Alonso García Tamés examines the evolution and application of the Principles of Emerging Market Debt.

Following the financial crises that hit many emerging market economies during the 1990s, a consensus emerged in the international financial community that a closer dialogue between debtors and creditors was needed: investors needed to have timely information about economic developments in debtor countries. This led to the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets (the Principles).

The Principles advocate best practices of transparency and timely sharing of information by debtor countries with their investors, close debtor-creditor dialogue and co-operation, good faith action during debt restructuring, respect for the sanctity of contracts, and fair treatment of all parties.

Mexico’s initiative

Having endured a number of financial crises, Mexico understands the importance of transparency, adequate and timely disclosure, equitable treatment and responsible behaviour in the international markets. It recognises them as critical elements for strengthening investor confidence and restoring capital inflows that might be interrupted in difficult times. Globally, it has been to the fore on this issue.

In 1995, the Mexican Ministry of Finance created an Investor Relations Office to promote the enhanced disclosure of financial and economic data, and to respond to the need of investors and analysts for a personal and ongoing dialogue with the country’s financial authorities.

Dialogue in isolation between creditors and debtors has proved insufficient, as shown by the financial crises in south-east Asian during 1997. There, the lack of an agreed framework within which to restructure public and private sector debt led to protracted litigation in local courts. It prolonged market disruption at the expense of a consensual process of restructuring and co-operative efforts to restore market access.

Against this background, Mexico sought to adopt and promote best procedures and practices for debt restructuring that would be available to it in the remote case of a new crisis. Thus, in 2003, it took the lead as the first emerging market to introduce collective action clauses (CACs) in its bonds. Its CACs contain majority enforcement provisions that are designed to limit the power of a minority of bondholders to disrupt the restructuring process by enforcing their claims after a default, ahead of any agreement on the terms of a restructuring. Following this initiative, many countries, including Brazil, South Africa, South Korea and Turkey, have included CACs in their bonds. Today, more than $50bn in bonds have been issued with CACs. Despite the importance of these clauses, they alone do not satisfy the need for a renewed and strengthened international financial architecture that offers security to investors and debtors alike.

International moves

At the meeting of finance ministers and central bank governors of the Group of 20 (G20) in New Delhi in November 2002, the participants agreed to take additional measures. The G20 members expressed their support for further work, including a code of good practices. In January 2003, the Banque de France released what became known as the “Trichet proposal”, so called because its then governor was Jean-Claude Trichet.

Following the Trichet proposal, private-sector lenders (represented by the Institute of International Finance, among others) together with Mexico and other major borrowing countries – Brazil, South Korea and Turkey – developed the Principles and presented them to the international financial community. The Principles set out guidelines for debtors and creditors in a crisis scenario. The initiative has the support of multilateral organisations, including the IMF and representatives from France, the UK, the US and Germany. Last November, it received the support of the G20.

The Principles are designed primarily to establish more reliable and secure financial markets, and to promote, strengthen and maintain the ability of emerging markets to obtain capital flows and pursue sustainable growth policies. Mexico has declared its intention to stand squarely behind the Principles and to strive with the international financial community to achieve their broad acceptance and application where necessary.

Alonso García Tamés is Mexico’s undersecretary of finance and public credit

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