Sovereign Debt Restructurings:
Some Comments
Benu Schneider
The views expressed are those of the discussant and do not
necessarily represent those of the Financing for Development
Office, Department of Economic and Social Affairs, UN
Some messages from today’s
presentations
• Discontent with present mechanisms for
both private and official debt amongst all
stake-holders
• Both pre-war and post-war interest arrears
accumulate sometimes exceeding the
defaulted (and sometimes original) amount
• Role of official sector, credit rating
agencies, creditors criteria questioned
Some questions on Belize
restructuring
• Do market swaps in Belize provide breathing space or a
permanent solution to the debt problem?
• What is the estimated recovery value?
• Why did lenders continue to pour money- What is
needed in financial architecture to ensure responsible
lending?
• What according to his view are distress signals? (if low
inflation, interest rates, tourism revenue are not and why
did the market not respond to them?
• When should a country default – before or after capital
flight?
Signaling mechanism
International Monetary Fund
Paris Club Agreements on official
bilateral debt restructuring
The World Bank
Credit Rating Agencies
IMF Forecasts Overoptimistic
• The dominant bottom-up (surveillance has
a strong country orientation) approach
yield consistently overoptimistic forecasts
for certain regions
• Does not sufficiently pick policy spillovers
in a global context
IEO, IMF, September 2006
WEO forecasts
• U.S. General Accounting office (2003)
found that between 1990 and 2001, WEO
forecasts for growth and inflation were
optimistically biased for 57 countries under
IMF supported programs
• Others such as Ghosh and others (2005)
cite evidence that optimistic bias is no
greater in program countries than in
nonprogram countries
Do transparency and information lead to
be better assessments?
IMF has been the main driving force for
transparency and yet the data in its
publications is outdated by several months
and sometimes years even if the country is
fully compliant with data standards
The role of the IMF in Paris Club negotiations
 IMF involvement in mediating debt-rescheduling
agreements between debtor countries and official creditors
through its role in the Paris Club does not necessarily
reflect debt distress.
 The financing of Fund Programs has become dependent
on debt relief
 This has coincided with the build-up of arrears
 Bi-lateral flows have increasingly been used to pay
International Financial Institutions
 The amount of debt relief is contingent upon a Fund
Program and its estimate of financing gap and in recent
times debt sustainability analysis.
The role of the IMF in Paris Club negotiations
 Role of the IMF as gatekeeper not compatible with supplier of concessional
resources and - issue of moral hazard at the BWIs.
 This conflict of interest entails that countries do not receive resources because
of good policies and governance, but because they have a high debt burden.
The problem of adverse selection. Bad policies receive more resources.
 Except for HIPC and MDRI, multilaterals as a creditor class are excluded from
debt negotiations because of their preferred creditor status
 Debt relief was often provided through re-scheduling which postponed, but
did not reduce debt payments but led to a bunching of payments in the
future. This combined with the problem of overoptimistic forecasts and
underestimated financing gaps.
Sovereign Ratings & SDDS/GDDS Subscription
(Source: Fitch Ratings and IMF)
16
15
14
13
investment grade
speculative grade/default
Neither
11
10
9
GDDS
8
7
6
SDDS
5
4
3
2
1
Rating
DDD
CCC-
CCC
CCC+
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
AA
AA+
0
AAA
No. of Sovereigns
12
Gap in financial architecture?
• The Paris Club is an ad hoc machinery
which emerged as a result of international
cooperation and not an international
agreement on financial architecture
• Functions like a debt collecting agency
• Negotiations are influenced by the foreign
policy objectives of the creditor countries
Serial rescheduling
Short consolidation periods to keep debtors on a
short leash
Mistakes in projections by the IMF
«Snowballing» debt because of bunching of
repayments due to lower grace periods; market
interest on non-ODA on new reschedulings; and new
credits issued after rescheduling
Serial Rescheduling: A Gap in International Financial Architecture ?
Increase in debt
and debt servicing
Liquidity /Solvency
Problems
Agreement with the
Fund - a new loan
Agreement with the
Paris Club
Houston Terms
Repayment and Grace Periods:
2-8 years non-ODA, 10 years ODA
Agreement allows
new credits from
Paris Club Creditors
Increase in debt
and debt servicing
Repayment Period: 5-10 years
- Further increase in debt servicing
because non-ODA is negotiated at
market interest rates
- Bunching of repayments
Estimates of financing gap
are based on forecasts of
growth and other variables
that are over optimistic
In the near future
repayment problems
surface again
A new arrangement
with the Fund
This cycle continues
leading to higher levels
of debt-stock and debtservicing
The changing role of Paris Club
• Rescheduling in the Paris Club was originally
perceived to lead to an avoidance of default
• Debt relief was supposed to be treated as an
unusual event
• It was not to be directly associated with
development assistance
• It was meant to be short term without
considerations of long term debt relief
The changing role of the Paris Club
•
The Paris Club today is dealing with three
sets of problems
1. Liquidity problems
2. Solvency problems
3. Debt relief for development expenditure
• The treatment accorded may sometimes be
the same for all three sets of problems
Some issues in debt rescheduling at the Paris Club
International financial structure for official debt has flaws, leading to serial
rescheduling and unsustainable debt
Originally, the rescheduling at the Paris Club perceived to deal with relief to
avoid a default, an exigent and short-term remedy, to be treated on merits
alone without consideration of any long-term relief. It was treated as an
unusual event. It was not directly associated with development expenditure
Presently the Paris Club reschedules debt for countries with liquidity and
solvency problems as well as provision of debt relief to finance development
expenditure
In practice solvency problems are very frequently dealt with like liquidity
problems (except for HIPC countries and politically motivated restructurings.)
Deferring payments into the future finances development expenditure for
non-HIPC countries.
It is suggested that:
Liquidity problems should be dealt with by the IMF -mediumand long-term problems for debt flow and stock reductions at
the Paris Club or another suitable body
Paris Club mechanisms for financing expenditure under the
PRGF needs to be further researched and a comparative
cost-benefit analysis with other sources of finance such as
donor commitments, drawing down on their quota at the IMF,
established relationships with banks and other investors.
More transparent machinery is needed for both official and
private debt restructuring. Challenge to bring debtors and
creditors together, independent information and political buyins.