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Rules for sovereign debt re-examined

Friday, August 29 09:53:54

Banks, investors and other users of bond markets have agreed to change how they would deal with defaulting government debt in an attempt to avoid the disputes seen with Argentina.

The International Capital Market Association (ICMA) published a revised framework on Friday that allows a majority of investors holding sovereign bonds that default to make changes to the bond terms, such as extending maturities or reducing the principal.

These changes would then be made legally binding on all holders of the bonds, including those who vote against the restructuring.

A small group of U.S. hedge funds rejected Argentina's 2005 and 2010 debt restructurings, pushing the country into default in July.

ICMA said revisions to so-called collective action clauses and a new standard pari passu clause, which refers to all creditors being treated the same, would provide a practical solution to the problem of blocking minorities.

"The potential adverse fallout globally from the default and restructuring of Argentina's debt demonstrates the importance of having clear, unambiguous contract terms for sovereign bonds," said Leland Goss, ICMA's general counsel.

"In-depth consultations with our members and other interested public and private sector representatives have led to the development of enhanced legal technology that will make more orderly and efficient sovereign debt restructurings achievable in the future," Goss added.

ICMA represent 450 members such as banks, debt issuers and investors from 52 countries. (Reuters)

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