After months of fielding criticism for standing idly by while Puerto Rico sank under a $72 billion debt heap, the Obama Administration is getting creative. On October 21, the U.S. Treasury, the Department of Health and Human Services, and the National Economic Council released a joint proposal for federal bankruptcy legislation to restructure all of Puerto Rico’s debts. Debt relief would come in exchange for fairly intrusive federal oversight, combined with Medicaid reform and federal tax relief to help mend the island’s fraying social safety net.

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Today's Greek referendum might look like a high point for democratic accountability, but it is not. When Greek citizens vote on the demands of their government’s international creditors, the outcome will bind Greek politicians, but not the creditors that have prescribed economic policy for Greece since 2010. Instead, the European institutions and the IMF answer to a complex tangle of constituents outside Greece, including taxpayers in other countries that stand to lose money if Greece fails to pay its debts, and those who would suffer shock-waves from Greece abandoning the euro as its currency.

This democracy mismatch can lead to over-lending and over-borrowing based on flawed policies and improbable assumptions, which might have been rejected if the creditors had a more direct stake in the consequences of their prescriptions for Greece from the start. Tying a small portion of debt repayment to policy outcomes would improve accountability and help align incentives for the borrowing government and its creditors alike.

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Debt restructuring is the second largest source of outside financing for Ukraine’s new IMF program. The Fund itself brings $17.5 billion over four years; $9.6 billion comes from governments and other multilaterals (including Europe, the United States, and most recently, China), leaving $15.3 billion for the "debt operation." The jargon makes debt restructuring sound like a mix of surgery, conspiracy, and military campaign, which together pretty much sum up Ukraine's challenge.

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Ukraine's bond restructuring talks are in high gear, and, as ever, Russia is trouble du jour. Not only is it threatening to hold out in the bond deal and take Ukraine to arbitration, Russia also seems poised to block IMF disbursements to Ukraine using an arcane Fund policy on "lending into arrears." My hunch is that this last risk is overblown, and in any event should not drive IMF policy or Ukraine's restructuring strategy. 

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Big day in sovereign debt. After months of kicking the can down the road and a couple of anticlimactic decisions from English courts that made no practical difference in the pari passu injunction, a giant big shoe has just dropped in the Southern District of New York. Judge Griesa ruled that Argentina's dollar-denominated local law bonds were covered by his injunction just the same as New York and English law bonds. In the process, he defined (or redefined?) the injunction super-broadly, effectively blocked Argentina from issuing new foreign currency debt under its own law, potentially expanded the reach of the pari passu clause for other sovereigns, told Argentina that it was all out of comity, and told Citi to choose between New York and Cristina Fernandez de Kirchner.

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The IMF has approved a new 4-year $17.5 billion program for Ukraine, with an immediate disbursement of $5 billion. This is a big economic, institutional, and geopolitical deal. I will comment on one small piece of one small piece: the treatment of Russia's $3 billion loan to the last Ukrainian government, about which I have written at various levels of weediness here, here, and here.

The IMF program is approved under the Fund's existing "exceptional access" (huge $$) policy, which has been interpreted to require debt restructuring unless the country's debt is "sustainable with high probability" (for some of the back-and-forth on the reform proposals, see here, or watch here and here). The Ukraine program therefore expressly hinges on a government and government-guaranteed debt "operation" to achieve sustainability, plus rolling over most of the debts owed by Ukrainian banks and corporations (lots of it to Russia). Brilliant minds are crunching the numbers now to figure out whether Ukraine's bondholders might get by without principal reduction, and without suspending interest payments, based on any realistic set of assumptions.

I am struck by one bit of arithmetic: Ukraine has about $7.7 billion in external sovereign debt payments due in 2015, of which $5.8 billion is principal, of which $3 billion is to Russia  (see p. 138). The IMF document contemplates $5.2 billion in financing from the "debt operation" in 2015 (see p. 12). Since 7.7-5.2=2.5, and since 2.5<3, Russia does not seem to be getting its $3 billion repayment in December. The fact that the IMF board, which includes Russia, approved this scenario, seems important. But (a) the details are super-foggy and (b) I may be missing something, like a big guarantee payment.

The IMF press release says that the debt operation must have "high participation" and be successfully concluded by the first program review, scheduled for June 15. If participation is not high, it would have to be ocean-deep. Since Russia and Franklin Templeton together likely hold more than half of the debt, a deal without both seems inconceivable. On the other hand, the top two creditors also presumably have blocking positions in lots (if not all) bonds for purposes of a restructuring vote–though other creditors could also coordinate to block votes. This will be one fascinating "voluntary" "operation."

To its credit, the IMF document highlights a slew of risks to the program and the debt restructuring operation, all of which seem scary-plausible, especially considering the optimistic gloss that must go with program approval. Buckle up. 

Like many others, I have been struggling to figure out whether the new lunar year is a Sheep or a Goat. I found the answer last week in the archives of the League of Nations Committee for the Study of International Loan Contracts, which spent four years from 1935 to 1939 investigating why sovereign debt was so screwed up, and what to do about it. During these four years, committee notables and their experts managed to foresee just about every 21st century sovereign debt controversy, from pari passu and feckless trustees to the epic and tiresome battle between contractual and statutory sovereign bankruptcy. The 1937 meeting minutes below also show a solid grasp of Odious Debt and sovereign lemons. Some governments might walk away from their debts just because, others have good economic or moral reasons not to pay, but the creditors cannot tell the two apart. The committee saw this as a problem of "telling the sheep from the goats," and ultimately concluded that there was not much to be done about it — but not before considering contract reforms to let creditors monitor whether loan proceeds were used for the benefit of the country.

Bottom line: you cannot tell a sovereign sheep from a sovereign goat. And 1937 was the year of the [Ram] OX (aaargh!!! How many horned animals are there …).

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Mexico's public offering with New York-style ICMA CACs is a huge deal. But it turns out that Vietnam's exempt offering on November 6, also under New York law, was there first. Since it is not a public offering, the disclosure document is not public, and the one press article describing it is behind a paywall. Here are a few bits that struck me as interesting about the three adoptions so far.

The Clause Formerly Known as Pari Passu:

Like Kazakhstan and Mexico, Vietnam fixes the pari passu clause to exclude the ratable payment interpretation. Funnily enough, the three seem to do it in slightly different ways:

Kazakhstan:

The Notes will at all times rank pari passu without preference among themselves and at least pari passu in right of payment, with all other unsecured External Indebtedness of the Issuer from time to time outstanding, provided, however, that the Issuer shall have no obligation to effect equal or rateable payment(s) at any time with respect to the Notes or any other External Indebtedness and, in particular, shall have no obligation to pay other External Indebtedness at the same time or as a condition of paying sums due on the Notes and vice versa.

Vietnam:

The Notes shall at all times rank without any preference among themselves and equally with all other present and future unsecured and unsubordinated External Indebtedness (subject to Condition 11 below [Negative Pledge]) provided, however, consistent with similar provisions in the Government’s other External Indebtedness, that this provision shall not be construed so as to oblige the Government to effect equal or rateable payment(s) at any time with respect to any such other External Indebtedness and, in particular, it shall not be construed so as to oblige the Government to pay other External Indebtedness at the same time or as a condition of paying sums due on the Notes and vice versa.

Mexico:

The debt securities rank and will rank without any preference among themselves and equally with all other unsubordinated public external indebtedness of Mexico. It is understood that this provision shall not be construed so as to require Mexico to make payments under the debt securities ratably with payments being made under any other public external indebtedness.

Majority Voting:

In substance, all three are the same as the ICMA model. They allow series-by-series, two-tier aggregated, and stock-wide aggregated votes at the option of the issuer–though they are drafted differently. Kazakhstan and Vietnam mostly use the ICMA language. Mexico is in line with its existing New York documentation, more pared down — but really a matter of style. The voting thresholds are the same: 75% of outstanding for individual series and stock-wide votes, 66 2/3% of each series + 50% of stock for two-tier aggregated votes. In a stock-wide vote, the output must be uniformly applicable (same instrument or same menu for all).

Collective Representation and Majority Enforcement:

Kazakhstan and Vietnam have fiscal agency agreements; Mexico has a trust indenture. All three require a creditor vote of 25% to accelerate. Kazakhstan provides for a noteholder committee if bad things happen; Vietnam and Mexico do not. ICMA has recommended contract clauses on committees since 2004; some issuers in London have taken up the call, but virtually none in New York have. Note that you do not need a contract clause ex ante to form a committee ex post; in contrast, you cannot have majority voting, ranking, or trustees unless your contract provides for them in advance.

Mexico has just filed a registration statement with the SEC for New York-law bonds with a version of ICMA collective action clauses (CACs), cheered here just a few months ago, among other refinements. This is a big deal for three reasons: Mexico, New York, and the clauses. Bottom line — a classy, confident move.

In 2003, Mexico led the market shift from unanimous consent to majority modification in New York. Once Mexico issued with CACs, everyone else followed. This time around, some expressed doubts that Kazakhstan, which adopted ICMA CACs in English-law bonds hot off the press in early October, could exert a comparable gravitational pull, especially in New York. As if to prove the point, a few Latin American issuers have issued in New York since Kazakhstan with revised pari passu clauses, but no new CACs. Mexico fixed both pari passu and CACs, and has a track record of bringing the market along.

New York is a big deal because all these contract reforms respond, at least in part, to U.S. court rulings, which (a) interpreted Argentina's pari passu clause as requiring ratable payment to holdout creditors, (b) said that CACs could cure the common cold, and (c) told market participants that they could avoid Argentina's fate by fixing their contracts. From this perspective, fixing English-law contracts is prudent; fixing New York-law contracts is imperative.

Mexico's refurbished contracts are notable in three ways.

1. The new bonds would be issued under an indenture, with its attendant collective enforcement provisions. Holdouts would have to get 25% of their series to instruct and indemnify the trustee before bringing a lawsuit for accelerated principal. Not very mavericky.
2. The pari passu clause has been stripped of all Latin, and disavows the ratable payment construction.
3. ICMA majority modification terms march on in substance, but in sparser (New Yorkier?) language. Modification of key terms can now happen 

(a) with a 75% vote of each series (as in the traditional English or post-2003 New York CACs),

(b) with a 2/3 vote of the aggregated bond stock or subset, *plus* a 50% vote of each modified series (as in Uruguay et al post 2003 and in the Euro area post 2013), or

(c) with a single 75% vote of the aggregated bond stock or subset. Here the outcome must be "uniformly applicable" — ie, everyone gets the same instrument or the same menu.

 So — if you are into sovereign debt contracts, this is your iPhone 6. Behold the un-boilerplate.