After already rising to record highs, sovereign debt levels have been exacerbated even further by fallout from the COVID-19 crisis and continue to rise across the globe.
A growing number of governments are at risk of joining Venezuela, Lebanon, and several other countries in announcing debt default since the pandemic began. As sovereign debt levels have increased, the types of creditors have also expanded, bringing a complex set of issues for restructurings. Dr. Rand Ghayad addresses the growing challenges in a recent Bloomberg Law article, “Sovereign Debt Challenges Ahead.”
Dr. Ghayad presents three key changes over the past two decades in the sovereign bond market– including the advancement of credit default swaps (CDS), a US Second Circuit ruling allowing holdout creditor access to asset records during Argentina’s debt restructuring, and the rise in heterogeneity and number of creditors – that have changed the rules for debt restructuring. These changes have been a catalyst for increased sovereign debt litigation in the past 10 years, and the record surge in debt levels is likely to bring additional litigation. This includes “vulture fund” litigation, as distressed debt funds seek to turn a profit by buying debt at a deep discount in the secondary market.
With sovereign debt restructurings and related litigation expected to become even more complicated in the coming years, Dr. Ghayad presents practical solutions for the road ahead, such as reforming debt contracts, and calls for additional innovations to address the sovereign debt crisis.