Together with the Friedrich-Ebert Foundation and the Friedrich-Naumann Foundation, erlassjahr.de organized a session at the first Hamburg Sustainability Conference (HSC), that was hosted among others by the German government, the city of Hamburg and UNDP and was meant to be one of the summits on the road to the fourth Financing for Development Conference (FfD4) in Sevilla 2025. The session took place on 8 October and was titled: “Legislative Measures for Successful Sovereign Debt Restructuring”. International experts and German and Ghanaian parliamentarians discussed the potential of national creditor legislation for successful debt restructuring. The event highlighted the urgency of national legislative initiatives to ensure the participation of private creditors in debt restructuring. It also became clear that there is a broad range of international expertise and experience that can be drawn on.
The background
Private creditors hold the majority of claims against critically indebted countries in the Global South. However, these private actors, which include commercial banks such as the Deutsche Bank and asset managers such as BlackRock, do not participate sufficiently in debt restructurings. The problem is also known in Berlin. German Development Minister Svenja Schulze recently emphasized once again – on the occasion of the handover of several thousand signatures calling the government to act more boldly in reforming the international debt architecture – that private creditors must be held more accountable.
This problem could be addressed by enacting creditorlaws in countries of the Global North. In Germany, this could be a so-called “safe harbor law”. Such a law would limit the amount that private creditors can sue for and enforce in Germany to the amount agreed in international debt restructuring negotiations.
At the HSC, the experts discussed what contribution such a law could make and what needs to be considered when drafting such a law. The panel was moderated by Kristina Rehbein, Political Coordinator from erlassjahr.de.
Need for action
Celine Tan, Professor of Law at Warwick University in England, highlighted the inadequacies of the current international financial architecture in dealing with public external debt crises in a context of a de-risking private finance paradigm. She stressed that sovereign debt is the only category of financial claims for which there is no regulated procedure on how to proceed in the event of repayment difficulties. While there was a lot of talk at the HSC about mobilizing private finance for development purposes, Celine Tan stressed that this approach is currently not working: private creditors are regularly bailed out by public means in times of crisis.
Malina Stutz, policy officer at erlassjahr.de, cited Ukraine as a concrete example, where the recently concluded deal means that legacy bondholders are being paid out with the public support that is being provided to Ukraine by Western governments. Further, the unwillingness of private creditors to restructure their claims also means that debt cancellation in ongoing restructuring negotiations is inadequate. This places a particular burden on the population in highly indebted countries and contributes significantly to serious human rights violations.
Sri Lanka is currently a particularly serious example of this. Penelope Hawkins, Senior Economist leading on debt in the Debt and Development Finance Division of the UN Organization for Trade and Development (formerly UNCTAD), also pointed out this social dimension of inadequate debt relief. The current debt crisis is primarily a development crisis, as she laid out.
Mark Flanagan, Deputy Director of the Strategy Policy and Review Department of the International Monetary Fund (IMF) agreed, that current processes often proved inadequate to ensure a reasonable participation of private creditors. The IMF had long pursued the strategy of solving the problem of private sector participation in debt restructurings by favouring a market-based approach, such as the use of contract innovation (e.g. Collective Action Clauses) in bond contracts. However, Flanagan agreed that even where such clauses had been included, effective restructuring and participation of private creditors could not always be adequately ensured. In this regard, Flanagan said that he would see potential for national laws that would restrict the legal enforcement of claims.
With view to the example of Sri Lanka as emblematic example of the current debt crisis, Flanagan agreed that the debt sustainability thresholds in Sri Lanka’s IMF program provide, in his view, for too little debt relief. Coming back to the example of Ukraine, from a taxpayer’s perspective, Flanagan also agreed that the creditor-friendly deal Ukraine struck with its bondholders in its current form would lead to public resources being used to bailout bondholders.
The potential of national legislation…
There was broad agreement among the panelists that national laws can, in principle, play an important role in making the international debt architecture fairer and more efficient and ensure the participation of private creditors. Addressing the objection that the bureaucratic burden of passing such a law must also be considered, Daniel Reichert-Facilides, Senior Counsel at Chatham Partners and lecturer at the Law and Finance Institute in Frankfurt, argued that the adoption of such a law could, on the contrary, reduce bureaucracy by relieving the burden on the judicial system that may be created through law suits by individual bondholders. In this context, he mentioned the cases of Greece and Argentina that faced lawsuits in German courts during their debt crises.
Armand Zorn, German MP and member of the Finance Committee for the social democratic party, reacted to the frequent argument that such a law could increase credit costs: Firstly, he considered this to be implausible, also in view of previous similar initiatives taken. Secondly, a moderate increase in credit costs would be acceptable as long as it was not caused by a poor design of the law, but merely reflected a more realistic risk assessment by lenders.
… in Germany
Karina Patrício Ferreira Lima, Assistant Professor of International Financial Law at the University of Leeds (UK) and Ohiocheoya Omiunu, Lecturer in International Economic Law at the University of Kent (UK), emphasized the relevance that such a law could also have in Germany. First, Ferreira Lima pointed out the political dimension: A corresponding legislative initiative in Germany would provide a political tailwind for comparable efforts in England and New York. Second, she emphasized that such a law could also have a strong protective effect for debtor states in Germany, particularly because it would protect the (financial) assets of debtor states located in or transferred via Germany from seizure attempts. Omiunu also emphasized the role of German investment banks as they do often act as underwriters when issuing government bonds.
Armand Zorn further highlighted that, in times of distrust and skepticism towards multilateral processes and regulations, Germany has an opportunity to restore confidence by actively contributing to a more equitable international financial architecture. He stressed that it is Germany’s responsibility to take necessary steps to achieve this goal.
The devil in the detail
During the discussion, it also became clear that much depends on the specific form of the law – thus, the exact wording of the legal text. Cassiel Ato Forson, Ghanaian MP and opposition leader, emphasized that such a law should not focus too narrowly on certain creditor groups. Instead, the problem must be viewed holistically. In this regard, Forson also pointed out the problem of the preferential treatment of multilateral creditor institutions.
With regard to the current debate and the draft legislation discussed in New York, Reichert-Facilides emphasized that a corresponding law would have to enforce equal treatment regardless of the applicable contract law – similar to previous legislative initiatives in the UK. This would reduce the risk of private creditors changing to “more attractive” jurisdictions, a threat that is currently discussed in light of the New York legislative proposals.
Stutz emphasized that it is crucial to design laws in such a way that the enforcement of international agreements is – under certain conditions – also possible, if the majority of private creditors refuse the restructuring. This would be the only way to overcome the existing asymmetry in the negotiating positions and at the same time ensure that future debt restructurings enable comprehensive debt cancellation. Thereby, it would be particularly important to clarify the conditions under which such a case can occur in the legal text, in order to create sufficient legal certainty for all parties involved. Stutz emphasized that the academic and civil society debate has been dealing intensively with these detailed issues for more than two years now and that there are good proposals on the table, which German legislators can use as a guide.
What happens next
Till Mansmann, German MP and member of the Finance Committee for the Free Democratic Party, pointed out that it is currently very difficult to get a corresponding law in Germany off the ground due to disagreements between the governing parties. However, he also emphasized that it is crucial that all responsible ministries deal intensively with the proposal in order to make progress on this issue. In addition to the Federal Ministry of Finance, he also mentioned the Federal Ministry of Justice and the Ministry for Economic Cooperation and Development as relevant ministries.