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Legislative efforts to address non-cooperative minority creditors

While the new CACs aim to reduce the ability of non-cooperating bondholders to undermine an otherwise agreed voluntary restructuring of sovereign debt, the success of ex post litigation has highlighted a gap in the architecture for debt crisis resolution. The Addis Agenda expressed concern about the ability of such creditors to disrupt the willingness of the large majority of bondholders to accept a sovereign restructuring, and noted legislative steps taken by some governments to prevent such disruptive activities.

Largely in response to litigations in their courts, a few jurisdictions have passed or debated legislation to discourage hold-out creditors by limiting creditors’ potential profits from secondary market purchases. Most of this legislation has focused on limiting claims against countries that benefitted from debt relief under the HIPC Initiative. For example, in the UK, a law was passed in 2010 that prevents creditors from suing in the UK court to enforce payment on the sovereign debt of HIPC debtors on terms more favourable than agreed under the HIPC Initiative. Similar legislation was also adopted by Jersey and the Isle of Man in 2012 and debated in Australia and in the States of Guernsey in 2012 and in the US in 2008.

In contrast, a Belgian law, adopted in 2015, is not restricted to heavily indebted poor countries; it limits creditors’ ability to seek enforcement from Belgian courts of claims that are clearly disproportionate to the price the debt was purchased at in the secondary market (the law applies to the debt of any sovereign). In order for this limit to apply, any one of a number of conditions must be satisfied, such as the creditor’s refusal to participate in a debt restructuring process, the creditor’s systematic use of legal proceedings to obtain payment on repurchased claims, or the creditor’s abuse of the weakness of the debtor state to negotiate an imbalanced repayment agreement. Since legislations have only been adopted very recently, there is little evidence to date about how effective they are.