Supranational creditors: A threat to the equal status of bondholders?

Sovereign bonds are actively traded in secondary markets and held by a broad community of creditors. The current profile of sovereign bondholders includes retail and institutional investors (banks, investment funds, pension funds and insurance companies), also encompassing sovereign wealth funds, central banks, the International Monetary Fund (IMF) and similar organizations, as well as institutions like the European Central Bank (ECB) and the European Investment Bank (EIB). Bondholders have become increasingly diverse, numerous, anonymous and difficult to coordinate. To further complicate a common course of action, they might have conflicting interests, different drives and bargaining power, as well as significant information asymmetries. The fragmentation of the bondholders’ profile poses a host of complex issues to the development of a dedicated workout mechanism for the restructuring of sovereign bond debt. In particular, the challenges raised by ‘supranational creditors’ are yet to be carefully addressed. This term is used to describe international organizations (like the IMF and the IBRD) and supranational institutions (like the ECB) when they purchase sovereign bonds on the secondary market. These atypical sovereign bond investors are halfway between private retail investors and multilaterals providing financial assistance and they might pursue objectives other than mere profit. The article addresses the question whether, in a debt restructuring, supranational creditors should be treated equally to other bondholders or should be given priority.