Eight financial industry groups, including the Institute of International Finance (IIF), condemned a new bill drafted by New York State lawmakers that seeks to change laws governing bonds issued by emerging market nations, saying the proposal would be damaging for global markets and developing countries.
Bondholders face the risk of their investments becoming “hostage” should a sovereign issuer seek to restructure debt, which would oblige investors to demand higher interest when when buying emerging-market bonds, the industry group said in a statement on Wednesday.
“Should this bill go through in current form, market prices for sovereign bonds would drop, leading to unnecessary losses for pension funds, mutual funds, insurance companies, and retirement savings accounts that invest in sovereign debt,” the statement said.
Increased borrowing costs for developing countries would make it more difficult for governments to access capital they need to fund spending and investments, it added.
“Higher debt service costs would absorb scarce fiscal capacity that could be better spent on health, education, or infrastructure,” the groups said. “Developing countries that are already struggling with higher interest rates and tighter global financial conditions could be pushed towards debt distress.”
Apart from the IIF, the statement was signed by the International Capital Markets Association, the Credit Round Table, the American Council of Life Insurers, the Investment Company Institute, the Life Insurance Council of New York, the Partnership for New York City and the Securities Industry and Financial Markets Association.
The Sovereign Debt Stability Act combines three bills that were submitted last year but were never voted. The proposal would limit how much creditors can recover in the event of a default on debt governed under New York law.
“The proposed bill would also be a major blow to New York law’s position as the gold standard for large, global financing transactions,” the groups said.
Washington DC-based non-profit Jubilee USA, one of the bill’s proponents, said the proposal offers developing countries a route out of indebtedness and would prevent “predatory” collection, obliging private lenders to participate in debt relief.
“More than half of the world’s private sector debt is governed by New York law,” Jubilee USA said in a statement. “The Sovereign Debt Stability Act offers two avenues to address debt crises in poor countries while protecting taxpayers, consumers and the economy of New York and the rest of the US.”