdings) with the other bondholders. Collective representation clauses facilitate the coordination and communication of bondholders (and “make majorities easier to assemble”) by allowing trustees or others to represent bondholders at bondholder meetings.
Since 99% of Pakistan’s bondholders voluntarily agreed to the exchange, one can definitely make the case that the collective action clauses were not necessary. However, there were, ostensibly, distinct reasons for Pakistan’s decision to try to sidestep the invocation of the collective action clauses. For despite the clear benefits of the usage of collective action clauses in sovereign bond restructuring (most saliently with regard to their ability to coerce dissenting bondholder(s) into a restructuring that has been approved by a qualified majority), there are some aspects of these clauses that a sovereign debtor might find disagreeable.
These reasons stem predominately from the collective representation clauses in collective action clauses. Pakistan was afraid that in the case of bondholder organization through a bondholder committee, the dissenting creditors would be able to organize and garner strength, thus preventing the qualified majority (needed to bind-in these creditors) to not be reached. The bondholder meetings can potentially lead to an extended and protracted negotiation process, which also gives the creditors time to coordinate their actions to act in concert against the debtor. In fact, no debtor nation would want to have a meeting of its creditors unless there has already been full disclosure of information, which would allow creditors to figure out what conditions would make a successful debt exchange offer (this information could potentially be disclosed by previous bilateral meeting(s) with individual creditors or a small group of creditors). A debtor nation may thus find it much more expeditious and effective to employ its financial and legal advisors into dialogues with certain groups of bondholders to figure out what conditions and terms will maximize the probability of a successful bond exchange, instead of having long and drawn-out — and potentially counterproductive (certainly from the perspective of the debtor nation) — bondholder meetings.
Nevertheless, because collective action clauses were not invoked in the case of
Pakistan’s bond exchange, some potential problems exist. Because the vast majority of Pakistan’s bondholders accepted the exchange, the dissenting bondholders constitute 100% of the holders of the old bonds. These creditors can certainly accelerate the debt they hold and potentially use legal action to obtain a more favorable settlement (thus creating a clear free-rider problem). This doesn’t have serious implications for the Pakistan case because the amount of dissenting creditors is so small, but this might be a problem in future debt restructurings.
Furthermore, even though Pakistan’s bond exchange was relatively successful, it doesn’t really provide a useful template or paradigm for future sovereign bond restructurings. This is because Pakistan’s case is fairly unique. Unlike many sovereign bonds, Pakistan’s bonds were not widely traded internationally at the major global financial centers. Additionally, Pakistan’s bonds were unique because they were held by a relatively small homogeneous group of regional investors. Logistically, it is much more difficult to restructure debt that is widely held by a heterogeneous and dispersed group of international investors.
Ukraine’s Bond Exchange
The second case to be studied is that of the Ukraine’s sovereign bond restructuring. In 1989-1990, Ukraine restructured much of its sovereign bonds. At best, this restructuring provided only a temporary solution. It “featured large up-front costs (with cash payments of at least 20 percent), short maturities for new debt (no more than 2 years), and high yields (up to 20 percent a year).” Within a very short amount of time, Ukraine was left with massive — and unsustainable — debt-servicing obligations. In 2000, the Ukraine owed $3.1 billion in external debt payments, with only $1.2 billion in hard currency reserves; since the country had little hope of borrowing new funds or having a sufficient trade surplus, it became clear that Ukraine would not be able to service its debt without a restructuring. Furthermore, the IMF made additional funding on its part conditional upon Ukraine’s ability to come to amicable terms with its commercial creditors (i.e. a restructuring of Ukraine’s external debt).
On February 4th, 2000, Ukraine’s Ministry of Finance announced an exchange proposal covering different types of bonds. The bonds covered were four different Eurobonds and all of the so-called “Gazprom” bonds (which consisted of Ukraine’s debt to the Russian gas company Gazprom for gas deliveries not paid) falling due 2000-2001. This constituted an exchange of $2.6 billion of debt. Bondholders could exchange their bonds into (depending on what type of bond they were holding): 1) dollar-denominated 7-year amortizing Eurobonds with an 11% coupon or 2) euro-denominated 7-year conventional Eurobonds with a 10% coupon. The bond exchange offered numerous incentives for exchange: “no debt forgiveness or reduction in principal, no interest-free grace period, amortization starting in 2001, and cash payment of all accrued, but unpaid interest on the outstanding bonds upon completion of the debt exchange.”
Since the Ukrainian Ministry of Finance set the overall participation threshold for the exchange of the bonds falling due in 2000 or 2001, there was little margin of era for Ukraine and its financial and legal advisors (the threshold was set at 85% because the ministry of finance felt that this percentage would give the exchange credibility in international capital markets). Three of the Eurobonds were held by a relatively small group of institutional investors. The fourth Eurobond, on the other hand, was held largely by a dispersed group of retail investors. For the first three Eurobonds, informal dialogues with key investors were fairly effective — as they were in Pakistan’s debt restructuring — in gauging what terms would be conducive towards achieving a successful bond exchange.
However, to ensure that the exchange reached its threshold target, more elaborate strategies were employed (particularly for the fourth issue, with the inordinately high amount of retail investors). Ukraine retained the services of several investment banking firms (the lead manager being ING-Barings), as well as a public-relations firm for the purpose of disseminating information about the exchange to both retail and institutional investors; among the methods employed were a road show, a highly successful and touted internet site, individual briefings and presentations with investors, and a constant barrage of information about the exchange aimed at the media. Ultimately, these strategies worked as 99% of the old bonds were tendered.
Three of the Eurobonds had collective action clauses embedded in their indentures under Luxembourg law (the fourth, which was governed by German law, did not). Ukraine did not invoke the collective action clauses until a qualified majority of proxies in favor of the exchange was received. Upon the receipt of a qualified majority of creditors (necessary to invoke the collective action clauses) accepting the debt exchange, an official “bondholders’ meeting was called, the proxies were voted, and the amendments were adopted and binding on all bondholders.”
Although the collective action clauses on the bonds were invoked, they were of limited importance due to the overwhelming participation by bondholders in the debt exchange. The fact that collective action clauses were invoked ex-post — and not ex-ante — has been shown to indicate that while collective action clauses may be helpful to the restructuring process, they are not critical. Thus far, “the role of CACs has been only to either provide a tool to ‘bind-in’ holdouts ex-post or to credibly threaten their use in case an exchange offer does not work.” Nevertheless, due to the collective action clauses, all dissenting bondholders were still bound by the amendments adopted by the qualified majority of bondholders (in the three bonds that had CACs).
The final case that I shall look at is that of Ecuador’s default on and restructuring of its Brady bond debt. It represents an important case, because unlike Brady bonds — governed virtually exclusively by U.S. law — do not have collective action clauses. Ecuador would have to restructure its debt — and also avoid free-rider problems and other potential pitfalls — without the benefit of these structures. It is a case that can provide a useful paradigm for future Brady restructurings.
During August of 1999, Ecuador announced that it would defer payment upon $96 million of interest on its Brady bond debt. With this move, Ecuador became the first country to default on its Brady bond debt. There had been speculation for months on the possibility of a default by the beleaguered country. Many believed that the IMF and the U.S. Treasury both wanted to use Ecuador as a test-case for a “bailing-in” of the private sector in sovereign debt restructurings during the age of emerging market bonds. Ostensibly, this would allow the IMF to show that it is receptive to moral hazard concerns. It would also provide an important precedent with regard to private sector involvement in sovereign bond restructurings: the private sector would no longer be able expect huge disbursements from the IMF and the official sector to bail it out in cases of crises. The IMF told Ecuador, prior to the default, that it would have to have a restructuring agreement with its private creditors before a much-needed IMF loan could be made. The Fund had been harshly criticized for using public funds to bail-out lending investors and borrowing LDC governments. The strategy of bailing-in the private sector would seem to be easier said than done as debt restructuring with a large group of heterogeneous bondholders (with different interests and motives) might prove unmanageable and difficult.
After Ecuador had announced its delay of payments in August, it had a month’s grace period to come to a resolution with its bond creditors. On September 26th 1999, Ecuador announced its decision. And while few were surprised by the decision in August, many were surprised and dismayed by the September decision. In that decision, Ecuador’s former President Jamil Mahuad announced that Ecuador would selectively default on only some of its Brady bonds. He stated that Ecuador would pay the $51.5 million in its past-due-interest bonds (PDIs), but not the $44.5 million on its discount bonds. Ecuador decided to pay the interest payments on the former, because these bonds were not covered by interest collateral under the Brady Plan. The discount bonds, however, had interest collateral (under the Brady restructuring) to cover the interest payments — and President Mahuad encouraged the discount bondholders to use the interest collateral on the bonds to cover the interest payments.
Of Ecuador’s $13.6 billion in external public debt in 1999, approximately $6 billion was in Brady bond debt and $500 million was in Eurobonds. The remainder of the debt was from the official sector, with about $3.9 billion from the IMF and another $2.7 billion in bilateral debt with the governments of industrialized countries (the Paris Club). Of the Brady Bond debt, $1.4 billion was in discount bonds, while $3 billion was in PDI bonds (which Ecuador did pay in September); and another $1.7 billion was in par bonds. The Par bonds are bonds that were exchanged for loans under the Brady Plan; they are at par but carry below-market fixed interest rates; they are long-term bonds that are fully collateralized with respect to principal and partially collateralized as to interest. Discount bonds are bonds that were exchanged for loans at a discount to face value under the Brady Plan; they carry a market interest rate priced on a spread with the London Interbank Offered Rate (LIBOR); they are also long-term issuances and are fully collateralized as to principal and partially collateralized as to interest. The past due interest (PDI) bonds allow countries to securitize unpaid interest claims under the Brady Plan; they have floating interest rates and are uncollateralized.
Mahuad’s September strategy on the one hand may seem clever, while on the other hand may seem stubborn and unrealistic. Mahuad figured that the interest collateral on the discounted Brady bonds would cover the missed payment; the other bonds — the PDIs —, which were not collateralized, Ecuador would make payment on. Bondholders, however, were irate with the decision. They were upset with Ecuador for imposing a “unilaterally imposed non-market solution that discriminated against certain classes of debt.” The then IMF Managing Director Michel Camedessus also expressed his ‘regrets’ over Ecuador’s inability to reach a mutually favorable solution with its creditors. Nevertheless, bondholders were angry with the IMF and the U.S. Treasury for their alacrity to support a bond default by Ecuador in order to create a debt restructuring that would impose further debt reduction on the private sector (although it is certainly apparent that the IMF and the U.S. Treasury did not support the specific terms of Ecuador’s decision).
One insurgent bondholder, in particular, managed to bring the situation to a head. On October 5th, 1999, Marc Hélie, a manager of a hedge fund called Gramercy Investors, mustered the support of 35 percent of the discount bondholders to force an acceleration of Ecuador’s bond debt (he only needed the support of 25 percent under the bond indenture). (A vote to accelerate is tantamount to voting for the default of a particular class of bonded debt.) Under a Brady bond indenture, accelerating the bond only gives the creditors the right to the interest collateral (which generally covers 2 to 3 interest payments); the principal collateral is not available to the bond’s maturity. Nevertheless, due to cross-default mechanisms embedded within the debt (which were triggered by the vote to accelerate the discount bonds), Ecuador was in default on not just the $1.4 billion of discount Brady bonds — it was in default on the over $6 billion in Brady bonds, as well as, the $500 million in Eurobonds. Ecuador had become the first country to default on its Brady debt. And the stage was set.
Litigation was a road not taken in the case of Ecuador’s debt restructuring. Although, certain intransigent creditors were able to gather the support for acceleration of the debt, these creditors were later tied into the restructuring process. Nevertheless, the threat of litigation in future sovereign debt restructurings still looms large — and indeed it did at various points during the Ecuadorian crisis. However successful the long-term economic effects of the latest Ecuadorian debt restructuring, it represents a success simply in the fact that it avoided harmful litigation.
The road to debt restructuring was a long and arduous one for Ecuador and its creditors — but not as long and arduous as many had thought. In the months following the October default on over $6 billion of Brady bonds and Eurobonds, Ecuadorian officials struggled to get official sector aid. Mahuad tried to get a standby loan from the IMF for the amount of $250 million; this standby loan would have automatically made Ecuador eligible to receive $850 million in additional credit from the World Bank and others to provide much-needed funds to the beleaguered banking sector. However, Mahuad surprised the IMF yet again by unveiling a plan to dollarise in January of 2000; this plan ired the IMF and caused the negotiations for funding to crumble — and the plan made Mahuad deeply disliked domestically.
In the months following the Mahuad’s January plan, Ecuador made little apparent headway with regard to reaching a solution with its creditors. Domestically, Ecuador underwent significant change. Mahuad was ousted, and a new president — Gustavo Noboa — was instated. Reforms were pushed through and plans to dollarise were realized. Although inflation rose (largely due to the dollarisation plans), the economy began to show signs of development and growth. These developments provided a more conducive atmosphere for Ecuador to conduct fruitful negotiations. By April of 2000, the Ecuadorian government was able to come to an agreement with the IMF. The IMF agreed to provide a one-year stand-by loan for about $306 million. And the government, through these negotiations with the IMF, was also able to receive multilateral funds of close to $2 billion “for an ambitious program of fiscal adjustment and financial sector reforms.”
On July 27th, 2000, Ecuador announced an exchange offer to swap the defaulted bonds for about $4 billion in new bonds and about $1 billion in cash (for accrued interest and principal collateral). The exchange offer allowed bondholders to swap the defaulted bonds into a 30-year Eurobond with a step-up provision on the coupon from 4% to a maximum of 10% (this means that the interest rate rises 1% a year to a maximum of 10%). Additionally, the bondholders were given the option of converting the 30-year bond into a 12-year Eurobond with a fixed coupon of 12% at the exchange ratio of .65 to 1. The bondholders were also offered a cash disbursement in full of accrued, but unpaid, interest on Discount and Par Brady bonds.
Approximately 97 % of Ecuador’s Brady bond investors accepted the exchange, in which they accepted an approximately 40 percent “haircut” (or write-down) on the principal. Although 97% of creditors accepted the resolution, the process leading up to it was not without its tumult. The Ecuadorian authorities had been unwilling to enter into discussions with dissenting creditors, due partly to the fact that the restructuring process was complicated because a number of different classes of debt were involved. Authorities instead met with a Consultative Group, which consisted of eight institutional investors with particularly large exposures (the information discussed in the meetings was disclosed for the benefit of the other bondholders); however the authorities did not disclose any information about the restructuring terms (they did this by citing U.S. securities law).
Ecuador — and the lawyers and bankers on its deal team — had to be innovative in working its way around NY law. The challenge was to compel the vast majority of private creditors to willingly enter into the restructuring and to prevent, or at least limit, potential litigation from hold-out creditors; the exchange was able to do this through the use of cash disbursements, exit consents, and principal reinstatement clauses. The exchange offer was unprecedented because it was the first example of the use of exit consents to make it unpalatable for investors to hold-out from the restructuring.  “An exit consent (or exit amendment) is a written consent to an amendment that is tendered along with an exchange offer (i.e. the consent is given as a bondholder exits the bond).” The exit-consent amendments only require a supermajority (although in order to meet IMF projections on debt service ability, 85% of bondholders actually needed to sign on), while a change in the payment terms, under NY law, would require unanimity. New York law governing bonds, unlike U.K. and Luxembourg law, do not have collective action clauses that allow a qualified majority to bind-in maverick creditors into a debt restructuring. Thus, an adroit usage of exit consent amendments was imperative for the allowance of a successful exchange of Ecuadorian bonds. The implementation of exit consents managed to achieve this by stipulating that the exiting bondholders (in entering into the bond exchange):
Strip away cross-default and cross-acceleration provisions to the new bonds (the new bonds include a cross-acceleration clause but cannot be triggered by continued defaults on the old bonds); reduce liquidity of the old bonds by delisting them; change negative pledge clauses; limit attachment possibilities of debt service made and on the new bond . . . 
The exit consents limited the ability of holdouts to attach their debt claims to the assets of the sovereign. By eliminating the cross-default and cross-acceleration clauses, the holdouts had no ability to declare the new bonds to be in technical default. Ecuador, through the restructuring, retained the right to hold the old Brady bonds, which precludes the holdouts from constituting the 25% needed to accelerate these bonds. By eliminating the old bonds from exchange listings, they were made illiquid. Finally, under the debt exchange, a trustee was used instead of a fiscal agent for disbursing the funds for debt servicing. This presumably makes it more difficult for holdouts to attach their claims to payments being made on the new bonds (as was done in the case of Elliot Associates and Peru) because the trustee is an agent of the creditor and not of the debtor.
Other measures were also taken to assure investors of the sustainability of Ecuador’s ability to service its debt. The terms of the restructuring require Ecuador to buy back portions of the debt stock — under an orderly timeline — prior to maturity; Ecuador has to “repurchase 3% of the outstanding stock of 2030 bonds in each of the last 17 years of the bond’s life, and 10% of the outstanding stock of 2012 bonds in each of the last six years of the bond’s life.” The requirement on Ecuador to manage its debt by reducing the size of it (whether through buybacks in the open market or by other means) prior to maturity has a number of virtues. It provides greater assurance that Ecuador will be able to service its debt upon maturity (since the debt stock will be reduced to a more manageable level), and it should benefit liquidity and prices in the secondary market since Ecuador will be a large and conscientious buyer of the debt.
Under the terms of the debt exchange, changes were made to compensate bondholders in the event of a default. In the instance of a default by Ecuador, there would be a re-inflating of principal on the long-term bond debt — the amount of principal re-inflation would depend on the timing of the default (i.e. there would be more generous compensation if the default occurred early in the life of the bond). This principal re-inflation in the incidence of default “would mitigate some of the haircut” or debt write-down mandated in the restructuring.
The Ecuador restructuring created important and beneficial changes in the circumstances of the country’s debt servicing ability. Through the restructuring Ecuador’s Brady bond and Eurobond stock fell 40%. Additionally, Ecuador’s short-term cash flow problems were mitigated since the bond exchange gave Ecuador $1.5 million in cash-flow savings over the first five years (in comparison to what they would have had to pay under the contracts of the old bonds).
Furthermore, Ecuador’s restructuring of its privately-held Brady bond debt afforded it the opportunity to restructure its official-sector debt. And in September of 2000, Ecuador was able to reschedule its multilateral debt with the Paris Club of official sector creditors. The debt restructuring covered 100% of arrears on April 30th 2000, as well as, the principal and interest that fell due and was falling due from May 1st 2000 to April 30th 2001. This restructuring covered $887 million of Ecuador’s official sector debt obligations. A goodwill provision was also included in which the Paris Club creditors pledged to consider a further rescheduling of Ecuador’s debt after 2001. Under the Paris Club’s current rules, Ecuador is not eligible for debt relief. Based upon the guidelines for HIPC (Highly Indebted Poor Countries) aid, Ecuador’s GDP is too high for debt relief, despite Ecuador’s massive debt burden (debatably an unsustainable one). This condition may change if the Paris Club, the IMF and the World Bank reconsider the criteria for debt forgiveness.
All in all, the restructuring process represented clever maneuvering around the limitations of NY law. Potentially dissenting bondholders were coerced to make the exchange because the exit consent agreements put negative amendments upon the old bonds, which caused the old bonds to decrease in value. The exit consents effectively made it very undesirable to continue to hold (and thus not exchange) the old bond debt. The debt restructuring process was able to preclude litigation efforts from resistant creditors through the exit amendments, because these amendments removed the cross-default and negative pledge clauses on the old bonds. The removal of these clauses gave and continues to give Ecuador the ability and right “to reacquire and to hold certain of its Brady bonds,” which makes it virtually impossible for dissenting bondholders to accelerate those bonds after the exchange. Exit amendments also allow for the removal of the waiver of sovereign immunity from the bond contracts (most sovereign bonds contain an express waiver of jurisdictional sovereign immunity in cases of litigation), which makes the sovereign debtor virtually impervious to harmful litigation by a remaining holdout creditor. The exit consents provide a remedy to the holdout creditor problem and facilitate an orderly bond restructuring between a sovereign debtor and its creditors.
The Ecuadorian debt crisis — as do the Pakistani and Ukrainian debt crises —represents the new-style of sovereign debt crisis, which involves bond debt instead of commercial bank loans. As the first restructuring of Brady bond debt, it is a true departure from the 1980s sovereign debt crises.
The Ecuadorian restructuring is an important precedent of how there can be an orderly restructuring of emerging market debt in the era of bond financing to emerging market countries. It shows how a bond restructuring can be achieved with a heterogeneous group of bondholders with competing interests. It also shows how this can be done even with the absence of collective action clauses, which bind dissenting creditors into a debt restructuring with the agreement of a qualified majority to enter into debt restructuring. The Ecuador case instead used exit consent agreements. The usage of exit consent mechanisms coerced virtually all creditors into the restructuring process by imposing negative amendments on the old bonds. This case proved that a restructuring of Brady bonds is possible. It offers a template for how moral hazard and free-riding can be reduced in future sovereign debt restructurings.
It is indeed an encouraging example of how dissenting creditors can be stopped from undermining the debt restructuring process. Vulture hedge funds, which bought Brady bonds on the secondary market at steep discounts, had the potential of free-riding upon the negotiations between the sovereign debtor and other creditors by trying to use litigation as a way to obtain debt service on interest and principal. Exit consents, by coercing dissenting creditors into debt exchanges, undermined these attempts. In the absence of collective clauses, they represent a way for the sovereign debtor and its creditors to protect themselves against the harmful and opportunistic behavior of these vulture hedge funds.
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 “Private Capital Flows in Historical Perspective.” Pg. 123.
 Dooley, Michael P. Pg. 14.
 Aggarwal, Vinod K. “The Evolution of Debt Crises: Origins, Management, and Policy Lessons.” University of California Berkeley. (May, 2000)
 Dooley, Michael P. Pg. 14.
 “Private Sector Involvement in Crisis Prevention & Resolution.” Pg. 123.
 Dooley, Michael P. Pg. 5
 Aggarwal, Vinod K.
 Allegaert, Theodore. “Recalcitrant Creditors Against Debtor Nations, or How to Play Darts.” Minnesota Journal of Global Trade. (Summer, 1997)
 Buckley, Ross P. Pg. 8.
 Dooley, Michael P. Pgs. 13-14. Also see Buckley, Ross P. Pg. 22.
 Chaudhuril, Adhip. “Mexican Debt Crisis, 1982.” The Pew Cases in International Affairs. (1989) Pg. 4.
 Bordo, Michael D. “International Rescues Versus International Bailouts: An Historical Perspective.” Rutgers University and NBER. Prepared for the Cato Institute’s 16th Annual Monetary Conference. (October 22nd, 1998) Pg. 6.
 MacMillan, Rory. “The Next Sovereign Debt Crisis.” Stanford Journal of International Law. (Summer, 1995)
 Buckley. Pg. 102.
 Power, Philip J. “Sovereign Debt: The Rise of the Secondary Market and its Implications for Future Restructurings.” Fordham Law Review. (May, 1996)
 Molano, Walter T. “From Bad Debts to Healthy Securities? The Theory and Financial Techniques of the Brady Plan.” Brady Net Inc. Editorial. http://www.bradynet.com.
 Chun, John H. “‘Post-Modern’ Sovereign Debt Crisis: Did Mexico Need an International Bankruptcy Forum.?” Fordham Law Review. (May, 1996)
 Global Development Finance 2000. The World Bank. Pg. 126.
 Buckley. Pg. 30.
 Gopinath, Deepak. “The Man Who Broke Ecuador.” Institutional Investor. (November 1st, 1999)
 Goldman, Samuel E. “Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt Restructurings.” UCLA Journal of International Law and Foreign Affairs. (Spring/Summer, 2000)
 Macmillan, Rory.
 Goldman, Samuel E.
 Gopinath, Deepak.
 Dixon, Liz and David Wall. “Collective Action Problems and Collective Action Clauses.” Financial Stability Review. (June 2000). Pg. 143.
 Goldman, Samuel E.
 Power, Philip J.
 Eichengreen, Barry and Christof Rühl. “The Bail-In Problem: Systematic Goals, Ad Hoc Means.” (May, 2000) Pg. 2.
 Buchheit, Lee C. “Sovereign Debtors and their Bondholders.” Unitar Training Programmes on Foreign Economic Relations, Document 1. (Geneva, 2000)
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 Power, Philip J.
 Goldman, Samuel E.
 Goldman, Samuel.
 Power, Philip J.
 Power, Philip J.
 Allegaert, Theodore.
 Power, Philip J.
 Goldman, Samuel E.
 Allegaert, Theodore.
 Bloomberg Business News. “Brazil Settles a Suit With Dart Family.” The New York Times. (March 20th,1996)
 Power, Philip J.
 Evans, Catherine. “Brazil’s Plan for Global Bond Issue Is Clouded by Dart Family’s Offering.” Wall Street Journal. (October 2nd, 1996)
 Power, Philip J.
Goldman, Samuel E.
 Lindenbaum, Eric and Alicia Duran. “Debt Restructuring: Legal Considerations Impact of Peru’s Legal Battle and Ecuador’s Restructuring on Nigeria and Other Potential Burden-Sharing Cases.” New York: Merrill Lynch. (October 30th, 2000) Pg. 2.
 Goldman, Samuel E.
 Power, Philip J.
 Pravin Banker Associates, Ltd. Vs. Banco Popular del Peru and the Republic of Peru. 9
F. Supp. 2d 300 (US District Court, 1998)
 Information obtained from a telephone conversation with Mark Cymrot, an attorney at Baker & Hostetler LLP, who defended Peru against Pravin Banker Associates (and later against Elliott Associates).
 “Involving the Private Sector in the Resolution of Financial Crises — Restructuring International Sovereign Bonds.” Prepared by the Policy Development and Review and Legal Departments of the IMF. Pg. 12.
 Elliott Associates, L.P. v. Banco de la Nacion, 194 F.3d 363 (2d Circuit, 1999)
 Ibid. Also see Lipworth and Nystedt. “Crisis Resolution and Private Sector Adaptation.” IMF Working Paper. Washington D.C.: International Monetary Fund. (November, 2000)
 Lindenbaum, Eric and Alicia Duran. Pg. 2.
 Goldman, Samuel E.
 Elliott Associates, L.P. v. Banco de la Nacion, 194 F.3d 363 (2d Circuit, 1999). Also see Elliott Associates, L.P. v. Republic of Panama, 975 F. Supp. 332 (District, 1997).
 Goldman, Samuel E.
 Elliott Associates, L.P. v. Banco de la Nacion, 194 F.3d 363 (2d Circuit, 1999).
 Lindenbaum & Duran. Pg. 2.
 Goldman, Samuel E.
 Elliott Associates, L.P. v. Banco de la Nacion, 194 F.3d 363 (2d Circuit, 1999).
 Goldman, Samuel E.
 Gulati and Klee. Pg. 635.
 Lindenbaum and Duran.
 Gulati and Klee.
 “Involving the Private Sector in the Resolution of Financial Crises — Restructuring International Sovereign Bonds.” Also see Lindenbaum and Duran.
 Lindenbaum and Duran.
 Elliott Associates, L.P. v. Banco de la Nacion, 2000 U.S. Dist. LEXIS 14169 (District,
 Lindenbaum and Duran.
 Remond, Carol S. “Peru Settles Dispute With Elliott For $58M.” Dow Jones Newswires. (September 29th, 2000)
 Lindenbaum and Duran.
 Remond, Carol S.
 Lipworth and Nystedt. Pg. 36.
 Lindenbaum and Duran. Pg.3.
 Gulati & Klee. Pg. 636.
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 Lindenbaum and Duran.
 Gulati and Klee. Pgs. 650-651.
 “Involving the Private Sector in the Resolution of Financial Crises — Restructuring International Sovereign Bonds.” Pg. 30.
 “Another Coup.” The Economist. (November 27th, 1999)
 Luce, Edward. “Pakistan’s New Six-Year Issue Faces Opposition.” Financial Times. (December 8th, 1999)
 Lipworth & Nystedt. Pg. 29.
 “Involving the Private Sector in the Resolution of Financial Crises.”
 Power, Philip J.
 “Resolving and Preventing Financial Crises: The Role of the Private Sector.” By IMF Staff. (March 26th, 2001) Also see Yianni, Andrew. “Resolution of Sovereign Financial Crises — Evolution of the Private Sector Restructuring Process.” Financial Stability Review. London: Bank of England. (June, 1999)
 “Involving the Private Sector in the Resolution of Financial Crises.”
 Frankel, Jeffrey and Nouriel Roubini. “The Role of Industrial Country Policies in Emerging Market Crises.” (October, 2000) Pg. 50.
 Lipworth & Nystedt. Also, “Involving the Private Sector in the Resolution of Financial Crises,” by the Policy Development and Review and Legal Departments of the IMF.
 “Involving the Private Sector in the Resolution of Financial Crises.” Pg. 31.
 Clover, Charles. “IMF and Ukraine Start Talks on Debt Restructuring.” Financial Times. (January 18th, 2000)
 Lipworth & Nystedt. Pg. 30.
 Ostrovsky, Arkady. “Ukraine Using Net for Debt Exchange.” Financial Times. (February 8th, 2000)
 “Involving the Private Sector in the Resolution of Financial Crises.” Pg. 31.
 Benady, Alex. “Ukraine Puts Off the Debt Collectors.” PR Week. (May 26th, 2000)
 “Involving the Private Sector in the Resolution of Financial Crises.” Pg. 32.
 Roubini, Nouriel. “Bail-In, Burden-Sharing, Private Sector Involvement (PSI) in Crisis Resolution and Constructive Engagement of the Private Sector. A Primer: Evolving Definitions, Doctrine Practice and Case Law.” Stern School of Business, New York University, NBER, and CEPR. (July, 2000) Pg. 55.
 Folsom, George A. “Implications of its Default on its Brady Bond.”
 Edwards, Sebastian. “Latin America at the End of the Century: More of the Same?” Also see Cline, William. “The Role of the Private Sector in Resolving Financial Crises in Emerging Markets.” Institute of International Finance. (October, 2000)
 Gopinath, Deepak.
 Gopinath, Deepak.
 “A New Deal for Debt.” Latin Finance (September, 2000)
 Gopinath, Deepak.
 Emerging Market Country Products and Trading Activities. Comptroller’s Handbook. Comptroller of Currency at the OCC of the U.S. Treasury Department. (December, 1995)
 Gopinath, Deepak.
 “A New Deal for Debt.”
 Gopinath, Deepak.
 MacMillan, Rory.
 Gopinath, Deepak.
 Newport, Samantha. “Did the IMF Drop the Ball in Ecuador?” Business Week. (January 31st, 2000)
 “The Ecuadorian Recovery Program.” A Statement by the IMF Representative at the Meeting with Private Creditors in New York. (May 16th, 2000) Pg. 1.
 “Ecuador: Back from the Brink.”
 Lipworth, Gabrielle and Jens Nystedt. Pg.33.
 “Involving the Private Sector in the Resolution of Financial Crises — Restructuring International Sovereign Bonds.” Pg. 33. Also see Lipworth and Nystedt. Pg. 33.
 Gopinath, Deepak (2). “Putting Ecuador’s House in Order.” Institutional Investor. (September 1, 2000)
 “Involving the Private Sector in the Resolution of Financial Crises.” Pg. 34. Also see Lipworth and Nystedt. Pg. 34.
 Lipworth and Nystedt. Pg. 35. Also see Buchheit, Lee C. “How Ecuador Escaped the Brady Bond Trap.” International Financial Law Review. Vol. 19, Issue 12. (December, 2000)
 “Involving the Private Sector in the Resolution of Financial Crises.”
 Gopinath, Deepak. (2)
 Lipworth and Nystedt. Pg. 35.
 Lindenbaum & Duran. Pgs. 3-4.
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 Buchheit, Lee C. “How Ecuador Escaped the Brady Bond Trap.”
 Lipworth & Nystedt. Pg. 35. Also see Buchheit, Lee. “How Ecuador Escaped the Brady Bond Trap.”
 Buchheit, Lee C. “How Ecuador Escaped the Brady Trap.”
 Global Development Finance 2001. The World Bank Group. Pg. 173.
 Roubini, Nouriel. “Bail-In, Burden-Sharing, Private Sector Involvement (PSI) in Crisis Resolution and Constructive Engagement of the Private Sector. A Primer: Evolving Definitions, Doctrine Practice and Case Law.” Stern School of Business, New York University, NBER, and CEPR. (July, 2000) Pg. 59.
 Buchheit, Lee & G. Mitu Gulati. “Exit Consents in Sovereign Bond Exchanges.” UCLA Law Review. (October, 2000)