THE ROLE OF THE LAWYER IN EXTERNAL DEBT MANAGEMENT
Lee C. Buchheit
Reference: Document No.5, October 1995)
II. The Usefulness of Lawyers
Once the client overcomes any inhibitions
about using its lawyers, it is likely to find that legal advice is helpful
throughout all stages of an external debt management program.
Many governments like to establish borrowing guidelines that set out the
approval procedure for incurring external indebtedness by the state (acting
in its own name) and by public sector entities. In some cases, these guidelines
may also apply to private sector borrowers. Borrowing guidelines can
be used to regulate the timing of external borrowings, the ceiling amounts,
minimum tenor/grace periods, maximum interest margins and fees payable
to the lenders and any other matters that the government feels are important.
The jurisdictional basis for promulgating borrowing guidelines can often
be found in the government's authority to give foreign exchange remittance
approvals for external borrowings, or in the government's authority to
tax and regulate inward investment.
Borrowing guidelines applicable to public sector borrowers may also set
out policies regarding standard legal/documentation issues that arise
in external borrowings. For example, the government may instruct that
any cross-default clauses in credit agreements for public sector borrowers
not pick up obligations of entities (such as the state itself or other
public sector obligors) that are not a party to the loan in question.
This is done to avoid the risk that all public sector indebtedness may
be placed in jeopardy of acceleration should one public sector borrower
fall out of compliance with one loan agreement. The guidelines may establish
policies on matters such as negative pledge exceptions, acceptable grace
periods on payment and covenant defaults, the scope of waivers of immunities
and so forth. The important point for the government to bear in mind when
establishing borrowing guidelines that address documentation issues is
that the announced policies should not be so out of line with market practice
that lenders refuse to do business in the country altogether. The notion
of "market practice", however, encompasses a fairly wide range of alternatives
on most issues.
There is no doubt that borrowers sometimes regard guidelines of this kind
as paternalistic and, for obvious reasons, they are not popular with lenders.
The justification for such guidelines is that both the business and legal
terms of cross-border financing transactions can be highly infectious.
If a public sector borrower agrees to pay a facility fee of 3% or accepts
a sweeping negative pledge clause in one loan agreement with one lender,
for example, those precedents will almost certainly become the benchmark
for all of its subsequent deals. Moreover, all public sector borrowers
in the country may have a direct interest in what each of their sister
entities is prepared to accept by way of credit terms and documentation.
If even one public sector borrower - out of laziness, inexperience or
an unwillingness to consult competent counsel - agrees to a lender's first
draft of a credit agreement, this will significantly increase the pressure
on all of the country's other public sector borrowers to accept equivalent
terms and similarly-worded clauses in their own external borrowings. Lenders
in subsequent transactions for other entities will seize upon the most
favourable precedents and purport to see in them standard market practice
for deals involving Ruritanian public sector borrowers. This is a very
hard argument for a borrower to resist when one of its sister entities
has just accepted the clause in another deal.
The infectious nature of these precedents justifies, in the minds of some
governments, the promulgation of borrowing guidelines whose purpose is
to standardize documentation practices throughout the public sector on
important business and legal issues that arise in cross-border financing
transactions. Some countries monitor these issues by requiring credit
documents to be submitted to the central bank or the ministry of finance
for review after negotiation by the parties but prior to signature. It
is obviously more efficient, however, for the government to signal in
advance what its policies are in this area and allow the parties to negotiate
within the prescribed policies rather than wait to be told that their
agreed deal trespasses upon some undisclosed government guideline.
 The history of the sovereign debt reschedulings
in the 1980s and early 1990s demonstrates that no government can afford
to ignore the borrowing practices of its private sector. Even though many
private sector loans during the 1970s were originally incurred without
the benefit of any type of government guarantee, the lenders were usually
successful once the debt crisis started in forcing the governments to
guarantee the rescheduled obligations or to assume the indebtedness entirely
upon the payment to the government of the local currency equivalent (sometimes
at a subsidized exchange rate) of the amounts originally due. The lenders'
theoretical argument in support of this request focused on the common
practice of forcing all foreign exchange in the country to be sold to
the central bank following the on-set of the debt crisis. If the government
wanted to centralize ownership of foreign exchange at the level of the
central bank, the lenders argued, then the government must also assume
liability for repaying the private sector's foreign currency obligations.
The lenders' practical argument lacked subtlety: if the government wanted
the lenders' cooperation in restructuring public sector debt, then the
government must satisfy those same lenders regarding the treatment of
their private sector exposure in the country. See Walker and Buchheit,
Legal Issues in the Restructuring of Commercial Bank Loans to Sovereign
Borrowers, in M. Gruson, R. Reisner (eds), Sovereign Lending: Managing
Legal Risk, 139,141-42 (1984).
See Wessel, "IMF Urges Developing Nations to
Study Controls on Inflows of Foreign Capital", Wall St. /., Aug. 22,1995
at A2, col. 2.
 A case in point was the policy of certain Latin American countries
during the 1970s not to accept foreign law or submission to foreign courts
in their external debt contracts. The reaction of many financial institutions
was to cease lending to those countries until the policies were changed.
See Shapiro, "Who Has Jurisdiction If a Government Is Sued?", Institutional
Investor, April 1977 at 56.
 It is no use asking, by the way, how subsequent lenders always seem
to know about a borrower's prior agreements. The international financial
community is a surprisingly small village in which information and documents
rarely stay confidential for very long.
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