UK lawmaker pushes debt restructuring reform for poor nations

[EUROPE] A British politician has filed a private member's bill to establish new standards for debt restructurings in an effort to expedite negotiations for poor countries grappling with unsustainable debt. Bambos Charalambous, who submitted the bill late last year, stated that support from other members of parliament had increased after the United Kingdom and the United States reduced aid spending. He represents the ruling Labour party in parliament, but neither it nor the opposition Conservatives have backed the bill.

The bill’s momentum comes amid growing frustration over the slow pace of debt relief for low-income nations, many of which are grappling with climate-related disasters and economic shocks. Advocates argue that current restructuring processes favor wealthy creditors, leaving debtor nations trapped in cycles of austerity and underinvestment. Charalambous has cited Zambia’s protracted restructuring as a key example of systemic failures the bill seeks to address.

Charalambous stated that his party could be convinced to support it, and that it was being studied by some government officials. His initiative follows similar suggestions in New York state, which advocates claim would help poor countries recover faster and stronger from economic hardship, while opponents warn that they could make future borrowing more expensive.

Critics, including some major financial institutions, contend that the proposed changes could undermine investor confidence, leading to higher borrowing costs for developing nations. They argue that contractual certainty is essential for maintaining access to capital markets. However, proponents counter that the current system incentivizes predatory lending and delays relief, exacerbating humanitarian crises in vulnerable economies.

Lawyers and investors monitoring the discussion on both sides of the Atlantic expect debt advocates to continue pushing until some version of the ideas becomes law. Bonds worth trillions of dollars, which account for practically all tradeable sovereign debt issued by emerging governments and enterprises on international capital markets, are issued under the laws of either New York state or England. English law rules a disproportionate part - up to 90% - of bonds issued by the poorest countries, such as Ethiopia and Ghana.

The dominance of English and New York law in sovereign debt contracts has long been a point of contention. Legal experts note that these jurisdictions often favor creditors, making it difficult for debtor nations to secure equitable terms. Recent cases, like Argentina’s battles with hedge funds, have highlighted the power imbalance, fueling calls for reform.

"It would, first and foremost, compel private creditors to negotiate in good faith and quickly with debt-burdened countries," Charalambous told Reuters about the plan. "And it could be worth billions to (the countries), and that money could be reinvested into health and education projects."

Charalambous' measure would allow governments to seek debt payment freezes while restructuring negotiations are ongoing, as well as a halt on judicial procedures during the process.

The proposed legal stay provision mirrors measures in corporate bankruptcy systems, such as Chapter 11 in the U.S., which temporarily shield companies from creditor lawsuits. Applying similar protections to sovereign debt could prevent disruptive litigation, giving nations breathing room to negotiate sustainable repayment plans.

It would also limit the claims that private creditors might make in lawsuits after restructurings were completed, with the goal of preventing holdout creditors from obstructing or stalling debt transactions.

Currently, if a country defaults on its obligations, creditors can go to court in the jurisdiction regulating the contract to seek repayment; some Ethiopian bondholders have stated that they may take legal action. Such court cases may result in protracted legal battles, which can delay or complicate a larger restructure.

A wave of developing countries, ranging from Ghana to Sri Lanka, have defaulted since 2020, weakened by the COVID-19 epidemic and a global interest rate hike cycle. The G20 launched the Common Framework effort in an attempt to bring together varied lenders - from China to New York investors - to accelerate impoverished countries' debt restructuring.

Despite its intentions, the Common Framework has struggled with coordination gaps, particularly between traditional Western creditors and newer lenders like China and private bondholders. Analysts suggest that without binding mechanisms to enforce cooperation, the framework risks becoming another bureaucratic hurdle rather than a solution.

However, it took Zambia more than three years to restructure its principal obligations, and opponents argue that the debt relief it and other countries have received makes them vulnerable to future crises. No version of the New York law has reached the governor's desk, but emerging market bond investors have begun to incorporate terms in bond deals that allow them to switch jurisdictions to escape prospective limits.