## ppea2022023 ## Source details **Canonical URL:** [ppea2022023](https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022023.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2022/english/ppea2022023.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2022/english/ppea2022023.pdf.json) --- ### Revisions to LIA and related policies - The Lending into Arrears to Private Creditors (LIA) policy has been revised to place greater emphasis on debt transparency and streamlined by eliminating the reference to a formal negotiating framework. - The Fund’s existing practice governing lending to members who are not in arrears but seeking a debt restructuring (“preemptive debt restructurings”) is codified into a formal policy, with an emphasis on debt transparency along the lines of the LIA policy. - The Lending into Official Bilateral Arrears (LIOA) policy remains unchanged, but the Fund’s definition of an official bilateral claim was updated in light of the recent evolution of the creditor landscape (such as new creditors and new types of instruments). - The Non-Toleration Policy (NTP) with respect to IFIs updated to provide clarity on how new IFIs will be treated; Board will consider, in addition to existing factors, whether the institution is a Regional Financing Arrangement and whether the IFI is receiving preferred creditor treatment by the official bilateral creditor community. ### Executive Board assessment — main findings and restatements - Directors welcomed the comprehensive review of the Fund’s arrears policies (LIA, LIOA, NTP). - Directors agreed arrears policies "have worked well" but noted creditor landscape and sovereign debt restructuring practice evolved over the last 20 years and certain updates are warranted. - Directors agreed the LIA policy remains broadly appropriate and supported staff’s proposed updates to the principles guiding the Fund’s assessment of good faith. ### Specific LIA guidance agreed by Directors - Debtors are expected to share “relevant” information, generally aligned with what the member would be required to share under the Debt Limits Policy; this expectation replaces the earlier two-track approach on confidential and non-confidential information. - Decisions on an adequate macroeconomic framework and the design of the financing plan or the adjustment program that could form the basis for the Fund’s lending into arrears remain in the sole purview of the Fund. - Any terms offered to creditors by the member should be consistent with the parameters of the Fund-supported program. - Debtors should provide clarity on the perimeter of claims that would be subject to the private-sector debt restructuring at the outset of the debt restructuring process. - The expectation that debtors would engage with creditor committees under a “formal negotiating framework” was eliminated; Directors continue to expect engagement with a representative creditor committee or committees. - Directors reiterated support for flexibility in applying the LIA policy in emergency financing cases, consistent with the flexibility provided under the LIOA policy. ### LIA — “good faith” and information sharing (staff recommendations) - Replace two-track confidential/non-confidential approach with expectation to share all relevant information, focusing on debt transparency consistent with Debt Limits Policy: - Disclosure elements could include creditor composition, major subcategories of instruments (with information on main financial terms), upcoming debt service, and collateralized debt. - Add a fourth guiding principle of good faith: any debt restructuring proposal offered by the debtor should be consistent with the parameters of the Fund-supported program. - Expectation for debtors to specify the perimeter of claims (including claims held on non-government public sector entities) at the outset to aid creditors and Fund financing assurances. - Eliminate “complexity” as a gate for engagement with creditor committees; retain flexible, case-specific assessment of committee “representativeness.” - Staff will provide more precise guidance on how to assess and document compliance with the good faith criterion in staff reports. ### Creditor committees, multiple committees, and engagement modalities - Creditor committees appear in around 80 percent of post-default cases reviewed and just under half in preemptive cases; high creditor participation has been achieved with and without committees. - Where multiple committees form, engagement with committees that individually or collectively meet representativeness factors is generally warranted; debtors may engage with the most representative committee or a steering group. - Aggregated voting thresholds cited: 66 2/3 percent across series (two-limb aggregated voting) or 75 percent across series for single-limb aggregated voting. - Staff and stakeholders recommend dropping the “complexity” limitation and avoiding numerical de minimis thresholds for representativeness. ### Preemptive debt restructurings — codification and outcomes - Staff codifies current practice: the Fund may provide financing only if it has adequate assurances that a preemptive restructuring will be successful. - Adequate assurances judged by whether a credible process is underway that will result in sufficient creditor participation to restore debt sustainability and close financing gaps within program parameters, taking into account official sector commitments. - Directors welcomed adding an expectation of enhanced transparency and information sharing in preemptive debt restructurings. - Empirical findings (preemptive episodes, 2002–2021): - Since 2002, 20 preemptive sovereign debt restructuring episodes occurred. - The average time to conclude the preemptive operations ranged from 1 to 15 months with an average of 6.3 months. - Examples from table entries: Moldova (Length 5; Presence No; Participation 100), Uruguay (Length 3; Presence No; Participation 91), Dominican Republic (Length 14; Presence No; Participation 97), Greece (Length 9; Presence Yes; Participation 96.9), Mozambique (Length 10; Presence Yes; Participation 85), Ecuador (Length 5; Presence Yes; Participation 100). - Mongolia participation entry: "90" with footnote clarifying "83 percent participation rate of existing holders, or over 90 percent excluding US-based investors who could not participate for legal reasons." ### LIOA policy — scope, criteria, and application - LIOA permits Fund financing despite arrears on Direct Bilateral Claims in carefully circumscribed circumstances where OSI is required. - Circumstances permitting financing despite OSI-related arrears include: - Representative Paris Club agreement providing a majority of total financing contributions (new financing and/or debt relief) required from official bilateral creditors—then arrears are "deemed away" for both participating and non-participating creditors when financing assurances received in anticipation of an Agreed Minute. - Creditor consent is provided in absence of a representative Paris Club Agreement. - If neither applies, financing may proceed only if all three criteria hold: - (i) prompt Fund support is considered essential, and member pursuing appropriate policies; - (ii) debtor making good faith efforts to reach agreement with the creditor consistent with program parameters (absence of agreement due to creditor unwillingness); - (iii) decision to provide financing despite arrears would not have an undue negative effect on Fund’s ability to mobilize official financing packages in future cases. - Good faith under LIOA assessed by whether debtor approached creditor bilaterally or through groupings, offered substantive dialogue, provided relevant information timely consistent with confidentiality, and offered terms consistent with program parameters. - Emergency situations: RCF and RFI may permit financing despite arrears without assessing the three criteria. ### LIOA — empirical review since 2015 (staff findings) - Staff reviewed 37 arrangements or outright disbursements during which arrears to official bilateral creditors arose since establishment of LIOA in 2015. - 11 had “non-OSI arrears”; in all such cases Fund provided financing as creditors’ Executive Directors acquiesced or did not object. - 29 had arrears where OSI was expected; in all 29 Fund provided financing. - Of these 29: - 14 had claims covered by a representative Paris Club agreement, allowing arrears to be deemed away. - 12: creditors provided explicit consent to Fund financing despite arrears. - Suriname (2021): LIOA allowed Fund to provide financing before restructuring agreement reached with all official bilateral creditors; China and India provided consent and restructuring discussions ongoing. - The three LIOA criteria applied in seven cases involving four debtors; criteria judged met in each case. - Four cases involved OSI-related arrears in emergency financing (RCF/RFI): Djibouti (2020) advanced under exceptional circumstances; Grenada (2020) flexibility not used; The Gambia (2017) and Guinea-Bissau (2021) obtained creditor consent. - Assessment: LIOA has worked well—arrears to hold-out official bilateral creditors have not prevented Fund financing; outreach feedback overwhelmingly positive. ### IFIs, multilateral creditors, and the Non-Toleration Policy (NTP) - Multilateral creditors play an important role; rationale for special treatment grounded in Article I(v). - Arrears on claims held by multilateral creditors are subject to NTP; arrears considered resolved if debtor has a Credible Plan to eliminate arrears over a defined period (creditor concurrence not required), but for World Bank Group and multilaterals providing substantial financing an Agreed Plan has generally been required. - Ambiguity exists for new IFIs; staff proposes clarifications to avoid dilution of special treatment as number of IFIs grows. - Proposed decision logic (Figure 3 summary): - Step 1: Is creditor the World Bank? If yes → Agreed plan to clear arrears is required. - Step 2: Is creditor an IFI with at least two sovereign members (and no non-sovereign members)? If no → NTP does not apply; LIA or LIOA may apply. - Step 3: Are the arrears OSI-related? If no → LIOA applies. If yes → a Credible Plan to clear arrears is required unless Step 4 applies. - Step 4: Is the IFI covered by proposed NTP (RFAs, global membership, or based on treatment by official creditor committee)? If yes → Agreed plan required; if no → Credible plan required. ### Proposed amendments and simplifications regarding IFIs and NTP - Proposed Amendment 1: Coverage of IFIs under the NTP in OSI cases - IFIs covered if they meet any of: - RFAs that form part of the GFSN and RCUCBs whose operations strengthen the GFSN. - IFIs with global membership: defined as IFIs with more than half of the number of Fund members, or membership in excess of half of the Fund’s total voting pool. Apart from the World Bank Group, criterion currently met by seven IFIs (Table 3 referenced in source). - IFIs identified as being outside scope of debt restructuring by a creditor committee based on a representative standing forum of official bilateral creditors. - Implementation nuance: case-by-case guidance if representative standing forum treatment unclear. - Proposed Amendment 2: Apply LIOA to OSI-related arrears of IFIs not covered by the NTP (mutatis mutandis), with consent modalities analogous to LIOA and three criteria adapted. - Proposed simplification: Streamline NTP by requiring an Agreed Plan only for the World Bank Group; for other IFIs a Credible Plan would suffice in most cases. - For any IFIs meeting criterion (1) or (2) above, a Credible Plan would be required to clear arrears (except World Bank Group where Agreed Plan always required). - In non-OSI cases, Credible Plan to clear arrears to IFIs with two or more sovereign members (and no non-sovereign members) remains required under NTP. ### Definitions and perimeter of claims (key restatements and amendments) - Direct Bilateral Claims defined as claims that are (a) held by a government, or an agency acting on behalf of a government; and (b) originate from an underlying transaction where the creditor government, or an agency acting on behalf of the government, provided or guaranteed financing to the borrowing member. - Two endorsed amendments: - If an IFI purchases securities in the secondary market as part of the global financial safety net, such claims can be treated as claims subject to the Fund’s arrears policies as applicable to IFIs, relying on the IFI’s own representation. - Any Direct Bilateral Claims or claims held by IFIs that are contractually part of a pooled voting mechanism with private creditors shall be subject to the LIA policy. - Staff proposal (paragraph 72): remove from definition of Direct Bilateral Claims and IFI/multilateral claims all claims that are contractually part of a pooled voting mechanism with private creditors (applies to any debt instrument, including syndicated loans and bonds with CACs). - Rule for single-series CACs: treat as Direct Bilateral Claims only if creditor government maintains continuous and full ownership of the entire bond series; any private acquisition disqualifies the series as a Direct Bilateral Claim. - Restatements: - Secondary market purchases by official bilateral creditors do not qualify as Direct Bilateral Claims under current LIOA policy. - Focus on whether creditor public entities form part of the creditor member's budgetary process to classify government creditors; most SWFs and state-owned banks likely fail test. - Claims held outside the budgetary process could still be Direct Bilateral Claims if acquired explicitly “on behalf of” the government. - Operationalization: Fund would rely initially on creditor representations of continuous ownership; Fund could challenge and would give creditor benefit of reasonable doubt; trustees could be encouraged to notify debtors on transfers. ### Vote pooling and bonded debt issues - Concerns that vote pooling where official creditors are in common voting pools with private creditors via CACs complicates perimeter and can create seniority/treatment inconsistencies. - Staff judged risk of incentivizing issuance without CACs to be small, but recognizes tradeoffs. - Recommendation: treat vote-pooled claims with private sector under LIA to avoid differing treatment of identical instruments based on holder. ### Case studies and empirical evidence - Argentina (2001–2004) and GCAB: - GCAB Steering Committee represented holders of approximately $35 billion of eligible bonds, accounting for approximately 89 percent of eligible bonds identified as held outside Argentina, or approximately 43 percent of all eligible bonds. - The 2004 GCAB example used to illustrate representativeness assessments and the Fund’s approach to creditor committees. - Post-default restructurings: many resolved arrears shortly after successful debt exchanges; several cases achieved full or very high creditor participation (some only after application of CACs). - Exceptions noted: Argentina 2005 exchange achieved 76 percent participation; additional participation occurred in 2010 and 2016; US$1.2 billion of arrears to residual hold-outs remained outstanding by the time of the 2018 SBA. Iraq: initial 2006 exchange attracted 96 percent participation; reopening in 2008 resolved a further US$500m of arrears, but some residual arrears remained until after 2010 SBA. ### Implementation timing and reviews - Staff proposes amendments and restatements enter into effect immediately and apply to all future purchases and disbursements (including under existing arrangements), with respect to existing and future arrears. - Directors agreed arrears policies should be reviewed on an as needed basis. - Staff will monitor developments such as the Common Framework (CF) and may revert to the Executive Board with stand-alone proposals if appropriate. ### Financing assurances, debt sustainability, and market access — key provisions - Financing assurances policy requires Fund-supported programs to be fully financed: - (i) "firm commitments" of financing must be in place for the upcoming 12 months of the arrangement; and - (ii) "good prospects" that there will be adequate financing for the remaining program period beyond the upcoming 12 months. - If debt is unsustainable, Fund precluded from providing financing unless member takes steps to restore sustainability; under exceptional access a higher degree of probability required: "The steps taken by the member must render debt sustainable with high probability." - Assurances required differ by creditor type (Paris Club, non-Paris Club official creditors, IFIs, private creditors); private creditor assurances derive from judgment that a credible restructuring process is underway. - All purchases/disbursements while arrears to private or official bilateral creditors are outstanding remain subject to financing assurances reviews at approval or at each program review. *Italic source attribution: ppea2022023 — Reviews of the Fund’s Sovereign Arrears Policies and Perimeter (excerpts).* ### 1. The LIA policy has been revised to place greater emphasis on debt transparency, and ### ppea2022023 - 1. The LIA policy has been revised to place greater emphasis on debt transparency, and ### Revisions to LIA and related policies - The Lending into Arrears to Private Creditors (LIA) policy has been revised to place greater emphasis on debt transparency and streamlined by eliminating the reference to a formal negotiating framework. - The Fund’s existing practice governing lending to members who are not in arrears but seeking a debt restructuring (“preemptive debt restructurings”) is codified into a formal policy, with an emphasis on debt transparency along the lines of the LIA policy. - The Lending into Official Bilateral Arrears (LIOA) policy remains unchanged, but the Fund’s definition of an official bilateral claim was updated in light of the recent evolution of the creditor landscape (such as new creditors and new types of instruments). - The Non-Toleration Policy (NTP) with respect to IFIs has been updated to provide clarity on how new IFIs will be treated; the Board will consider, in addition to existing factors (global membership, treatment by the Paris Club, participation in the HIPC initiative), whether the institution is a Regional Financing Arrangement and whether the IFI is receiving preferred creditor treatment by the official bilateral creditor community. ### Executive Board assessment — main findings and restatements - Directors welcomed the comprehensive review of the Fund’s policy on lending into arrears to private creditors (LIA), the LIOA policy, and the Fund’s non-toleration of sovereign arrears policy to official bilateral and multilateral creditors. - Directors agreed that, overall, the Fund’s arrears policies have worked well in enabling the Fund to proceed with providing financing in cases of arrears, while noting the creditor landscape and sovereign debt restructuring practice have evolved over the last 20 years and certain updates are in order. - Directors agreed the LIA policy remains broadly appropriate and supported staff’s proposed updates to the principles guiding the Fund’s assessment of good faith. ### Specific LIA guidance agreed by Directors - Debtors are expected to share “relevant” information, generally aligned with what the member would be required to share under the Debt Limits Policy; this expectation replaces the earlier two-track approach on confidential and non-confidential information. - Decisions on an adequate macroeconomic framework and the design of the financing plan or the adjustment program that could form the basis for the Fund’s lending into arrears remain in the sole purview of the Fund. - Any terms offered to creditors by the member should be consistent with the parameters of the Fund-supported program. - Debtors should provide clarity on the perimeter of claims that would be subject to the private-sector debt restructuring at the outset of the debt restructuring process. - The expectation that debtors would engage with creditor committees under a “formal negotiating framework” was eliminated; Directors continue to expect engagement with a representative creditor committee or committees. - Directors reiterated support for flexibility in applying the LIA policy in emergency financing cases, consistent with the flexibility provided under the LIOA policy. ### Preemptive debt restructurings — codification and expectations - Current practice in preemptive restructuring cases is codified: the Fund may provide financing only if it has adequate assurances that such a restructuring will be successful. - Such assurances are obtained by a judgment that a credible process for restructuring is underway and will result in sufficient creditor participation to restore debt sustainability and close financing gaps within the macroeconomic parameters of the program, taking into account official sector commitments. - Directors welcomed the recommendation to add an expectation of enhanced transparency and information sharing in preemptive debt restructurings, while cautioning against overly prescriptive codification. ### Treatment of claims held by official bilateral creditors and IFIs - Directors broadly agreed that the Fund’s non-toleration of arrears policy in non-OSI cases and the LIOA policy in OSI cases continue to be appropriate; no amendments required to the core approach. - New IFI treatment: Directors endorsed the Supplement approach, recognizing staff’s expectation that implementation would not fundamentally differ from the original proposal. - Agreed points: - Fund financing in the face of arrears to the World Bank Group should continue to require an Agreed Plan between the debtor and the World Bank to clear the arrears over a defined period. - Fund financing in the face of arrears to any other IFI should continue to require that a Credible Plan be in place in non-OSI cases. - In OSI cases: - The Fund should judge whether a Credible Plan to resolve such arrears is required as a condition for lending. Factors informing the Fund’s judgment include: (i) global, rather than regional, membership of the institution; (ii) whether the institution is a regional financing arrangement or a reserve currency union central bank that forms part of the global financial safety net; (iii) the Paris Club’s treatment of the institution; (iv) participation of the institution in the Heavily Indebted Poor Countries (HIPC) Initiative; and (v) whether the institution is being excluded from the scope of debt restructuring by official bilateral creditors through a creditor committee based on a representative standing forum recognized under the LIOA policy in the case at hand. - When arrears are owed to an IFI not captured under the above factors, Directors agreed that the LIOA policy should be expanded to apply mutatis mutandis; the policy will provide for flexibility in extraordinary circumstances for emergency financing cases consistent with the LIOA policy. ### Definitions and perimeter of claims - Directors broadly agreed with staff’s restatements of how a Direct Bilateral Claim is defined for the Fund’s arrears, financing assurances, and debt sustainability policies, and emphasized alignment with World Bank and Paris Club classifications where possible. - Two endorsed amendments: - If an IFI purchases securities in the secondary market as part of the global financial safety net, such claims can be treated as claims subject to the Fund’s arrears policies as applicable to IFIs, relying on the IFI’s own representation. - Any Direct Bilateral Claims or claims held by IFIs that are contractually part of a pooled voting mechanism with private creditors shall be subject to the LIA policy. - Directors asked that staff reports include greater transparency on how staff assessed the perimeter of claims, including when the Fund’s classifications differ from the Paris Club’s. - A few Directors called for caution in treating central bank swaps given unique characteristics. ### Implementation and timing - The amendments and restatements will enter into effect immediately and will apply to all future purchases and disbursements (including under existing arrangements), with respect to existing and future arrears. - Directors agreed that the Fund’s arrears policies should be reviewed on an as needed basis. ### Executive summary — staff recommendations (overview) - Staff assesses the LIA policy (established in 1989, last reviewed in 2002) remains broadly appropriate, recommending improvements: simplify engagement requirements with creditor committees (eliminate references to a formal negotiating framework), add that any debt restructuring offer should restore debt sustainability consistent with program parameters, and provide additional guidance on sharing relevant information with creditors focusing on debt transparency. - Staff recommends codifying practice for preemptive debt restructurings into a Fund policy with an amendment focusing on debt transparency; the Fund can lend if a credible restructuring process is underway likely to deliver debt sustainability in line with program parameters, and staff would usually expect the member to share relevant information. - Given limited experience with the LIOA policy (established in 2015), staff proposes only a restatement confirming current practice that an OSI determination will carry forward to future Fund arrangements and to monitor whether a new representative standing creditor forum may emerge. - To address proliferation of IFIs, staff proposes refining arrears policies with respect to multilateral creditors so treating all new IFIs as multilaterals would not dilute the NTP: in OSI cases the NTP will cover only IFIs closely aligned with the Fund’s mandate (e.g., RFAs and global MDBs) or those excluded from restructuring by official bilateral creditors’ representative standing forums; claims of other IFIs would be subject to the expanded LIOA policy. - Staff proposes restatements and two amendments to the definition of an official claim: (1) exclude claims of official bilateral creditors and IFIs subject to vote pooling with the private sector from LIOA and NTP treatment to avoid differing treatment of identical instruments based on holder; and (2) clarify treatment of claims purchased in the secondary market by official bilateral creditors and IFIs. *February 24, 2022 — Reviews of the Fund’s Sovereign Arrears Policies and Perimeter (Executive Board summary and staff recommendations)* ### 2. Lending Into Arrears to Official Bilateral Creditors (LIOA) Policy _______________________________ 15 ### 2. Lending Into Arrears to Official Bilateral Creditors (LIOA) Policy ### Overview and Rationale for Review - The paper undertakes a comprehensive review of the Fund’s sovereign arrears policies. - Since 1970, the Fund has had a policy of non-toleration of arrears (NTP), unless a specific policy applies that enables the Fund to lend into sovereign arrears. - Specific lending-into-arrears policies: - Lending into Arrears (LIA) to private creditors — adopted in 1989 and last reviewed in 2002. - Lending into Arrears to Official Bilateral Creditors (LIOA) — adopted in 2015 with an expectation of review in two to three years. - Motivations for review: - The LIA policy has not been reviewed since 2002 despite multiple attempts. - The Fund’s NTP has not been comprehensively reviewed since its establishment in 1970. - Evolution of the creditor landscape warrants review and potential updates to definitions and practices used to categorize claims for application of arrears policies. ### Existing Legal and Policy Framework - Under the Fund’s Articles of Agreement (the “Articles”), the Fund may only provide financing to assist members to resolve their balance of payments (BOP) problems under adequate safeguards. - Fund financing can only be provided in support of a member’s economic policies capable of resolving the member’s BOP problems over a timeframe consistent with the revolving nature of Fund financing aimed at restoring the member to medium external viability. - Inter-related policies germane to restoring medium term external viability: - Financing assurances - Debt sustainability - Market access - Arrears policies - For the Fund to provide financing, it must determine that the requirements under each of these policies have been met. ### Financing Assurances, Debt Sustainability, and Market Access - The financing assurances policy requires Fund-supported programs to be fully financed. - Program financing includes assumptions regarding: - Expected financing from private sector creditors (including (re)gaining market access, if relevant) - Clearance of arrears - Envisaged debt restructuring operation - Requirements where there are gaps with respect to new external financing to be provided by the official sector: - (i) "firm commitments" of financing must be in place for the upcoming 12 months of the arrangement, and - (ii) "good prospects" that there will be adequate financing for the remaining program period beyond the upcoming 12 months. - Post-program period assessment: - Staff needs to assess whether prospective policies deliver a projected post-program macroeconomic performance that adequately safeguards repayments to the Fund consistent with a sustainable debt path. - A Fund-supported program in the Fund’s General Resources Account (GRA) is designed to restore the member to medium term external viability and resolve the BOP problem within the program period. - Where a member’s debt is assessed as unsustainable, the Fund is precluded from providing financing unless the member takes steps to restore debt sustainability. - Market access: - Distinct from debt sustainability. - Lack of debt sustainability normally triggers loss of market access, but temporary loss of market access does not necessarily imply debt unsustainability. - Judgment that a member has market access depends on ability to tap international capital markets on a sustained basis across a range of maturities and at reasonable interest rates. - The Fund’s exceptional access policy requires that the member has prospects of (re)gaining access to private capital markets within the timeframe Fund resources are outstanding. ### Assurances and Arrears Policies in Preemptive and Post-default Contexts - When debt is unsustainable, but a member is not yet in arrears, the Fund requires assurances that debt sustainability will be restored and the program will be fully financed. - Standards for assurances in preemptive debt restructurings derive from the debt sustainability and financing assurances policies. - Form of assurances depends on creditor type: - Official bilateral creditors: - Require “specific and credible” assurances on debt relief and/or financing. - Preferably take the form of a written communication from the creditor showing an understanding of the debtor member’s situation and a commitment to the needed actions to restore debt sustainability and financing in line with program parameters. - International Financial Institutions (IFIs): - A similar standard of “specific and credible” assurances applies to new financing provided by IFIs. - Private creditors: - Assurances are derived from the Fund’s judgment that a credible process for debt restructuring is underway and will likely deliver an outcome in line with program parameters. - Considerations include engagement of legal and financial advisors by the member, launching consultations with creditors, and design of the debt restructuring strategy (terms of new instruments and use of inducements for creditor participation). - Timing: - Debt restructuring should normally be undertaken before approval of the Fund arrangement, though in some circumstances the conclusion of the debt operation may be contemplated by the first review under the Fund arrangement. - When debt is unsustainable and the member is in arrears to its private creditors: - The Fund may consider that debt sustainability will be restored if: - (i) the member’s debt restructuring offer (if any) is sufficient to restore debt sustainability consistent with the program parameters, and - (ii) the criteria under the LIA policy are satisfied. - The LIA policy criteria act as a safeguard to give the Fund assurance that a debt restructuring deal will be forthcoming and arrears will be resolved. - Financing assurances reviews required under the LIA policy allow the Fund to assess status of debtor-creditor negotiations and progress toward agreement. - If the Fund determines the member is no longer in compliance with the LIA policy and a debt restructuring deal is unlikely, the Fund can decide not to approve Fund financing. *Source: ppea2022023 - 2. Lending Into Arrears to Official Bilateral Creditors (LIOA) Policy* ### 10. When debt is unsustainable and the member is in arrears to its official bilateral ### 10. When debt is unsustainable and the member is in arrears to its official bilateral creditors, the Fund may consider that debt sustainability will be restored, provided the requirements under the Fund’s LIOA policy are satisfied (as described in detail below). ### Scope and key judgment - The LIOA policy is more stringent in certain respects than other arrears policies and is normally dependent on an agreement being reached between the debtor and a (representative) majority of its official bilateral creditors. - In practice, the LIOA is normally applied to minority hold-out creditors. - The Fund may proceed to lend under the LIOA policy even in the presence of arrears to a majority creditor or creditors where the creditor provides consent (see paragraph 49 reference in source). - The Fund may ultimately judge that, despite compliance with LIOA requirements, the overall risks to the Fund-supported program may be too high to proceed if a durable debt restructuring is unlikely without participation of large creditors. ### Procedural interaction with arrears policies - When a member is in arrears to external creditors at the time Fund financing is requested (for instance, at either approval of or a review under an arrangement), the arrears policies (LIA or LIOA) must be satisfied for the Fund to lend. - The arrears policies enable the Fund to continue providing financing when members face difficulties securing creditor agreements, provided the member meets the requirements under these policies. - The arrears policies are designed to tackle the hold-out problem by removing veto power from creditors while assuring creditors that the debt relief or financing sought is consistent with a Fund-endorsed balance between financing and adjustment. ### Numeric and procedural references preserved from source - Paragraph references and footnotes retained in original: 10, 11, 12, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 49. - Emergency facility names and abbreviations preserved: Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI). --- ### B. Arrears Policies ### Purpose and general approach - The Fund encourages members to stay current on obligations where possible; when not possible, arrears policies give the Fund the possibility to continue providing financing in the face of creditor negotiation difficulties. - The Fund takes a claim-by-claim determination whether the LIA or the preemptive restructuring practice applies; the LIA only applies to an external debt claim in arrears. (“External” is defined in terms of residency of the creditor.) - The Fund’s arrears policies do not apply to arrears in dispute; disputed claims are not treated as arrears for Fund purposes but are taken into account as contingent claims for financing assurances and the DSA. --- ### LIA (Lending Into Arrears) policy — scope and principles - The LIA policy governs Fund lending in the face of arrears to external private creditors and other types of external debt claims. - Originally established for sovereign arrears to external creditors on bank loans; extended to sovereign arrears to other private creditors, including bondholders, and non-sovereign arrears from imposition of exchange controls. - The Executive Board has applied the LIA policy to “commercial financial obligations of a contractual nature” not paid when due (taking into account contractual grace periods): examples include arrears on bank loans, suppliers' credits, and since 1999, bonds. - The LIA has not been applied to non-debt obligations (e.g., arbitral awards, unpaid dues, payment on delivery). Box 1 — LIA key conditions and “good faith” assessment - Under LIA, Fund financing despite sovereign arrears to private creditors is case by case and only where: - (i) prompt Fund support is considered essential for successful implementation of the member’s adjustment program, and - (ii) the member is pursuing appropriate policies and making a good faith effort to reach a collaborative agreement with its private creditors (or to facilitate a collaborative agreement between private debtors and creditors and a good prospect exists for removal of exchange controls). - Assessment of “good faith” guided by: - Early and continuing engagement with creditors once debtor judges restructuring necessary. - Timely sharing of relevant, non-confidential information, normally including: - i. explanation of economic problems and financial circumstances that justify a debt restructuring; - ii. briefing on broad outlines of a viable economic program and implications for the envelope of resources available for restructured claims; - iii. comprehensive picture of proposed treatment of all claims on the sovereign, including official bilateral creditors, and basis for restoring medium term sustainability. - Providing creditors an early opportunity to give input on restructuring design and instruments. - Where warranted, entering into good faith negotiations with a representative creditor committee, sharing confidential information and agreeing to a standstill on litigation by committee members. - For imposition of exchange controls (jurisdictional arrears), LIA applies case-by-case only where: - i. prompt Fund support is essential, and - ii. the member pursues appropriate policies, is making good faith efforts to facilitate a collaborative agreement between private debtors and creditors, and a good prospect exists for removal of exchange controls. - In emergency situations (e.g., RCF and RFI requests), the LIA applies with flexibility in the wake of conflicts and natural disasters. - So long as a member has outstanding arrears to private creditors, all purchases under a Fund arrangement are subject to financing assurances reviews. --- ### Official bilateral creditors — treatment and differentiation ### Direct Bilateral Claims and policy allocation - Official bilateral creditors hold a variety of claims; the arrears policies give preferential treatment only to Direct Bilateral Claims: - Direct Bilateral Claims are claims that are (a) held by a government, or an agency acting on behalf of a government; and (b) originate from an underlying transaction where the creditor government, or an agency acting on behalf of the government, provided or guaranteed financing to the borrowing member. - Central bank swap lines extended on behalf of the government for BOP purposes are Direct Bilateral Claims and are subject to the Fund’s arrears policies. - Claims guaranteed by governments or agencies acting on their behalf receive preferential treatment once the guarantee has been called. ### Application depending on Official Sector Involvement (OSI) - The treatment of Direct Bilateral Claims depends on whether contributions from the official sector (OSI) are required under the Fund-supported program. - In non-OSI cases, the Fund’s NTP (non-tolerance of pre-existing arrears) applies to arrears on Direct Bilateral Claims—the Fund may only provide financing if the creditor’s Executive Director acquiesces or does not object to approval of financing despite arrears. - In OSI cases, the LIOA policy applies to Direct Bilateral Claims. - Claims held by official bilateral creditors that are not Direct Bilateral Claims are treated in practice under the LIA policy. --- ### Box 2 — Lending Into Arrears to Official Bilateral Creditors (LIOA) Policy ### Purpose and origins - LIOA allows Fund financing despite sovereign arrears to official bilateral creditors on Direct Bilateral Claims in carefully circumscribed circumstances. - Introduced in 2015 “to ensure that, where a restructuring is deemed necessary, collective action among official bilateral creditors is encouraged and the provision of Fund support is not held up by the unwillingness of hold-out creditors to join an effort that is supported by an adequately representative group of creditors.” ### Circumstances under which LIOA permits financing despite arrears where OSI is required - The Fund may provide financing despite arrears on Direct Bilateral Claims where any of the following holds: - There is a representative Paris Club agreement (i.e., providing a majority of the total financing contributions—meaning new financing and/or debt relief—required from official bilateral creditors over the program period). In such cases, based on the Paris Club’s comparability of treatment principle, arrears are considered eliminated (“deemed away”) for purposes of LIOA for both participating and non-participating creditors when financing assurances are received from the Paris Club in anticipation of an Agreed Minute. - The Executive Board has indicated that “should another representative standing forum emerge, the Fund would be open to engaging with such a forum.” Affording another representative standing forum similar status to the Paris Club under LIOA would require an Executive Board decision. - Creditor consent has been provided, in the absence of a representative Paris Club Agreement. - In the absence of a representative Paris Club agreement or creditor consent, if the following three criteria hold: - (i) prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies; - (ii) the debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and - (iii) the decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. - The Executive Board has provided guidance on how to apply the second and third criteria. ### Good faith assessment for debtors under LIOA - In assessing “good faith,” the Fund will consider whether the debtor: - i. has approached the creditor to which it owes arrears either bilaterally or through a relevant grouping of official bilateral creditors; - ii. has offered to engage in substantive dialogue with the creditor and has sought a collaborative process to reach agreement; - iii. has provided the creditor relevant information on a timely basis consistent with the Fund’s policy on confidentiality of information; - iv. has offered the creditor terms that are consistent with the parameters of the Fund-supported program and consistent with contributions from other official bilateral creditors. ### Assessment of the third criterion (signal to official bilateral creditors) - The Fund will consider the signal that providing financing despite arrears would send to official bilateral creditors as a group given the specific circumstances. - This criterion would normally not be satisfied where the creditor or group of creditors that has not reached agreement with the debtor accounts for an adequately representative share. - An assessment of whether the third criterion is satisfied also considers the creditor’s track record of providing contributions in past debt restructurings under Fund-supported programs, even if the creditor does not account for an adequately representative share of total financing contributions. ### Emergency situations and procedural safeguards - In emergency situations where extraordinary demands on the affected government preclude time for good faith creditor efforts, the Fund may provide financing under the RCF or the RFI despite arrears to official bilateral creditors and without assessing the three criteria or obtaining creditor consent. - So long as unresolved arrears owed to official bilateral creditors are outstanding, every purchase or disbursement made after approval of the arrangement is subject to a financing assurances review by the Executive Board. --- *Italic source attribution: ppea2022023 - 10. When debt is unsustainable and the member is in arrears to its official bilateral creditors (IMF PDF content provided).* ### 15. Multilateral creditors play an important role in the international financial architecture. ### 15. Multilateral creditors play an important role in the international financial architecture. ### Role and rationale for special treatment - Multilateral creditors are better placed than official bilateral creditors to pool risk, internalize global externalities, and overcome collective action problems. - The rationale for special treatment of multilateral claims is based on the Articles, which require the Fund to assist its members in solving BOP problems without resorting to measures destructive of national or international prosperity (Article I(v)). - The Fund’s NTP provides special protection to claims of multilateral institutions arising from activities that help the Fund achieve this objective. ### Treatment of arrears to multilateral creditors under the NTP - Arrears on claims held by multilateral creditors are subject to the NTP (Figure 1). - Fund-supported programs have long required the resolution of existing arrears and the non-accumulation of new arrears during the program period with respect to multilateral creditors. - While membership with at least two sovereign members is a necessary condition, the Fund does not have a clear definition of a multilateral creditor or an agreed list of such institutions. - The Fund considers a number of factors in making such a judgment, including: - (i) global, rather than regional, membership of the institution, - (ii) the Paris Club’s treatment of the institution and the institution’s participation in the Paris Club, and - (iii) the treatment of the institution under the Heavily Indebted Poor Countries (HIPC) Initiative. - Arrears to multilateral creditors are considered resolved if, in the Fund’s judgment, the debtor has a credible plan and projected financing to eliminate arrears over a defined period (Credible Plan). - Such a plan must be credible to Fund staff—and ultimately the Executive Board—but the creditor’s concurrence is not required. - For the World Bank Group or multilaterals providing substantial financing (i.e., net positive BOP financing) to the Fund-supported program, the creditor’s agreement with the arrears clearance plan over a defined period has generally been required (Agreed Plan). - The current NTP is silent on the treatment of claims to IFIs that are not considered “multilateral creditors”. ### Scope of claims and practice notes (footnote content summarized as practice) - In practice, the NTP also takes into account the type of claim held by the multilateral institution. - Claims related to IFI financing of a global public good nature, even outside the context of resolving BOP problems, have been protected by the NTP. - Arrears on other types of claims—such as membership fees or treasury/investment operations—have been considered to fall outside the NTP. - Most overdue membership fees are owed to multilateral non-financing institutions, and key IFIs do not impose membership fees—so non-payment does not affect a country’s ability to access external financing. - In most cases, amounts of overdue fees are de minimis. ### Review of post-default and preemptive private-sector involvement (PSI) cases - Fund staff reviewed 30 sovereign debt restructuring cases involving private-sector creditors since 2002 and reached out to stakeholders in early 2021. - Staff reviewed all preemptive and post-default PSIs that occurred in the context of financing from the Fund (including both Fund-supported programs and emergency financing requests), and four cases without a Fund arrangement, since 2002 (Figure 2, Annex II). - Staff held consultations with stakeholders representing private sector investors, interest groups, financial and legal advisors, IFIs, and public-sector officials and representatives. ### Outcomes and timing in post-default vs preemptive cases - In most post-default debt restructuring cases reviewed, arrears were resolved shortly after the successful completion of the debt exchange. - Most post-default debt restructurings during the review period had either full or very high creditor participation rates (in some instances only after the application of Collective Action Clauses (CACs)). - When full participation was not initially achieved, several countries opted to clear the arrears to remaining hold-outs. - Exceptions with more protracted arrears to hold-outs included: - Argentina: the 2005 exchange achieved only 76 percent participation; additional creditors participated in a reopened exchange in 2010 and a further settlement in 2016; US$1.2 billion of arrears to residual hold-outs remained outstanding by the time of the 2018 Stand-By Arrangement (SBA). - Iraq: initial 2006 debt exchange attracted 96 percent participation; a reopening of the exchange in 2008 resolved a further US$500m of arrears, but some residual arrears remained until after the conclusion of the 2010 SBA. - Early dialogue timing: - The average time between the announcement of the debt restructuring and the start of dialogue with private creditors in preemptive cases was two months, less than half the average time observed in post-default cases (five months). - The average time between announcement and the completion of the debt restructuring in preemptive cases was much shorter, only about a third of the average time for post-default cases. - The difference in durations may reflect case complexity (selection effect) and stronger incentives to reach agreement in preemptive cases due to the threat of default. - There is no evidence of substantial differences in the “quality” or the form of dialogue between preemptive and post-default cases. ### Stakeholder views on the LIA policy and good faith requirement - Stakeholders generally found the LIA policy to be broadly appropriate. - The Fund’s involvement was welcomed for enhancing the credibility of the debt restructuring process. - The LIA policy’s good faith requirement incentivizes debtors to engage with creditors in a timely and constructive manner. - Criticisms and divergent views: - Some stakeholders argued that a higher bar than the current “good faith” requirement would be appropriate. - Others contended the Fund should not try to referee debtor-creditor engagement. - Consensus that the current policy’s flexible case-by-case approach seems appropriate, while noting certain implementation issues. ### Creditor committees, forms of engagement, and recommendations - Dialogue form and creditor committees: - Creditor committees were somewhat more common in post-default cases, appearing in around 80 percent of cases reviewed, compared to just under half in preemptive debt restructurings. - There was no clear relationship between the existence of a recognized creditor committee and the duration of debt restructurings. - High creditor participation was also achieved in the absence of creditor committees. - Stakeholder consensus: - Creditor committees can be useful and there is strong support for engagement where committees exist. - Committees are not seen as a prerequisite for efficiency; bilateral negotiations or facilitating agents can be effective depending on the types of claims. - Timely engagement is more important than the specific form of engagement. - Forming committees involves monetary costs and complications that may prevent some creditors from participating. - High participation has been achieved without committees. - Policy on creditor engagement clauses: - Very few bonds include clauses requiring engagement with creditor committees. - IIF has advocated inclusion of such clauses; they are included as optional clauses in the ICMA enhanced CACs. - Some stakeholders argue Fund policy should encourage creditor engagement clauses, including provisions obligating debtors to pay for creditor committee costs. - The 2014 Executive Board did not endorse creditor engagement clauses, leaving modalities and related fees for debtor and creditors to agree. - Staff sees no reason to recommend a change in this position. - Recommendation on LIA “complexity” limitation: - Stakeholders argued—and staff agrees—that the “complexity” limitation for creditor committees under the LIA should be dropped. - Determinations of committee “representativeness” need to be case specific. - Objectively defining “representativeness” is difficult; it has several dimensions and could depend on the debt portfolio. - The Fund should not be overly prescriptive on de minimis thresholds. - It should be anticipated that multiple committees may arise; creditor committees could organize themselves with a steering committee for engagement. - Multiple committees do not necessarily prevent creditors from reaching agreement (examples: Argentina (2020) and Ecuador (2020)). ### Case study: Argentina (2001–2004) and the Global Committee of Argentina Bondholders (GCAB) - Context: - Argentina announced a default in December 2001 and the Fund approved two SBAs during its debt restructuring. - Several creditor committees formed; a “global” creditor committee, GCAB, was established on January 12, 2004. - Disagreements over Argentina’s engagement with creditors under the LIA policy delayed completion of a review. - Executive Board assessment and outcomes: - Staff sought guidance on assessing GCAB as “representative” based on criteria proposed. - Argentine authorities argued case complexity precluded a single representative committee, noting GCAB did not include important constituencies, inadequate verification of bond holdings, and some members with prior bad faith. - The Executive Board advised GCAB was a representative committee; authorities agreed to negotiate with GCAB and other creditor groups. - Evidence supporting GCAB’s representativeness: - GCAB appeared to represent the creditors it purported to, with most support evidenced by formal, documented mandates and customary informal procedures for the remainder. - GCAB’s Steering Committee represented holders of approximately $35 billion of eligible bonds, accounting for approximately 89 percent of eligible bonds identified as held outside of Argentina, or approximately 43 percent of all eligible bonds. - Membership was open to any major non-litigating creditors and included non-Argentine institutional and retail creditors from various jurisdictions. - No Argentine institutional investors joined GCAB; staff noted reasons (different interests, litigation) and that GCAB was nonetheless representative due to: - (1) one group should not have veto power over committee formation; - (2) the absent group had been invited to join; - (3) litigation precluded some from joining; - (4) a finding that GCAB was representative would not prevent authorities from engaging directly with non-participating creditors. *Source: ppea2022023 - 15. Multilateral creditors play an important role in the international financial architecture.* ### Box 3. Argentina and the 2004 Global Committee of Argentina Bondholders (GCAB) ### Box 3. Argentina and the 2004 Global Committee of Argentina Bondholders (GCAB) ### Information Sharing and Opportunity for Input - Debtors routinely shared non-confidential information in both preemptive and post-default cases reviewed, and creditors appeared to have been given an opportunity to give input on the design of the debt restructuring. - Staff reports indicate non-confidential information was generally shared by the debtor with its creditors; private creditors recognized this but noted essential information—“notably the full set of assumptions underlying the debt sustainability analysis”—are not typically shared. - Information sharing by debtors generally lent creditors an opportunity to provide input on the design of debt restructuring instruments. - Private creditors proposed deleting the term “non-confidential” after “relevant” in the expectations for information sharing under “good faith,” arguing: - The distinction between “confidential” and “non-confidential” can be misunderstood and may be used by debtors to withhold information that is not market sensitive. - Creditor committee members may wish to continue trading while negotiating; receiving confidential (market sensitive) information could violate securities law if they traded. - Private creditors asserted they have developed mechanisms for sharing market sensitive information consistent with securities-law constraints. - Participants identified information that would be important to share where feasible: - (i) the exchange of current macroeconomic and debt data, - (ii) disclosure of the proposed treatment for different creditor classes, - (iii) transparency around macro policy assumptions (to the extent such information can be disclosed). ### Flexibility in Emergency Financing Cases - The LIA policy applies flexibly in emergency financing situations, but in practice this flexibility did not appear needed in the cases reviewed. - Four emergency financing requests involving LIA were identified, 42 but in each case the debtor had taken actions sufficient to support a determination that the authorities were engaged in “good faith” negotiations in line with the LIA policy. - Footnote 42: Iraq (EPCA, 2006), Mali (2012, RCF), Ecuador (2016, RFI), Mozambique (2019, RCF). ### Review of Application of LIA Policy to Jurisdictional Arrears - Jurisdictional arrears (non-sovereign arrears arising from exchange controls) have been relatively few under LIA since 2002; staff identified three such cases since 2002: Iceland (2008); Latvia (2008); and São Tomé and Príncipe (2019). - In each case LIA required the member to make a good faith effort to facilitate collaborative agreements between private debtors and creditors and to have good prospects for removal of exchange controls. - Exchange controls were removed in both Iceland and Latvia, resolving the arrears; exchange controls remain in São Tomé and Príncipe, and the Executive Board has approved their temporary retention under the ongoing Fund-supported program. - Staff proposes no amendments to the LIA policy with respect to jurisdictional arrears, noting the policy continues to highlight arrears arising from exchange controls and operates in tandem with Article VIII, Section 2(a) to convey the need to eliminate exchange controls and consequent arrears to the extent possible. ### Recommendations — Overview - Staff considers the LIA policy to be well balanced with no need for a major overhaul, but some amendments and updates are warranted based on 20 years of PSI experience. ### Update Elements of “Good Faith” Engagement - Principles from 2002 remain broadly appropriate but could be amended, updated, and sharpened in several respects: - To provide guidance on what constitutes “relevant” information, with a focus on debt transparency: - Staff proposes specifying that relevant information generally shared with creditors would include a comprehensive picture of the government debt stock and its terms (in the aggregate) in line with recent changes adopted under the Fund’s Debt Limits Policy (DLP). - Suggested disclosure elements could align with what the member would/could be required to disclose in Fund program documents under the DLP: creditor composition, major subcategories of instruments (with information on the main financial terms), upcoming debt service, and collateralized debt. - To replace the two-track approach (confidential vs non-confidential information) with an expectation to share all relevant information with creditors: - The distinction between confidential (market sensitive) and non-confidential information is judged no longer meaningful; private creditors have modalities to deal with market sensitive information outside a formal negotiating framework. - Staff proposes eliminating the formal negotiating framework expectation (including the expectation to enter formal negotiations with a representative committee if timely formed in complex cases), substituting a generalized expectation that the debtor should share relevant information, subject to appropriate safeguards where information is market sensitive. - This change would align the LIA policy more closely with “good faith” under the LIOA policy, which includes sharing of “relevant information.” - To add an element that the debtor’s offer should be consistent with the parameters of the Fund-supported program: - Good faith engagement should include that any debt restructuring proposal—if made before the Executive Board meeting—be broadly in line with what is needed to restore debt sustainability as reflected in Fund-supported program parameters. - Staff proposes explicitly including as a fourth guiding principle of good faith that any debt restructuring proposal offered by the debtor should be consistent with the parameters of the Fund-supported program, aligning LIA with LIOA and ensuring restructuring is targeted to restore sustainability. - To encourage early dialogue and clear communication by the debtor on the perimeter of claims subject to PSI: - Fund could establish an expectation on the debtor to specify the perimeter of claims (including claims held on non-government public sector entities) at the outset to help creditors progress toward agreement. - This expectation would aid the Fund in establishing financing assurances or LIA assurances that restructuring will restore debt sustainability. - The Fund should avoid micromanaging restructuring processes; beyond establishing an expectation, the Fund should not interfere in debt restructuring negotiations, though Fund staff could, at the member’s request, explain Fund policies and assumptions underlying macro forecasts, program parameters, and the DSA. ### Sharpen the Expected Engagement with Creditor Committees - Staff recommends eliminating the expectation of engagement under a formal negotiating framework, but retaining expectation that the debtor engage with a representative creditor committee or committees when LIA criteria are met, with amendments: - Do not retain “complexity” as a gate for engagement with creditor committees: - The “complexity” test is difficult to determine and not critical; requiring a judgment on complexity could undermine debtor-creditor engagement. - Elements previously suggested to assess complexity (number and diversity of creditors, range of instruments, inter-creditor equity issues, prospective haircut size) largely overlap with factors for determining representativeness. - Retain expectation to engage with representative creditor committees; proposed factors to determine “representativeness” include: - Represent a substantial portion of the principal covered by the debt restructuring. No numerical thresholds are to be set, but in cases where bonds contain aggregated CACs, committees representing a share of claims sufficient to block activation of these CACs would typically meet this test. - Reflect the diverse financial and economic interests of creditors whose claims are to be restructured (different instruments, geographical location, nature of holders such as retail vs institutional, large vs small bondholders, special purpose vehicles, influential financial institutions, hold-to-maturity and distressed debt purchasers). No group's refusal to join should veto committee formation. - Have the support of the creditor groups they purport to represent. Verification of representation is generally disciplined by reputational risk; direct participation by largest creditors could be encouraged. The Fund could consider evidence that a participant represents its group, including where some creditors are constrained from participating directly. *Source: Box 3. Argentina and the 2004 Global Committee of Argentina Bondholders (GCAB), ppea2022023* ### 36. In cases where creditors form multiple committees, some engagement with ### 36. In cases where creditors form multiple committees, some engagement with ### Engagement with multiple creditor committees - Where creditors form multiple committees, some engagement with committees that individually or collectively meet the above factors would generally be warranted. - Entering into detailed negotiations with multiple committees may not always be feasible, nor may it be necessary in the case of smaller, non-representative committees. - The debtor may prefer to engage with the committee that appears most representative (or, if relevant, a steering group with representation from the different committees). - Where other committees hold a sizeable share of claims, debtors could still be expected to engage with those committees, including to supply relevant information at the committees’ request. - This expectation is particularly relevant when there are several sizeable committees of which none is individually representative, but which are collectively representative. - Individual committee representativeness assessments referenced factors such as (a) creditors that have signaled their support for the committee, and (b) the coverage of major types of creditors represented in the committee, with participation often higher among institutional rather than retail investors. ### Aggregated voting thresholds and precedent notes - Aggregated thresholds for approval in enhanced CACs are 66 2/3 percent across series (in two-limb aggregated voting) or 75 percent across series for single-limb aggregated voting. - Executive Directors recognized the importance of flexibility and judgment in evaluating participation and representativeness (Acting Chair's Summing Up—Fund Policy on Lending into Arrears to Private Creditors—Further Consideration of the Good Faith Criterion, September 2002). ### Restating use of flexibility in emergency financing cases (LIA policy) - Staff proposes to restate the circumstances in which the LIA policy can be applied flexibly for emergency financing requests in line with the LIOA policy. - Flexibility under the LIA policy is to be reserved for emergency situations, such as in the aftermath of a natural disaster, where extraordinary demands on the affected government mean there is insufficient time for it, as the debtor, to undertake good faith efforts to reach agreement with its creditors. - The requirements of debt sustainability and any other applicable Fund policies continue to apply. - It would be expected that the Fund’s support provided in such cases would help advance normalization of relations with private creditors and the resolution of arrears, so that approval of any subsequent Fund arrangement for the member would again be subject to the LIA policy. ### Guidance on staff reports and Fund role in sovereign debt restructuring - Staff will provide more precise guidance on how to assess, and document in the staff report compliance with the good faith criterion. - Enhanced transparency and evenhandedness can be better achieved through standardized documentation in staff reports. - Staff will also provide further guidance on the Fund’s role in sovereign debt restructuring. ### LIA policy versus IIF Principles (key differences) - While staff supports many elements of the IIF Principles and there are significant overlaps with the Fund’s current LIA policy and its Addendum, there are important differences; staff does not consider it appropriate to endorse the IIF Principles and their Addendum. - Key contrasts highlighted: - The Principles unreservedly encourage early negotiations with a committee after a default, while the current LIA policy provides for formal negotiations only if the case is complex, the committee is representative, and has been established on a timely basis. - The Principles call on the resumption of partial debt service and recommend including official bilateral creditors in the debt restructuring while the LIA policy remains silent on these issues. - In contrast to the Addendum to the Principles, the Fund’s policy does not foresee formal involvement of the private sector in DSA preparations and leaves specifics of creditor committee design, including costs, and the debt restructuring strategy and perimeter to negotiations between creditors and debtors. ### IIF Principles for Stable Capital Flows and Fair Debt Restructuring (summary) - The Principles establish best practices for consultation between debtors and creditors in sovereign debt restructurings; they are non-binding and were announced in the G20 Berlin Communique in 2004. - The four key principles of the IIF framework: - Transparency and timely flow of information: debtors should disclose relevant information to creditors, including maturity and interest rate structures, proposed treatment of obligations, and central aspects of economic policies and programs. - Close debtor-creditor dialogue and cooperation to avoid debt restructuring: regular dialogue on information and data, investor relations, and consultations; creditors should consider voluntary, temporary rollovers of short-term maturities to avoid broad restructuring. - Good-faith actions: voluntary, good-faith engagement to bring the debtor back to a sustainable BOP position while preserving asset value; supports establishment of creditor committees, costs usually borne by the debtor. - Fair treatment: borrowing countries should avoid unfair discrimination among affected creditors. - The Addendum to the Principles (post-Greece 2012) clarifies “good faith actions”, calls for early restoration of market access, recommends early discussions with representative creditor committees, and greater private sector involvement in DSAs. ### Preemptive debt restructuring practice — review of outcomes and Fund practice - Preemptive debt restructurings are associated with better outcomes for the debtor member and creditors: they tend to be shorter in duration, achieve higher creditor participation, have lower haircuts, and lead to better post-restructuring growth outcomes than post-default restructurings. - The Fund advises members to remain current on all debt obligations to the extent possible and to seek to initiate preemptive debt restructuring while continuing to service original claims. - The Fund does not have a formal policy linking Fund support to a specified standard for creditor engagement in preemptive debt restructuring negotiations; the LIA policy applies to post-default settings and tolerates arrears in PSI cases under limited circumstances. - Since 2002, 20 preemptive sovereign debt restructuring episodes have taken place. - The average time to conclude the preemptive operations ranged from 1 to 15 months with an average of 6.3 months. - A review shows creditor committees have been as frequent in preemptive as in post-default cases; market participants view preemptive cases with elevated debt vulnerabilities as having similar engagement levels to post-default cases. ### Empirical table highlights (preemptive episodes, 2002-2021) - Table of episodes includes country-level data showing Start and End months, Length of process (in months), Presence of a committee, and Participation rate (in percent) for cases such as Moldova (Length 5; Presence No; Participation 100), Uruguay (Length 3; Presence No; Participation 91), Dominican Republic (Length 14; Presence No; Participation 97), Greece (Length 9; Presence Yes; Participation 96.9), Mozambique (Length 10; Presence Yes; Participation 85), Ecuador (Length 5; Presence Yes; Participation 100), and others. - Note: ongoing cases as of February-2022 excluded; preemptive defined as (i) no debt service payments missed or (ii) some payments missed but only temporarily after start of negotiations (no unilateral default). - Specific note for Mongolia: Participation rate entry notes "90" with a footnote clarifying "83 percent participation rate of existing holders, or over 90 percent excluding US-based investors who could not participate for legal reasons." ### Fund role in preemptive cases and past engagements - On rare occasions, preemptive restructurings have taken place outside Fund-supported programs; the Fund has acted as an independent and neutral party (Belize 2007, 2013, 2016, and 2021 examples). - Fund staff engagement has included Article IV consultation documents, DSA and cash flow analysis, assessment letters to the international financial community, close contact with authorities and financial advisors, and technical assistance on debt management. ### Recommendations for preemptive debt restructuring policy - Staff views current practice as broadly appropriate given time-sensitive nature of preemptive cases; policies should allow flexibility so policy application does not delay debt restructuring and cause arrears. - Staff recommends codifying current practice into a Fund policy that: - Requires the Fund to assess that a credible process for debt restructuring is underway and that such restructuring will likely deliver an outcome in line with program requirements. - Continues to consider engagement of legal and financial advisors, launching of consultations with creditors, design of debt restructuring strategy (including terms of new instruments and use of inducements for creditor participation). - Allows staff to consider a range of factors, including (but not limited to) the stage of negotiations, the private sector’s share of the overall financing envelope, and the strength of creditors’ position (e.g., existence of collateral). - Adds an expectation of enhanced transparency and information sharing: the Fund policy on preemptive debt restructurings should include an expectation that relevant information—as defined under the LIA policy—be shared on a timely basis. *Source: ppea2022023 - 36. In cases where creditors form multiple committees, some engagement with* ### 49. Staff reviewed the 37 arrangements or outright disbursements during which arrears ### ppea2022023 - 49. Staff reviewed the 37 arrangements or outright disbursements during which arrears to official bilateral creditors arose since the establishment of the LIOA policy in 2015 ### Overview of cases reviewed - Staff reviewed 37 arrangements or outright disbursements during which arrears to official bilateral creditors arose since the establishment of the LIOA policy in 2015. - Several cases required application of multiple strands of the LIOA policy over the course of the Fund-supported program. ### Application of arrears policies and key findings - Of the 37 cases: - 11 had “non-OSI arrears” (the program anticipated full repayment of the claim without the need for a contribution from official bilateral creditors). In all such cases, the Fund was able to provide financing, as the creditors’ Executive Directors acquiesced or did not object at the time of the Executive Board meetings. - 29 had arrears on claims where OSI was expected under the macro-framework. In all these 29 cases, the Fund was able to provide financing. - Of these 29 cases: - 14 had claims covered by a representative Paris Club agreement, allowing remaining arrears to official bilateral creditors to be deemed away. - 12 cases: creditors provided explicit consent to Fund financing despite the arrears. - Suriname (2021): the LIOA policy allowed the Fund to provide financing even before agreement on a restructuring was reached with all official bilateral creditors; China and India provided consent to Fund financing despite the arrears, and restructuring discussions are ongoing. - The three criteria under the LIOA policy were applied in seven cases involving four debtors; the criteria were judged to be met in each case. - Of these seven cases: - Three involved a national-security dispute between the debtor and creditor. - One involved non-recognition of the creditor government. - The remaining three involved two debtors and a single creditor where creditor consent was sought but not provided by the time of relevant Executive Board meetings; this was due both to creditors providing no response at times and to affirmative objections at other times. - Four cases involved OSI-related arrears in emergency financing requests under the RCF or RFI: - Djibouti (2020) was determined to fit the exceptional circumstances under the LIOA policy that allowed flexible application: it advanced on the basis of the authorities’ expected application for relief under the Debt Service Suspension Initiative (DSSI). - Grenada (2020): flexibility was not used given long-running debtor-creditor discussions prior to the request. - The Gambia (2017) and Guinea-Bissau (2021): creditor consent was obtained because arrears pre-dated HIPC and debt restructuring discussions were already underway. ### Assessment of LIOA policy performance - The LIOA policy appears to have worked well: arrears to hold-out official bilateral creditors have not prevented Fund financing, the main objective of the policy. - Outreach feedback from debtor and creditor members has been overwhelmingly positive: the policy provides engagement opportunities on arrears and balances discouraging arrears with preventing hold-out creditors from vetoing Fund financing. - Arrears have been addressed through collective action or debtor-creditor agreement in the large majority of cases. - It is difficult to draw broad lessons from the few cases where the Fund applied the three criteria. Sovereign arrears could only be fully resolved in a few cases. ### Clarification on the LIOA third criterion - Some stakeholders requested further clarification of the LIOA policy’s third criterion: whether lending into arrears to an official bilateral creditor would have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. - The summing up indicates the third criterion “would normally not be satisfied where the creditor or group of creditors that has not reached agreement with the debtor accounts for an adequately representative share.” - The use of “normally” indicates discretion to rebut the presumption not to lend into arrears to a majority creditor or group of creditors; any such evaluation should be aligned with the Fund’s mandate and focus exclusively on whether lending would have an undue negative effect on mobilizing official financing packages in future cases. - In general, a durable solution requiring a debt restructuring is unlikely to be achievable without participation of large creditors. ### Treatment of persistent OSI-related arrears across successor programs - Once a claim has been determined to be OSI related, such determination is permanent under current policy. - New Fund-supported programs have in practice incorporated the assumption that old OSI-related claims would be restructured in line with terms stipulated in the original Fund-supported program. - Staff proposes to restate that, once a claim has been determined to be OSI related, such determination is permanent. - A claim originally non-OSI related may be recategorized as OSI related if required by economic developments. ### The Common Framework (CF) as a potential representative standing forum - The CF, endorsed in November 2020 by G20 countries and the Paris Club, is a set of principles and processes to facilitate debt treatment for 73 low-income countries eligible for the DSSI. - The LIOA policy presently provides special status only to the Paris Club; adequately representative Paris Club agreements can “deem away” arrears to non-participating official creditors. - Adequately representative CF treatments can “deem away” arrears to non-participants only when a Paris Club creditor participates (both non-Paris Club and Paris Club financing under the CF count when determining representativeness). - Uncertainties about the CF’s evolution: - A new creditor committee is established for each CF request, requiring case-by-case approvals from some official creditors. - Unlike the Paris Club, the CF does not allow regular ex ante monitoring of debtor members. - To date, a single country case (Chad) has received official sector financing assurances under the CF and the treatment is still to be implemented; the CF has not yet delivered timely and reliable financing assurances in practice. - Staff will monitor CF developments and, if appropriate, revert to the Executive Board with a stand-alone proposal to amend the LIOA policy. ### Policy on non-toleration of arrears to International Financial Institutions (IFIs): findings and rationale for review - The evolution of the international creditor community and new IFI entrants has demonstrated a need to review the Fund’s approach to IFIs under arrears policies. - Under the current approach, designation of a claim holder as “multilateral” is based on judgment informed by factors including global membership and past treatment by the Paris Club and HIPC; this creates ambiguity for newer IFIs or regional IFIs. - Staff reviewed all use of Fund resources cases since 2010 and cross-checked World Bank Group data (aggregated): - Staff identified 22 staff reports that discussed arrears to IFIs that were either cleared shortly before the staff report or remained outstanding at the time of Executive Board approval. - Most cases with arrears to IFIs to date have been non-OSI; a Credible Plan to clear arrears was assessed to be in place to enable Fund approval. - In all cases where arrears to the World Bank Group could be identified, the arrears were cleared before Executive Board approval of Fund financing. - Staff did not find any case where an Agreed Plan was required to clear arrears to IFIs providing substantial financing. - In a few recent cases involving new IFI entrants, staff applied NTP using room for judgment, but this approach is unsustainable for future OSI cases with substantial IFI exposures. ### Recommendations and proposed amendments regarding IFIs and the NTP - Objectives of the proposed reform: - Remove ambiguity: specify criteria for deciding whether new entrants benefit from the policy. - Avoid dilution: ensure special treatment of multilateral creditors is not diluted as the number of IFIs receiving that treatment increases. - Minimize risk of unintended effects on IFIs’ de-facto preferred creditor status (PCS): changes should address only the treatment of claims under the Fund’s arrears policies, but perception risks remain. - Proposed restriction of the NTP in OSI cases to two classes of IFIs: - (1) A small set defined by clearly specified mandate and functional characteristics closely linked to the Fund’s mandate. Specifically proposed to encompass: - Regional Financing Arrangements (RFAs) and reserve currency union central banks (RCUCBs), whose operations have the effect of strengthening the GFSN; and - MDBs with global membership, meaning their membership includes more than 50 percent of the number of Fund members or more than 50 percent of the Fund’s total voting power. - (2) For IFIs outside this set, the Fund would defer to the consensus of the official bilateral creditor community on whether to apply the NTP in a specific OSI case. - This approach: - Ensures the Fund’s arrears policies do not unintentionally alter perceived PCS of specific institutions (treatment would track official bilateral creditor community consensus). - Guards against dilution because official bilateral creditors have an interest to avoid proliferation of preferred claims. - For any IFIs meeting criterion (1) or (2), a Credible Plan would be required to clear any arrears (except for the World Bank Group, for which an Agreed Plan would always be required). - In non-OSI cases, a Credible Plan to clear arrears to all IFIs with two or more sovereign members (and no non-sovereign members) will still be required under the NTP. *International Monetary Fund — Reviews of the Fund’s Sovereign Arrears Policies and Perimeter (excerpts).* ### 59. In addition, staff proposes to ### ppea2022023 - 59. In addition, staff proposes to ### Proposed multilateral NTP: main changes and decision logic - Key differences between current and proposed approach: - (1) Application of the LIOA policy in OSI cases for IFIs no longer covered by the NTP. - (2) More precise determination of what institutions are covered under the NTP. - For IFIs covered by the NTP, the only change is the streamlining: no longer requiring an “Agreed Plan” (rather than merely a “Credible Plan”) in cases where the IFI provides substantial financing to the Fund-supported program. - Decision logic (as summarized in Figure 3): - Step 1: Is creditor the World Bank? If yes → Agreed plan to clear arrears is required. - Step 2: Is the creditor an IFI with at least two sovereign members (and no non-sovereign members)? If no → NTP does not apply; depending on creditor, LIA or LIOA policy may apply. - Step 3: Are the arrears OSI-related? If no → LIOA policy applies. If yes → a Credible Plan to clear arrears is required unless Step 4 applies. - Step 4: Is the IFI covered by the proposed NTP (RFAs, global membership, or based on treatment by official creditor committee)? If yes → Agreed plan to clear arrears is required; if no → Credible plan required. ### Proposed Amendment 1: Coverage of IFIs under the NTP in OSI cases - IFIs that would be covered by the NTP even in OSI cases if they meet any of the following criteria: - RFAs that form part of the GFSN and RCUCBs whose operations strengthen regional financial safety nets and the GFSN. - IFIs with global membership. Proposal: define global MDBs as IFIs with more than half of the number of Fund members, or a membership in excess of half of the Fund’s total voting pool. Apart from the World Bank Group, this criterion is currently met by seven IFIs (Table 3). - IFIs identified as being outside the scope of debt restructuring by a creditor committee based on a representative standing forum of official bilateral creditors (preserving link to Paris Club treatments when applicable). - Implementation nuances: - If treatment by a representative standing forum cannot be decided in the case at hand, staff would be guided by the IFI’s treatment in past cases (past Paris Club or CF treatments with a Paris Club creditor participating). - The same IFI could be included under the NTP in one Fund-supported program but excluded in another if official bilateral creditors seek comparable treatment in one case but not another. ### Proposed Amendment 2: Application of LIOA to OSI-related arrears on IFI claims not covered by the NTP - Staff proposes expanding the LIOA policy to apply to OSI-related arrears of IFIs not covered under the NTP. - Modalities and conditions: - Consent modalities follow the LIOA policy by analogy: consent from the IFI to Fund financing despite the arrears could be conveyed directly to staff or via an Executive Director designated by the IFI. - The three criteria under the LIOA policy would apply, with appropriate adaptations. - If the IFI provides substantial financing (such as grants) to the Fund-supported program, such financing would be taken into account for purposes of the IFI’s contribution to the OSI much like for official bilateral creditors. - An IFI contribution to OSI would not count for purposes of calculating the representativeness of a collective creditor agreement of a standing forum. - Flexibility in extraordinary circumstances: - For OSI-related arrears to IFIs, staff proposes to mirror the flexibility in extraordinary circumstances for emergency financing cases in line with the LIOA policy, reserving such flexibility for emergency situations (e.g., aftermath of a natural disaster) where there is insufficient time for the debtor to undertake efforts to engage in good faith under the LIOA policy. ### Proposed simplification: Streamlining the NTP - Empirical finding: - Staff has found no case of using the “Agreed Plan” for clearance of arrears to IFIs providing substantial financing to the Fund-supported program. - Provision of new and existing financing to members in arrears to the IFI is substantially constrained by the IFI’s own overdue financial obligations policies and is typically limited to grants, until arrears are cleared in full. - Proposal: - An Agreed Plan will only be required for the clearance of arrears to the World Bank Group. ### Treatment of certain claims under the Fund’s arrears policies: issues identified - New instruments and delineation challenges: - The 2015 Russian-held Ukraine Eurobond case highlighted issues about whether bonded debt should be excluded from the Fund’s definition of Direct Bilateral Claims; the Executive Board confirmed the bonded claim was official in December 2015. - If bonded claims had multiple holders and common voting pools (via CACs), official bondholders could be in a common voting pool with private bondholders, complicating PSI and OSI given official creditor protections/seniority. - Surge in sovereign bonds held by external public-sector entities: - Stock of sovereign bonds held by external public-sector entities (e.g., SWFs) has surged and may be multiples of the stock of official bilateral loans; such claims have generally been presumed not to have been acquired by the official bilateral creditor government or on its behalf and thus have been subject to the LIA policy (paragraph 15). - There is scope for specifying how judgments are made about classification for consistency across entities and instruments. - RFAs and secondary market bond purchases: - Some RFAs explicitly recognize secondary market bond purchases to maintain or restore orderly bond market conditions in member countries. - Eurosystem secondary market purchases of euro-area sovereign bonds are an instrument of monetary policy implementation and thereby indirectly contribute to maintaining or restoring orderly bond market conditions; such purchases can constitute BOP financing-related claims or claims acquired in the context of the euro area’s single monetary policy and may provide de facto support to the GFSN. - Classification inconsistency: - Claims held by state-owned development banks and lending institutions have not been consistently classified as official or private across cases, undermining certainty about the perimeter of Direct Bilateral Claims (example: DSSI). ### Concerns about vote pooling and bonded debt - Tradeoffs in 2015 discussion: - Two polar proposals considered: (a) treat all bonds held by sovereigns as Direct Bilateral Claims (rejected because it would give unwarranted seniority to commercially-motivated claims); (b) withhold Direct-Bilateral-Claim status from all bonds (raised concerns of “double dipping” and instrument-based carve-out). - Instrument-neutral approach rationale: - Excluding specific instruments is arbitrary under an instrument-neutral approach because bond features (double dipping, tradability, collective payment mechanisms) may be present in other forms of official financing or future instruments. - Syndicated loans currently mostly do not have majority restructuring provisions for payment terms, though some syndicated loans have sharing provisions requiring equal payment to all holders. - Vote pooling risk: - Where an official bilateral creditor is part of more than one voting pool (e.g., holds instrument subject to same CAC as private bondholders and is also a member of the Paris Club or Common Framework), this can complicate restructuring processes, create perimeter uncertainty, affect restructuring terms, and obstruct agreement—potentially costly for the debtor and the system overall. ### Recommendations (summary of staff proposals and restatements) - Staff proposes two amendments and three restatements (detailed proposals above): - Proposed Amendment 1: Pooled Voting Mechanism / Coverage of IFIs under the NTP in OSI cases. - Proposed Amendment 2: Application of the LIOA policy to OSI-related arrears on claims held by IFIs not covered by the NTP. - Proposed simplification: Streamline NTP by requiring Agreed Plan only for the World Bank Group. - Additional restatements and recommendations address classification rules, vote pooling risks, and consistent treatment of new instruments and public-sector holdings. *International Monetary Fund — Reviews of the Fund’s Sovereign Arrears Policies and Perimeter (excerpts).* ### 72. Staff hence proposes to remove from the definition of Direct Bilateral Claims and ### 72. Staff hence proposes to remove from the definition of Direct Bilateral Claims and IFI/multilateral claims ### Exclusion of vote-pooled claims from Direct Bilateral and IFI/multilateral claims - Staff proposes to remove from the definition of Direct Bilateral Claims and IFI/multilateral claims all claims that are contractually part of a pooled voting mechanism with private creditors. - This criterion would apply to any debt instrument, including syndicated loans, and is immediately apparent with respect to bonds with CACs. - All bonds with any CACs, including enhanced CACs or traditional CACs, would be disqualified from being treated as Direct Bilateral Claims when a private creditor acquires any bond covered by the enhanced CACs, or a portion of the series in the case of single-series CACs. - Example rule for single-series CACs: Bonds with single-series CACs could be treated as Direct Bilateral Claims only on the strict condition that the creditor government (or an agency acting on its behalf) maintains continuous and full ownership of the entire bond series. If any part of the series were acquired by a private creditor, the entire series would be subject to the LIA policy. ### Operationalization and verification - The Fund would rely in the first instance on the creditor’s representation of continuous and full ownership; the Fund could challenge that representation but would give the creditor the benefit of any reasonable doubt. - To reduce disputes, borrowers could be encouraged to include disclosure provisions mandating the trustee to inform the debtor if a transfer of ownership occurs. - Contractual provisions could be included to prevent a bond series from being re-opened to avoid vote-pooling through re-openings; for existing debt, bonds currently held in their entirety by an official bilateral creditor would not lose official-bilateral-claim status should the debtor re-open the bond issuance and the bilateral creditor continues to hold the entire issuance. ### Risks, incentives, and staff assessment - There is a risk this approach could incentivize issuance of bonds without CACs and undermine wider use of CACs, but staff judges this risk to be likely small. - Staff’s view: official finance to sovereigns is normally motivated by public-policy objectives; official bilateral creditors are unlikely to sell official holdings on the secondary market. - Selling concessional official bonds would likely result in a loss for the official creditor; the likely loss would be even greater when approaching a restructuring scenario relative to what the official creditor may recoup in a bilateral, Paris Club, or CF process. ### Treatment of IFI secondary market purchases (Proposed Amendment 2) - IFI support in BOP crises could take the form of secondary market bond purchases; such purchases under facilities or purchase programs set up to provide BOP support should be considered part of the GFSN and merit special treatment under the Fund’s arrears policies (i.e., treated like direct crisis lending). - Some IFIs may choose to treat certain secondary market purchases pari passu with private claims; large-scale IFI purchases can raise demand/prices but may also de-facto subordinate private bondholders. - Staff proposes the Fund should take into account the IFI’s own stated treatment of the claim: - If the IFI treats the claim as pari passu with privately-held claims, the Fund would treat the claim as a privately-held claim under its arrears policies (i.e., the LIA policy would apply). - If the IFI does not assert pari passu status and its purchases are considered an important component of the GFSN, the Fund would give the claim special protections described for IFI claims. - Vote-pooled claims with the private sector would be treated under the LIA policy regardless of the IFI’s assertions. ### Restatements: secondary market purchases by official bilateral creditors and budgetary process - Restatement 1: Secondary market purchases by official bilateral creditors do not qualify as Direct Bilateral Claims under the current LIOA policy; staff does not propose amendments. The definition limits Direct Bilateral Claims to those reflecting the provision of direct financing to the debtor government (i.e., primary market purchases). Claims acquired in the secondary market by the government or entities acting on its behalf would be subject to the LIA policy. - Restatement 2: Clarify which entities are “government” creditors by focusing on whether public entities form part of the member's budgetary process. Staff proposes restating that public entities that form part of the member's budgetary process are classified as part of government. - The definition on the debtor side is limited to claims of public sector entities whose financial operations form part of the member’s budgetary process (Box 6). - For operational purposes, staff proposes to focus on a ‘budgetary process’ test on the creditor side as well; almost all SWFs and state-owned banks would likely fail this test. ### Box 6 (Defining the Budgetary Process) — key points - Arrears of a public-sector entity constitute sovereign arrears of the member only when the financial operations of the entity form part of the member’s budgetary process. - No precise definition exists in Fund policy; assessment is country-specific and based on domestic budgetary law and interpretation. - Ad hoc budgetary support or occasional coverage of losses may not indicate an entity forms part of the budgetary process. - Profit transfer from a state-owned enterprise to the central government does not mean the entity forms part of the budgetary process. - An entity that is a direct budgetary unit or that receives direct moneys from the budget would form part of the budgetary process. ### Acting “on behalf of” the government (Restatement 3) - Claims held by a creditor entity outside the budgetary process could still be Direct Bilateral Claims if acquired explicitly “on behalf of” the government (e.g., guarantees/indemnifications issued explicitly on behalf of the government by ECAs). - Central bank swaps for BOP support could qualify as Direct Bilateral Claims to the extent the central bank acts on behalf of the government. - Determination requires consideration of the totality of circumstances on a claim-by-claim basis; the creditor’s representation should be supported by unambiguous documentary evidence. - Important elements: governance structure of the entity; whether the claim originated from explicit directions from the government; terms of the financing provided. - Claims held or guaranteed/indemnified by ECAs would normally pass the “on behalf of” test, but claim-by-claim analysis remains required. ### Alignment with Paris Club and practical implications - The Fund’s definition need not always align exactly with Paris Club or other representative creditors fora practices; the Fund uses a claim-by-claim analysis whereas Paris Club may use an institution-by-institution approach. - Most claims typically treated in the Paris Club (development assistance, BOP support, bulk of ECA guarantees) would continue to be classified as Direct Bilateral Claims under these proposals. - Clarifications would cover central bank swaps acting for BOP purposes as Direct Bilateral Claims; secondary market purchases of sovereign bonds for portfolio or reserve management by central banks and SWFs would not be Direct Bilateral Claims. ### Implementation timing and issues for discussion - Staff proposes all proposed amendments enter into force immediately; if the Board supports the proposed amendments, they will apply immediately to all future Fund disbursements, including under existing arrangements with respect to existing and future arrears. - Staff seeks Directors’ views on: - Whether the LIA policy remains broadly appropriate and whether staff’s updates to guiding principles on good faith (paragraphs 32-37) are agreed. - Codifying current practice into Fund policy with respect to preemptive debt restructurings with enhanced debt transparency expectations (paragraphs 47-48). - Whether the LIOA policy remains broadly appropriate with no amendments. - Agreement with staff’s two proposed amendments and one simplification on treatment of arrears to IFIs (paragraphs 57-64) and the proposed amendment on treatment of arrears on secondary market purchases held by IFIs (paragraphs 76-78). - Agreement with staff’s one proposed amendment and three restatements on the definition of Direct Bilateral Claims (paragraphs 67-75 and 79-85). *Source: https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022023.pdf* ### 4. If debt is unsustainable (i.e., the Fund determines that debt sustainability cannot be ### ppea2022023 - 4. If debt is unsustainable (i.e., the Fund determines that debt sustainability cannot be ### Debt unsustainability and preconditions for Fund financing - If debt is unsustainable (i.e., the Fund determines that debt sustainability cannot be preserved through credible and sustainable policy adjustment), the Fund is precluded from providing financing unless the member takes steps to restore sustainability. - Under the exceptional access policy, a higher degree of probability is required: "The steps taken by the member must render debt sustainable with high probability." (Access Policy and Limits in the Credit Tranches and Under the Extended Fund Facility and on Overall Access to the Fund’s General Resources, and Exceptional Access Policy—Review and Modification, Decision No. 14064-(08/18), February 2008, as amended, paragraph 3(b).) ### Types of steps and assurances to restore sustainability - Steps that could restore sustainability: - Provision of new concessional financing. - Completion of a debt operation (debt restructuring). - Where upfront restoration is not feasible, the Fund may accept assurances that the member is on track to restore sustainability through two types of assurances: 1. Grants or highly concessional financing sought from donors: assurances can be sought directly from the donors as to the amount and timing of the contribution. 2. Rescheduling (a change in contractual terms): the form of assurances depends on the nature of creditors—Paris Club official creditors, non-Paris Club official creditors, or private creditors (see Box AI.1 and Box AI.3). ### Assurances on debt sustainability (Box AI.1) - Paris Club official bilateral creditors: - Assurances are provided by a Club meeting to give a preliminary indication that the Club is willing to provide debt relief in anticipation of an Agreed Minute. - If Paris Club creditors are representative (i.e., a majority of contributions required from official bilateral creditors over the program period), comparability of treatment provisions and the Fund’s arrears policies (allowing non-participating creditors to be “deemed away”) permit the assumption that other creditors will provide debt relief on the same terms as the Paris Club. - Non-Paris Club official creditors: - “Specific and credible” assurances are required from the creditors sufficient to restore debt sustainability and fully finance the Fund-supported program. - This is understood to mean a communication from a sufficiently high-ranking official authorized under domestic law to commit the creditor; preferably written and showing understanding of the debtor’s situation and needed actions. - The actual debt restructuring can come later. - Private creditors: - Assurances are derived from staff judgment that a credible process for debt restructuring is underway and likely to deliver an outcome in line with program requirements. - Relevant considerations: engagement of legal and financial advisors by the member, launching of consultations with creditors, design of a debt restructuring strategy including terms of new instruments and use of inducements for creditor participation. - When creditors with greater leverage are involved (e.g., foreign law-governed debt, collateralized claims, or blocking positions to neutralize collective action clauses), the process must be further along to provide sufficient assurances. - The Fund has in some cases approved financing only after completion of a debt exchange. - Note: While assurances are typically not conveyed verbatim to the Executive Board, the Executive Board must be informed of their existence and their substance for an informed decision on Fund financing. ### Evolution of the Paris Club and coordination with the Fund (Box AI.2) - Paris Club background and evolution: - The Paris Club was established in 1956. - Initially relied on short-term reschedulings at market rates; follow-up reschedulings were often required. - During the sovereign debt crisis of the 1980s, practices adapted toward longer-term solutions and more concessional terms. - Since 1988, the Paris Club can provide debt write-offs to low-income countries and played a key role in the HIPC Initiative. - The “Toronto Terms” (1988) allowed debt reduction of up to 33 percent for the poorest countries, with longer repayment periods or lowered interest rates on remaining debt. - Under the “Cologne Terms”, countries eligible for the HIPC Initiative were granted debt cancellation of up to 90%. - In 2003, the Paris Club adopted the “Evian Approach”, which uses a case-by-case approach incorporating debt sustainability considerations; reschedulings for liquidity issues and comprehensive debt treatment (including principal or NPV reduction) for solvency issues. - Coordination with the Fund: - The evolution of Paris Club approaches dovetails with the Fund’s focus on debt sustainability. - The Fund expressly recognized debt sustainability as a key safeguard in 2002. - Given the adoption of the “Evian Approach” and “Cologne Terms”, debt sustainability combined with Fund-supported programs is a key factor driving analysis in providing debt relief. ### Debt sustainability in emergency financing cases (Box AI.3) - Requests for emergency lending (RFIs or RCFs) in unsustainable debt situations are complex because an urgent disaster may be layered on top of a debt crisis. - Risks of upfront financing without safeguards: money could be used to pay existing creditors, not address the disaster, and make debt resolution harder. - The debt sustainability requirement can be met if the Fund has adequate assurances that the member is on track to restore sustainability, e.g., through a debt restructuring; assurances from creditors remain critical and the standards in Box AI.1 continue to apply. - Very rare precedents: - Iraq 2004 and Lebanon 2006: the Fund found adequate assurances through consultations with the majority of the member’s official bilateral creditors, where creditors (i) recognized the Fund's preferred creditor status for the emergency purchase, (ii) were willing to make their best efforts to provide debt relief on appropriate terms to ensure timely repayment to the Fund, and (iii) confirmed a deferral would be in place for obligations falling due to them during the emergency assistance period. ### Market access - Market access is distinct from debt sustainability: - Lack of debt sustainability normally triggers loss of market access. - Temporary loss of market access does not necessarily imply debt is unsustainable. - To achieve medium-term external viability, a member needs to restore investor confidence and re-establish capacity to regain access to international private capital. - Under the Fund’s exceptional access policy, the member must have prospects of (re)gaining access to international private capital markets within the timeframe Fund resources are outstanding. - In practice, market access assessment depends on the ability to tap international capital markets on a sustained basis through contracting of loans and/or issuance of securities across a range of maturities, regardless of currency denomination, and at reasonable interest rates. ### Financing Assurances Policy - Purpose: - Ensures consistency of Fund financing with the member's return to medium-term external viability and gives the Fund assurances it can be repaid within the medium term. - Historical context: - Developed during the 1980s debt crisis when commercial banks limited exposure to heavily indebted countries. - Initially required other creditors to furnish specific assurances as a prior condition to Fund assistance. - In the late 1980s, the policy was modified to allow approval of an arrangement before banks provided assurances when prompt Fund support was essential, negotiations had begun, and a financing package consistent with external viability was expected within a reasonable period of time. - In practice, a “critical mass” of banks was often sought—generally over 90 percent—though this was a case-by-case judgment. - Key requirements under the policy: - Program financing must be adequate to fill financing gaps: - (i) during the program period to ensure viability, and - (ii) to ensure the member can repay the Fund during the post-program period. - “Fully financed” in practice requires: - (i) "firm commitments" of financing in place for the first 12 months of the arrangement, and - (ii) "good prospects" that there will be adequate financing for the remaining program period beyond the first 12 months. - During program reviews, assurances on full financing of successive 12-month periods beyond the initial 12 months must be ascertained; specifically, the "good prospects" must become “firm commitments” or actual financing. - For the post-program period, staff must assess whether prospective policies deliver projected post-program performance that adequately safeguards repayments to the Fund consistent with a sustainable debt path during the program period. - Good prospects of regaining market access and debt sustainability are germane to observance of the financing assurances policy. - Applicability and exceptions: - The financing assurances policy applies to all Fund-supported programs, including those supported by Policy Coordination Instruments (PCI) and Policy Support Instruments (PSI). - For stand-alone emergency financing under the Rapid Credit Facility and Rapid Financing Instrument, the requirements for (i) are set aside given there is no underlying economic program. - The policy does not apply to support under the Flexible Credit Line and the Short-term Liquidity Line. - Under ECF arrangements under the PRGT, the protracted BOP need does not need to be resolved within the program period; however, any post-program financing gaps must still be such that the Fund is assured the member can repay the Fund and that gaps are consistent with a sustainable debt path. - Debt restructuring and allocation of financing: - The financing assurances policy does not prescribe allocation of financing between official and private creditors. - If the financing gap cannot be filled with new financing, the policy encourages restructuring of creditors' claims on terms compatible with balance of payments viability. - Assurances about debt sustainability and financing in these cases are obtained as laid out under the debt sustainability section (Box AI.1). *Source: ppea2022023 - 4. If debt is unsustainable (i.e., the Fund determines that debt sustainability cannot be — IMF PDF chapter.* ### 10. The Fund always encourages members to stay current on their obligations to the ### ppea2022023 - 10. The Fund always encourages members to stay current on their obligations to the ### Overview - The Fund encourages members to stay current on their obligations to the extent possible, but recognizes that financing gaps are sometimes filled through the accumulation of arrears. - The arrears policies set forth a framework under which the Fund can provide financial assistance to members despite such arrears, with the ultimate goal that the member will soon regularize relations with creditors, resolve arrears, ensure medium-term viability, and secure financing assurance for the post-program period. ### Arrears policies: scope and history - Since 1970, the Fund has had a policy of non-toleration of arrears (NTP), unless a specific policy applies that enables the Fund to lend into sovereign arrears. - Specific arrears policies: - Lending into sovereign Arrears (LIA) to private creditors: adopted in 1989 and last reviewed in 2002. - Lending into Arrears to Official Bilateral Creditors (LIOA): adopted in 2015. - Application of the arrears policies depends on: - whether a sovereign debtor member is in arrears to private sector, official bilateral, or multilateral creditors, and - whether Private Sector Involvement (PSI) and/or Official Sector Involvement (OSI) is needed. - The arrears policies do not apply to claims in dispute. ### Disputed Claims Doctrine - The Fund’s arrears policies do not apply to arrears on claims in dispute. - Where the Fund accepts a member's representation that the validity or amount of a debt claim is in dispute, such disputed claim does not give rise to arrears for all Fund purposes. - Disputed claims are taken into account as a contingent claim for purposes of determining whether adequate assurances exist for financing of a Fund-supported program and the DSA. - The disputed claims doctrine is grounded in the Fund’s duty of neutrality; the Fund must maintain a neutral position with respect to claims whose underlying validity or amounts are in dispute between members. - The Fund reserves the right to challenge a member’s representation of a dispute, but has given the member the benefit of any reasonable doubt; the Executive Board makes the final determination of claims in dispute. - Where only a portion of a claim is in dispute, only the difference falls under the disputed claims doctrine; the portion recognized by both parties is treated as an undisputed claim. ### Financing assurances reviews when arrears exist - For both the LIA and LIOA policy, as long as there are external arrears to creditors (either private or official bilateral), the Fund needs to conduct a financing assurances review at: - the approval of an arrangement or emergency financing, or - at each program review. - Purpose of financing assurances reviews: - Assess progress in restoring debt sustainability where the member has incurred external arrears. - Determine whether sufficient safeguards exist for further provision of Fund financing in the member’s circumstances. - Determine whether the member’s adjustment efforts are undermined by developments in debtor-creditor relationships. - Assess whether arrears are temporary and do not undermine medium-term external viability and capacity to repay the Fund. - The recommendation to complete the financing assurances review requires staff’s judgment that, in light of progress made in restructuring the member’s debt, the Fund should continue to provide the member with access to Fund resources. - The arrears policies apply to all Fund financing instruments and, by analogy, to Policy Support Instruments and Policy Coordination Instruments; they do not apply to SMPs. The arrears policies apply with some flexibility to financing under the RCF and RFI. ### Interaction with financing assurances and debt sustainability analysis (DSA) - Financing assurances: financing gaps may be filled through the accumulation of arrears so long as the relevant arrears policy is satisfied. - Debt sustainability: application of the arrears policies is underpinned by criteria designed to restore debt sustainability and may provide sufficient safeguards to negate the need for further assurances on debt sustainability. - Application of LIA or LIOA criteria, including provision of consent by the creditor Executive Director, will generally act as a safeguard that a restructuring deal will be forthcoming to restore debt sustainability. - A member’s debt restructuring offer must be consistent with program parameters. - Financing assurances reviews under LIA/LIOA allow reassessment at each program review of debtor-creditor negotiations and likelihood of a restructuring deal. - Where significant uncertainties exist that creditors will restructure their claims (e.g., debt is collateralized and/or high legal risk that creditor action could severely undermine program implementation) and such restructuring is critical to debt sustainability and medium-term viability, the Fund may need to seek further assurances from the creditor(s) as laid out in Box AI.1 before approval or completion of a review. ### Evolution of the Fund’s LIA policy (selected milestones) - Pre-1989: - Prior to 1989, the Fund had a non-toleration of arrears policy with respect to all creditors (private, official bilateral and multilateral). - Originally limited to arrears on payments from residents to non-residents on current (and not capital) transactions and to arrears arising from exchange restrictions, not to those arising from government default on its own external obligations. - In 1980 the policy was extended to include sovereign arrears arising from government default. - In 1982 the Fund developed a policy on financing assurances to complement the arrears policy, requiring other creditors to provide assurances as a prior condition to Fund financing. - 1989 modification and introduction of LIA: - LIA introduced as a limited exception to non-toleration of arrears to private creditors. - Rationale: by the late 1980s financial institutions were increasingly reluctant to provide financing assurances, and problems reflected sustainability rather than liquidity for many debtors. - LIA required that approval of a Fund arrangement be granted only where: - (i) prompt Fund support was judged essential for successful implementation of the member’s adjustment program; - (ii) negotiations between the member and its creditors had begun; and - (iii) it could be expected that a financing package consistent with external viability would be agreed upon within a reasonable amount of time. - 1998 modification: - Scope of debt to which the LIA policy could be applied was broadened to encompass international sovereign bonds and other debt to private creditors (previously limited to external commercial banks). - Fund financing could be provided on a case-by-case basis only where: - (i) prompt Fund support was considered essential for the successful implementation of the member’s adjustment program; - (ii) negotiations between the member and its private creditors had begun; and - (iii) there were firm indications that the sovereign borrower and its private creditors would negotiate in good faith on a debt restructuring plan. - 1999 modification: - Recognized reasons private creditors might delay negotiations (creditor heterogeneity, large element with no ongoing commercial interest, magnitude of financing available to emerging market borrowers). - Replaced requirements (ii) and (iii) of the 1998 policy with an assessment of whether the member was making good faith efforts to reach a collaborative agreement with its private creditors. - Retained the requirement that prompt Fund support be critical to the authorities’ adjustment program. *Source: ppea2022023 - 10. The Fund always encourages members to stay current on their obligations to the* ### 8. In 2002, the Board reviewed the application of the good faith criterion and provided ### ppea2022023 - 8. In 2002, the Board reviewed the application of the good faith criterion and provided ### 2002 Board review and procedural clarity - The Board (2002) reviewed application of the good faith criterion and provided procedural clarity guiding dialogue between debtors and their external private creditors, including where representative creditor committees had been formed. - All purchases made while a member has outstanding arrears to private creditors remain subject to financing assurances reviews to enable monitoring of debtor–creditor relations. ### Directors’ conditionality for Fund lending into sovereign arrears to private creditors - Directors agreed Fund lending into sovereign arrears to private creditors (including bondholders and commercial banks) should be on a case-by-case basis and only where: - (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and - (ii) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors. ### Principles to guide debtor–creditor dialogue (balance of clarity and flexibility) - First: When a member concludes a debt restructuring is necessary, it should engage in an early dialogue with its creditors, continuing until restructuring is complete. - Second: The member should share relevant, non-confidential information with all creditors on a timely basis, which would normally include: - an explanation of the economic problems and financial circumstances that justify a debt restructuring; - a briefing on the broad outlines of a viable economic program to address the underlying problems and its implications on the broad financial parameters shaping the envelope of resources available for restructured claims; and - the provision of a comprehensive picture of the proposed treatment of all claims on the sovereign, including those of official bilateral creditors, and the elaboration of the basis on which the debt restructuring would restore medium-term sustainability, bearing in mind that not all categories of claims may need to be restructured. - Third: The member should provide creditors with an early opportunity to give input on the design of restructuring strategies and the design of individual instruments. ### Expectations on negotiating frameworks and creditor committees - Members in arrears are expected to initiate a dialogue with creditors prior to agreeing on a Fund-supported program consistent with the principles above. - Where complexity and timely formation of a representative creditor committee warrant an organized negotiating framework, the member is expected to enter into good faith negotiations with that committee, while considering unique case characteristics. Such a formal framework would include, inter alia: - sharing of confidential information (subject to adequate safeguards) needed for creditors to make informed decisions on restructuring terms; and - agreement to a standstill on litigation during the restructuring process by creditors represented in the committee. - In less complex cases or where representative committees are not organized within a reasonable period, members are expected to engage creditors through a less structured dialogue. ### Annex IV — Resolution of official bilateral arrears (data and key findings) - Data collected to inform review of the NTP and LIOA policies covered the stock and creditor composition of official bilateral arrears in Fund arrangements between 2016–20, focusing on the stock immediately prior to each arrangement and at the end of 2020. Main sources: staff reports, supplemented by Fund country teams. - Findings: - A majority of debtor countries made some progress towards resolving their official bilateral arrears, but only a few resolved them fully. - There were only four cases in which the arrears to which the LIOA/NTP applied were fully resolved (in two of these arrears arose again before a subsequent Fund arrangement). - Eleven countries resolved arrears with some of their external bilateral creditors, often resulting in a substantial reduction in the stock of official bilateral arrears. - Eight debtor countries did not resolve the arrears with any of their official bilateral creditors (in some of these there are ongoing negotiations). In this last group the arrears were generally OSI-related (often relating to the HIPC Initiative), and in most cases significantly predated the 2015 reforms. - Table AIV.1 covers the evolution of arrears to official bilateral creditors in Fund arrangements from 2016–20 and provides case-level initial arrears (US$ mn) and end-2020 arrears (US$ mn) by creditor composition for each debtor listed. - Notes and data caveats: - Arrears figures are based on reporting by debtor countries, and generally do not include any accrual of additional interest. - For Fund members with multiple Fund arrangements with official bilateral arrears during this period, the data on the initial stock of arrears was collected for their first Fund arrangement after 2015. - Jordan is not included, since the authorities represented a dispute as to the validity of the official arrears reported during its 2016 EFF arrangement. - Country-specific footnotes in Table AIV.1 specify particular circumstances for Gabon, Suriname, Comoros, Djibouti, The Gambia, Serbia, and Afghanistan. *International Monetary Fund — Reviews of the Fund’s Sovereign Arrears Policies and Perimeter (excerpt).* ### 5. With respect to lending into sovereign arrears to private creditors, [Directors] agreed that ### 5. With respect to lending into sovereign arrears to private creditors, [Directors] agreed that ### Clarity and flexibility in applying the “good faith” criterion - Greater clarity about the good faith dialogue between a debtor and its creditors during the restructuring process and enhanced debt transparency could help provide better guidance about the application of the Fund’s LIA policy and, more generally, promote a better framework for the engagement of debtors and creditors in the restructuring of sovereign debt. - Greater clarity concerning the framework for possible debt restructuring would strengthen the capacity of investors to assess recovery values under alternative scenarios, thereby facilitating the pricing of risk and improving the functioning of the capital markets. - [Directors] stressed the need for continued flexibility in applying the “good faith” criterion to accommodate the characteristics of each specific case to avoid putting debtors at a disadvantage in the negotiations with creditors; and to avoid prolonged negotiations that could hamper the ability of the Fund to provide timely assistance. - Any clarification of the “good faith” criterion should serve primarily to support the difficult judgments that will continue to have to be made in each case, and should be made operational in a manner that does not impair market discipline. ### Principles to guide dialogue between debtors and private external creditors (paragraph 6) - First, when a member has reached a judgment that a restructuring of its debt is necessary, it should engage in an early dialogue with its creditors, which should continue until the restructuring is complete. - Second, the member should share relevant information with all creditors on a timely basis, which would normally include: - an explanation of the economic problems and financial circumstances that justify a debt restructuring; - a briefing on the broad outlines of a viable economic program to address the underlying problems and its implications on the broad financial parameters shaping the envelope of resources available for restructured claims; and - the provision of a comprehensive picture of the outstanding debt stock and its terms, and the proposed treatment of all claims on the sovereign, including those of official bilateral creditors; the perimeter of claims subject to the envisaged debt restructuring; and the elaboration of the basis on which the debt restructuring would restore medium-term debt sustainability, bearing in mind that not all categories of claims may need to be restructured. - Third, the member should provide creditors with an early opportunity to give input on the design of restructuring strategies and the design of individual instruments. - Fourth, any terms offered to the creditors by the member should be consistent with the parameters of the Fund-supported program. ### Expectations and judgments in arrears cases (paragraphs 7–14) - Although the form of the dialogue is left to the debtor and its creditors, a member in arrears would be expected to initiate a dialogue with its creditors consistent with the principles above. - Where creditors form a representative committee on a timely basis, there would be an expectation that the member would enter into good faith negotiations with this committee, though the unique characteristics of each case would also be considered. - The balance between promoting effective communication and retaining flexibility to address diverse member circumstances is crucial. - Judgments will continue to be required on issues such as the representativeness of creditor committees and whether a reasonable period has elapsed to allow their formation; absent such committees, the member is expected to engage creditors through a less structured dialogue. - If negotiations become stalled because creditors request terms inconsistent with the adjustment and financing parameters under a Fund-supported program, the Fund should retain flexibility to continue to support members notwithstanding lack of progress with creditors. - Where a debtor enters into good faith discussions with creditors prior to Fund arrangement approval, creditors may express views on program dimensions, but decisions on the macroeconomic framework and financing plan remain in the sole purview of the Fund. - Emergency situations (e.g., aftermath of a natural disaster) may justify Fund financing under the Rapid Credit Facility (RCF) or the Rapid Financing Instrument (RFI) despite arrears to private creditors; such support is expected to help advance normalization with private creditors and subsequent Fund arrangements would again be subject to the LIA policy. - All purchases/disbursements made while a member has outstanding arrears to private creditors will continue to be subject to financing reviews to monitor debtor-creditor relations and inform the Board at an early stage. - The policy outlined above supersedes all previous policies regarding lending into arrears to private creditors. ### Codifying practice in preemptive restructuring cases (paragraph 15) - Current practice in preemptive restructuring cases remains appropriate: where a contribution from external private creditors in the form of a debt restructuring is needed to restore debt sustainability, the restructuring should ideally be undertaken before approval of the Fund arrangement. - There may be circumstances warranting more flexibility so that the debt operation conclusion is contemplated later, normally by the first review under the arrangement. - In such cases, the Fund may provide financing only if it has adequate assurances that restructuring will be successful, judged by whether a credible process is underway that will result in sufficient creditor participation to restore debt sustainability and close financing gaps within program parameters, taking into account official sector commitments. - Relevant considerations informing such judgment may include engagement of legal and financial advisors by the member, launching of consultations with creditors, and the design of the debt restructuring strategy, including terms of new instruments and use of inducements for creditor participation. - The member is expected to share relevant information as defined under the LIA policy with all private creditors on a timely basis. ### Lending Into Arrears to Official Bilateral Creditors (LIOA) policy (paragraphs 16–22) - [Directors] agreed the Fund’s non-toleration of arrears policy in non-(Official Sector Involvement) OSI cases and the policy on lending into sovereign arrears to official bilateral creditors in OSI cases continues to be appropriate and no amendments are needed. - New Fund-supported programs should continue to incorporate the assumption that old OSI-related claims would be restructured in line with the terms stipulated in the original Fund-supported program. - Application of the non-toleration of arrears policy to multilaterals has worked well but needs updating to clarify how it applies to new International Financial Institutions (IFIs) and to ensure special treatment of multilateral creditors is not diluted. - IFIs are defined as international financial institutions with at least two sovereign members (and no non-sovereign member). - Staff’s proposal endorsed along three main lines: - First, Fund financing in the face of arrears to the World Bank Group should continue to require an Agreed Plan between the debtor and the World Bank to clear the arrears over a defined period. Fund financing in the face of arrears to any other IFI should continue to require that a Credible Plan be in place in cases where a contribution from the official sector is not required to restore debt sustainability (non-OSI cases). In this context, a Credible Plan is a plan that is credible to the Fund, and the creditor’s concurrence is not required. - Second, in cases where a contribution from the official sector is required to restore debt sustainability (OSI cases): - The Fund should only provide financing when a Credible Plan is in place in cases in which arrears are owed to (i) regional financing arrangements and reserve currency union central banks that form part of the global financial safety net or IFIs with global membership as defined in the staff paper, or (ii) IFIs being excluded from the scope of debt restructuring by official bilateral creditors through a creditor committee based on a representative standing forum recognized under the LIOA policy—either in the case at hand or as expected based on previous cases if no decision has been made in the current case. - [Alternative formulation in staff paper: Where the member is in arrears to an IFI, the Fund should judge whether a Credible Plan to resolve such arrears is required as a condition for lending. Factors informing the Fund’s judgment will include: (i) global, rather than regional, membership of the institution; (ii) whether the institution is a regional financing arrangement or a reserve currency union central bank that forms part of the global financial safety net; (iii) the Paris Club’s treatment of the institution, (iv) participation of the institution in the Heavily Indebted Poor Countries (HIPC) Initiative, and (v) whether the institution is being excluded from the scope of debt restructuring by official bilateral creditors through a creditor committee based on a representative standing forum recognized under the LIOA policy in the case at hand.] - When arrears are owed to an IFI that does not fall under the previous bullet, [Directors] agreed the Fund’s policy on lending into official bilateral arrears should be expanded to apply to these cases mutatis mutandis, with flexibility in extraordinary circumstances for emergency financing cases consistent with the Fund’s policy on lending into official bilateral creditors arrears. - In such latter cases, the Fund would consider lending into arrears owed to an IFI creditor only where all the following criteria are satisfied: - Prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies; - The debtor is making good faith efforts to reach agreement with the IFI creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and - The decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. - In assessing good faith where arrears are owed to an IFI, the Fund will consider whether the debtor has approached the IFI bilaterally; has offered substantive dialogue and a collaborative process; has provided relevant information on a timely basis consistent with the Fund’s confidentiality policy; and has offered terms consistent with program parameters. Requests from an IFI for financing contributions exceeding program requirements would generally not indicate good faith. - The Fund will consider the signal any decision to lend into IFI arrears would send to IFI creditors or official creditors more generally when assessing undue negative effects on future mobilization of official financing. - An IFI creditor may consent to Fund financing notwithstanding arrears owed to it, conveyed either through an Executive Director designated by the IFI or an authorized executive of the IFI to the Managing Director; in such cases the Executive Board would not need to judge the three criteria above, though the Fund would continue to encourage an agreement during the program. - While IFI arrears remain outstanding, purchases or disbursements will be subject to a financing assurances review where the Executive Board will verify that all three criteria are satisfied for continued use of Fund resources. ### Perimeter and classification of claims (paragraphs 23–26) - For determining the application of the Fund’s arrears, financing assurances and debt sustainability policies, [Directors] endorsed the approach proposed by staff. - Direct Bilateral Claims will continue to be defined as those claims that are (a) held by a government, or an agency acting on behalf of a government; and (b) originate from an underlying transaction where the creditor government, or an agency acting on behalf of the government, provided or guaranteed financing to the debtor member. - In operationalizing this definition, [Directors] supported using the creditor member’s budgetary process to determine which entities form part of the creditor government. For entities that fall outside the government, a case-by-case analysis, taking into account the totality of the circumstances, would continue to be required to determine whether the entity is “acting on behalf of the government.” - Secondary market purchases of claims by official bilateral creditors would not qualify as Direct Bilateral Claims, as they would not directly extend financing to the debtor member. - Two endorsed amendments to classification of official claims: - To the extent that the IFI purchases securities in the secondary market as part of the global financial safety net, such claims can be treated as claims subject to the Fund’s arrears policies as applicable to IFIs; the Fund would rely on the IFI’s own representation in this regard. - Any Direct Bilateral Claims or claims held by IFIs that are contractually part of a pooled voting mechanism with private creditors shall be subject to the LIA policy. ### Effectiveness and reviews (paragraphs 27–28) - The above amendments and new policies will enter into effect immediately and will apply to all future purchases and disbursements (including under existing arrangements), with respect to existing and future arrears. - [Directors] agreed that the Fund’s arrears policies should be reviewed on an as needed basis. *Source: ppea2022023 - Extract of IMF staff/Directors discussion on lending into arrears and related arrears policies* ### 5. Against this backdrop, With respect to lending into sovereign arrears to private creditors, ### ppea2022023 - 5. Against this backdrop, With respect to lending into sovereign arrears to private creditors, ### Principles guiding debtor–creditor dialogue and “good faith” (paras. 5–6) - Greater clarity about the good faith dialogue between a debtor and its creditors during the restructuring process and enhanced debt transparency could help provide better guidance about the application of the lending into sovereign arrears policy LIA policy and, more generally, promote a better framework for the engagement of debtors and creditors in the restructuring of sovereign debt. - Greater clarity concerning the framework for possible debt restructuring would strengthen the capacity of investors to assess recovery values under alternative scenarios, thereby facilitating the pricing of risk and improving the functioning of the capital markets. - Directors stressed the need for continued flexibility in applying the “good faith” criterion to: - accommodate the characteristics of each specific case; - avoid putting debtors at a disadvantage in the negotiations with creditors; and - avoid prolonged negotiations that could hamper the ability of the Fund to provide timely assistance. - Any clarification of the “good faith” criterion should serve primarily to support the difficult judgments that will continue to have to be made in each case, and should be made operational in a manner that does not impair market discipline. - Directors considered the following principles to strike an appropriate balance between clarity and flexibility: - First: when a member has reached a judgment that a restructuring of its debt is necessary, it should engage in an early dialogue with its creditors, which should continue until the restructuring is complete. - Second: the member should share relevant, non-confidential information with all creditors on a timely basis, which would normally include: - an explanation of the economic problems and financial circumstances that justify a debt restructuring; - a briefing on the broad outlines of a viable economic program to address the underlying problems and its implications on the broad financial parameters shaping the envelope of resources available for restructured claims; and - the provision of a comprehensive picture of the outstanding debt stock and its terms, and the proposed treatment of all claims on the sovereign, including those of official bilateral creditors; the perimeter of claims subject to the envisaged debt restructuring; and the elaboration of the basis on which the debt restructuring would restore medium-term debt sustainability, bearing in mind that not all categories of claims may need to be restructured. - Third: the member should provide creditors with an early opportunity to give input on the design of restructuring strategies and the design of individual instruments. - Fourth: any terms offered to the creditors by the member should be consistent with the parameters of the Fund-supported program. - Most Directors considered that the third approach suggested in the staff paper for refining the good faith criterion provides an appropriate basis for implementation while retaining sufficient flexibility. ### Formal negotiation framework and representative committees (paras. 7–11) - Under the preferred approach, a member in arrears would be expected to initiate a dialogue with its creditors consistent with the principles above. - Where creditors form a representative committee on a timely basis, the member would be expected to enter into good faith negotiations with this committee, taking into account the unique characteristics of each case. - The formal negotiating framework would include, inter alia: - sharing of confidential information needed to enable creditors to make informed decisions on the terms of a restructuring (subject to adequate safeguards), and - agreement to a standstill on litigation during the restructuring process by creditors represented in the committee. - Directors emphasized balancing effective communication with retaining flexibility for diverse country circumstances. - Judgments about good faith efforts will continue to consider: - the complexity of the restructuring case; - the extent to which creditor committees are sufficiently representative; and - whether a reasonable period has elapsed to allow for the formation of a representative committee. - In less complex cases, or where creditors have not organized a representative committee within a reasonable period, the member would be expected to engage creditors through a less structured dialogue. - If negotiations become stalled because creditors request terms inconsistent with the adjustment and financing parameters established under a Fund-supported program, the Fund should retain flexibility to continue to support members notwithstanding lack of progress with creditors. - Directors recognized that creditors may express views on program dimensions prior to Fund arrangement approval, but emphasized that decisions on the macroeconomic framework and design of the financing plan or the adjustment program remain in the sole purview of the Fund. ### Emergency financing and financing reviews (paras. 12–13) - In emergency situations (e.g., aftermath of a natural disaster) where insufficient time exists for good faith creditor negotiations, the Fund may provide financing under the Rapid Credit Facility (RCF) or the Rapid Financing Instrument (RFI) despite arrears to private creditors. - It would be expected that Fund support in such cases helps advance normalization of relations with private creditors and the resolution of arrears; subsequent Fund arrangements would again be subject to the LIA policy. - All purchases/disbursements made while a member has outstanding arrears to private creditors will continue to be subject to financing reviews to bring developments at an early stage to the attention of the Executive Board and to assess whether the member’s adjustment efforts are undermined by creditor–debtor relations. - Directors underscored the importance of strengthening debtor–creditor dialogue in good times. ### Policy status and preemptive restructuring cases (paras. 14–15) - The policy outlined supersedes all previous policies regarding lending into arrears to private creditors. - Current practice in preemptive restructuring cases remains appropriate: - If a contribution from external private creditors is needed to restore debt sustainability, restructuring should ideally be undertaken before Fund arrangement approval. - More flexibility may be warranted so that conclusion of the debt operation can be contemplated by the first review under the arrangement. - The Fund may provide financing only if it has adequate assurances that the restructuring will be successful, judged by a credible process likely to result in sufficient creditor participation to restore debt sustainability within the program’s macroeconomic parameters, taking into account official sector commitments. - Relevant considerations to inform such judgment may include engagement of legal and financial advisors, launching of consultations with creditors, and design of the debt restructuring strategy, including new instrument terms and use of inducements. - The member would be expected to share relevant information as defined under the LIA policy with all private creditors on a timely basis. ### Lending Into Arrears to Official Bilateral Creditors (LIOA) and IFIs (paras. 16–22) - Directors agreed the Fund’s non-toleration of arrears policy in non-Official Sector Involvement (OSI) cases and the policy on lending into sovereign arrears to official bilateral creditors in OSI cases continues to be appropriate and no amendments are needed. - New Fund-supported programs should continue to incorporate the assumption that old OSI-related claims would be restructured in line with the terms stipulated in the original Fund-supported program. - Application of the non-toleration of arrears policy with respect to multilaterals has worked well but needs updating to clarify application to new International Financial Institutions (IFIs) and to ensure special treatment for multilateral creditors is not diluted. IFIs are defined as international financial institutions with at least two sovereign members (and no non-sovereign member). - Directors endorsed staff’s proposal along three main lines: - First: Fund financing in the face of arrears to the World Bank Group should continue to require an Agreed Plan between the debtor and the World Bank to clear the arrears over a defined period. Fund financing in the face of arrears to any other IFI should continue to require that a Credible Plan be in place in cases where a contribution from the official sector is not required to restore debt sustainability (non-OSI cases). A Credible Plan is a plan that is credible to the Fund, and the creditor’s concurrence is not required. - Second: in OSI cases where official sector contribution is required: - The Fund should only provide financing when a Credible Plan is in place in cases in which arrears are owed to (i) regional financing arrangements and reserve currency union central banks that form part of the global financial safety net or IFIs with global membership as defined in the staff paper, or (ii) IFIs being excluded from the scope of debt restructuring by official bilateral creditors through a creditor committee based on a representative standing forum recognized under the LIOA policy—either in the case at hand or as expected based on previous cases if no decision has been made in the current case. - Where the member is in arrears to an IFI, the Fund should judge whether a Credible Plan to resolve such arrears is required as a condition for lending. Factors informing the Fund’s judgment will include: (i) global, rather than regional, membership of the institution; (ii) whether the institution is a regional financing arrangement or a reserve currency union central bank that forms part of the global financial safety net; (iii) the Paris Club’s treatment of the institution; (iv) participation of the institution in the Heavily Indebted Poor Countries (HIPC) Initiative; and (v) whether the institution is being excluded from the scope of debt restructuring by official bilateral creditors through a creditor committee based on a representative standing forum recognized under the LIOA policy in the case at hand. - When arrears are owed to an IFI that does not fall under the previous bullet, the Fund’s policy on lending into official bilateral arrears should be expanded to apply mutatis mutandis, with flexibility in extraordinary circumstances for emergency financing consistent with the Fund’s policy on lending into official bilateral creditors arrears. - In these latter cases, the Fund would consider lending into arrears owed to an IFI only where all the following criteria are satisfied: - Prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies; - The debtor is making good faith efforts to reach agreement with the IFI creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and - The decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. - In assessing a debtor’s good faith with an IFI creditor, the Fund will consider, inter alia, whether the debtor has approached the IFI creditor bilaterally, offered to engage in substantive dialogue, sought a collaborative process, provided relevant information on a timely basis consistent with the Fund’s confidentiality policy, and offered terms consistent with Fund-supported program parameters. Requests for IFI terms that would result in financing contributions exceeding program requirements would generally not indicate good faith. - In assessing undue negative effects on the Fund’s ability to mobilize official financing packages, the Fund will consider the signal such a decision would send to IFI creditors and official creditors more generally. - An IFI creditor may consent to Fund financing notwithstanding arrears owed to it; such consent can be conveyed by an Executive Director designated by the IFI or an authorized executive of the IFI to the Managing Director. In such cases, the Executive Board would not need to judge the three criteria above. - So long as arrears to IFI creditors remain outstanding, purchases or disbursements will be subject to a financing assurances review where the Executive Board will verify that all three criteria are satisfied and the policy continues to be met for further use of the Fund’s resources. ### Perimeter and classification of claims (paras. 23–26) - Directors endorsed the staff approach for determining application of the Fund’s arrears, financing assurances and debt sustainability policies. - Direct Bilateral Claims continue to be defined as claims that are: - (a) held by a government, or an agency acting on behalf of a government; and - (b) originate from an underlying transaction where the creditor government, or an agency acting on behalf of the government, provided or guaranteed financing to the debtor member. - In operationalizing this definition, Directors supported using the creditor member’s budgetary process to determine which entities form part of the creditor government. For entities outside the government, a case-by-case analysis, taking into account the totality of the circumstances, would be required to determine whether the entity is “acting on behalf of the government.” - Secondary market purchases of claims by official bilateral creditors would not qualify as Direct Bilateral Claims, as they would not directly extend financing to the debtor member. - Two amendments to classification of official claims were endorsed: - First: to the extent an IFI purchases securities in the secondary market as part of the global financial safety net, such claims can be treated as claims subject to the Fund’s arrears policies as applicable to IFIs, relying on the IFI’s own representation. - Second: any Direct Bilateral Claims or claims held by IFIs that are contractually part of a pooled voting mechanism with private creditors shall be subject to the LIA policy. *International Monetary Fund — excerpt from chapter on Reviews of the Fund’s Sovereign Arrears Policies and Perimeter* ### 27. The above amendments and new policies will enter into effect immediately and will apply to ### ppea2022023 - 27. The above amendments and new policies will enter into effect immediately and will apply to ### Introduction and Scope - The document attaches Annexes 1–3 with clean and redlined versions of the consolidated Executive Board understandings of the Fund’s arrears policies and perimeter. - Updates reflect the May 4, 2022 Executive Board meeting and include the full Lending Into Official Arrears policy previously excluded. - Annex 2 shows differences from Supplement 1; Annex 3 shows differences between the proposals and Fund policies in effect before the May 4, 2022 Executive Board meeting. - Date on contents page: May 12, 2022. - Staff prepared the supplement with an inter-departmental team led by Wolfgang Bergthaler (LEG). ### Reviews of the Arrears Policies — Key Findings - Directors welcomed a comprehensive review of: - The Fund’s policy on lending into arrears to private creditors. - The Fund’s policy on lending into sovereign arrears to official bilateral creditors. - The Fund’s non-toleration of sovereign arrears policy to official bilateral and multilateral creditors. - Directors agreed that overall the Fund’s arrears policies "have worked well" in enabling Fund financing, but noted that practice in sovereign debt restructuring and the creditor landscape have evolved "over the last 20 years" and that updates are warranted. - All purchases and disbursements made while a member has outstanding arrears to private creditors will continue to be subject to financing reviews. ### Lending Into Arrears (LIA) Policy — Principles and Conditions - Purpose: enable Fund support before agreement with private creditors where essential for program success. - LIA to private creditors should continue on a case-by-case basis only where: - (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and - (ii) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors. - LIA into non-sovereign arrears from exchange controls remains case-by-case only where: - (i) prompt Fund support is essential; and - (ii) the member is pursuing appropriate policies, making good faith efforts to facilitate collaborative agreements, and a good prospect exists for removal of exchange controls. - Directors agreed greater clarity on the “good faith” dialogue and enhanced debt transparency would help application of LIA, while stressing need for continued flexibility so as not to disadvantage debtors or unduly delay assistance. - Principles to guide debtor–creditor dialogue: - Early and continuous engagement once a restructuring judgment is reached. - Timely sharing of relevant information with all creditors, generally aligned with Debt Limits Policy requirements, normally including: - an explanation of economic problems and financial circumstances justifying restructuring; - a briefing on broad outlines of a viable economic program and implications for financial envelope available for restructured claims; - comprehensive picture of outstanding debt stock and terms, proposed treatment of all claims (including official bilateral creditors), perimeter of claims subject to restructuring, and basis on which restructuring restores medium-term debt sustainability. - Early opportunity for creditors to provide input on restructuring strategy and instrument design. - Terms offered should be consistent with Fund-supported program parameters. - Flexibility: form of dialogue is generally left to debtor and creditors; expectation to engage representative creditor committees where formed. - Judgment areas in assessing good faith include representativeness of creditor committees and reasonable time elapsed for committee formation. - Stalled negotiations where creditors request terms inconsistent with program parameters should not automatically prevent continued Fund support. - Emergency circumstances (e.g., natural disaster): Fund may provide financing under Rapid Credit Facility (RCF) or Rapid Financing Instrument (RFI) despite arrears to private creditors, but such support should advance normalization with private creditors and resolution of arrears; subsequent arrangements remain subject to LIA policy. - The policy supersedes all previous policies regarding lending into arrears to private creditors. ### Codifying Existing Practice in Preemptive Restructuring Cases - Practice remains that if a contribution from external private creditors is needed to restore sustainability, restructuring should ideally be completed before Fund arrangement approval. - Flexibility allowed where conclusion of debt operation is contemplated later, normally by the first review under the arrangement. - Fund may provide financing in such cases only with adequate assurances that restructuring will be successful—judgment that a credible restructuring process is underway and will yield sufficient creditor participation to restore sustainability and close financing gaps within program parameters, considering official sector commitments. - Relevant considerations for assurance include engagement of legal/financial advisors, launching creditor consultations, design of debt restructuring strategy, terms of new instruments, and use of inducements for participation. - Expectation that member shares relevant information with all private creditors as defined under the LIA policy. ### Lending Into Arrears to Official Bilateral Creditors (LIOA) Policy — Framework and Criteria - Directors broadly agreed that the Fund’s non-toleration of arrears policy in non-OSI cases and the policy on lending into sovereign arrears to official bilateral creditors in OSI cases remain appropriate with no amendments needed. - More experience with the Common Framework (CF) is needed; staff will monitor CF’s evolution and report back. - LIOA policy summary: - If an agreement through the Paris Club is "adequately representative," arrears are considered eliminated for both participating and non-participating creditors when financing assurances are received from the Paris Club in anticipation of an Agreed Minute. - If an adequately representative Paris Club agreement has not been reached, Fund would consider lending into arrears owed to an official bilateral creditor only where all the following criteria are satisfied: - Prompt Fund support is essential, and the member is pursuing appropriate policies; - The debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with Fund-supported program parameters—i.e., absence of agreement is due to creditor unwillingness to provide such contribution; - The decision to provide financing despite arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. - Considerations to guide Board judgment: - An agreement is "adequately representative" when it provides a majority of the total financing contributions required from official bilateral creditors over the program period. "Contribution" is limited to debt relief and new financing (loans, bond financing, guarantees, and grants). - In assessing debtor good faith, Fund will consider whether the debtor has approached the creditor bilaterally or via relevant creditor groupings; offered substantive dialogue; provided relevant information timely consistent with Fund confidentiality; and offered terms consistent with program parameters. Requests for contributions exceeding program requirements generally do not indicate good faith. Assessment also considers whether a creditor is being asked for a disproportionate contribution relative to peers. - In assessing undue negative effect on mobilizing official financing, the Fund will consider the signal to official bilateral creditors as a group. Criterion would normally not be satisfied where the creditor or group that has not reached agreement accounts for an adequately representative (i.e., majority) share of total required official bilateral contributions. The creditor’s track record in past restructurings is also relevant. - Official bilateral creditor consent: if a creditor consents to Fund financing notwithstanding arrears owed to it, the Board need not judge the three criteria, but the Fund will still encourage agreement during the program. - Emergency situations (e.g., natural disaster): Fund may provide financing under RCF or RFI despite arrears owed to official bilateral creditors and without assessing the three criteria or obtaining creditor consent; expected that such support advances normalization and resolution of arrears so that subsequent arrangements are subject to the three criteria. - While unresolved arrears to official bilateral creditors remain outstanding, every purchase or disbursement after arrangement approval is subject to a financing assurances review by the Board and verification that all three criteria continue to be satisfied. ### Reviews and Governance - Directors agreed arrears policies should be reviewed "on an as needed basis." - All purchases and disbursements while arrears to private or official bilateral creditors are outstanding are subject to financing reviews to keep the Board informed and to monitor debtor–creditor relations. *REVIEWS OF THE FUND'S SOVEREIGN ARREARS POLICIES AND PERIMETER (Supplement, May 12, 2022).* ### 18. Directors concurred that new Fund-supported programs should continue to incorporate the ### 18. Directors concurred that new Fund-supported programs should continue to incorporate the ### Directors' conclusion on OSI-related claims - Directors concurred that new Fund-supported programs should continue to incorporate the assumption that old OSI-related claims would be restructured in line with the terms stipulated in the original Fund-supported program. ### International Financial Institutions (IFI) — policy updates and endorsed approach - Directors agreed that application of the non-toleration of arrears policy with respect to multilaterals has worked well, but the policy needs to be updated to: - clarify how the policy applies to new International Financial Institutions (IFIs), and - ensure that the special treatment multilateral creditors receive under the Fund’s arrears policy is not diluted. - IFIs are defined as international financial institutions with at least two sovereign members (and no non-sovereign member). - While many Directors preferred staff’s original proposal (in SM/22/47) to reduce scope for judgment and provide clarity, a number of Directors could not support that original proposal. Most Directors endorsed the alternative approach set out in Supplement 1, in light of staff’s expectation that implementation would not fundamentally differ from the original proposal. - Endorsed elements: - Fund financing in the face of arrears to the World Bank Group should continue to require an Agreed Plan between the debtor and the World Bank to clear the arrears over a defined period. - Fund financing in the face of arrears to any other IFI should continue to require that a Credible Plan be in place in cases where a contribution from the official sector is not required to restore debt sustainability (non-OSI cases). - In this context, a Credible Plan is a plan that is credible to the Fund, and the creditor’s concurrence is not required. - In OSI cases (where a contribution from the official sector is required): - Where the member is in arrears to an IFI, the Fund should judge whether a Credible Plan to resolve such arrears is required as a condition for lending. - Factors informing the Fund’s judgment include: - (i) global, rather than regional, membership of the institution; - (ii) whether the institution is a regional financing arrangement or a reserve currency union central bank that forms part of the global financial safety net; - (iii) the Paris Club’s treatment of the institution; - (iv) participation of the institution in the Heavily Indebted Poor Countries (HIPC) Initiative; and - (v) whether the institution is being excluded from the scope of debt restructuring by official bilateral creditors through a creditor committee based on a representative standing forum recognized under the LIOA policy in the case at hand. - When arrears are owed to an IFI that does not fall under the previous bullet, Directors agreed that the LIOA policy should be expanded to apply to these cases mutatis mutandis. - The Fund policy will also provide for flexibility in extraordinary circumstances for emergency financing cases consistent with the LIOA policy. - Circumscribed circumstances for lending into arrears owed to an IFI creditor (all criteria must be satisfied): - Prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies; - The debtor is making good faith efforts to reach agreement with the IFI creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and - The decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. - Consent by an IFI creditor: - An IFI creditor may consent to Fund financing notwithstanding arrears owed to it by conveying consent through an Executive Director designated by the IFI or an authorized executive of the IFI to the Managing Director. - In such cases, the Executive Board would not need to make a judgment as to whether the three criteria above are satisfied. - The Fund would nevertheless continue to encourage the parties to come to an agreement during the program. - Purchases or disbursements while IFI arrears remain outstanding: - Subject to a financing assurances review where the Executive Board will verify that all three criteria are satisfied and the policy continues to be met for further use of the Fund’s resources in the member’s circumstances. ### Perimeter — definitions and operationalization - Directors broadly agreed with staff’s proposed approach for determining the application of the Fund’s arrears, financing assurances and debt sustainability policies. - Direct Bilateral Claims definition: - Continue to be defined as claims that are (a) held by a government, or an agency acting on behalf of a government; and (b) originate from an underlying transaction where the creditor government, or an agency acting on behalf of the government, provided or guaranteed financing to the debtor member. - Operationalization: - Use the creditor member’s budgetary process to determine which entities form part of the creditor government. - For entities outside the government, a case-by-case analysis, taking into account the totality of the circumstances, would continue to be required to determine whether the entity is “acting on behalf of the government.” - Secondary market purchases of claims by official bilateral creditors would not qualify as Direct Bilateral Claims, as they would not directly extend financing to the debtor member. - Two endorsed amendments to classification of official claims: - To the extent an IFI purchases securities in the secondary market as part of the global financial safety net, such claims can be treated as claims subject to the Fund’s arrears policies as applicable to IFIs; the Fund would rely on the IFI’s own representation in this regard. - Any Direct Bilateral Claims or claims held by IFIs that are contractually part of a pooled voting mechanism with private creditors shall be subject to the LIA policy. ### Effectiveness and timing - The above amendments and new policies will enter into effect immediately and will apply to all future purchases and disbursements (including under existing arrangements), with respect to existing and future arrears. - Directors agreed that the Fund’s arrears policies should be reviewed on an as needed basis. ### Annex II — Comparison Against Supplement 1 (selected summaries) - Directors welcomed the comprehensive review of the Fund’s policy on lending into arrears to private creditors, the Fund’s policy on lending into sovereign arrears to official bilateral creditors, and the Fund’s non-toleration of sovereign arrears policy to official bilateral and multilateral creditors. - Directors agreed that overall, the Fund’s arrears policies have worked well in enabling the Fund to proceed with providing financing in cases of arrears, but noted that practice in sovereign debt restructuring and the creditor landscape have evolved and certain amendments, refinements, and updates are in order. - Lending Into Arrears (LIA) policy — retention of case-by-case approach and conditions: - For lending into sovereign arrears to private creditors, continue on a case-by-case basis and only where: - (iii) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and - (iv) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors. - For lending into non-sovereign arrears stemming from the imposition of exchange controls, continue on a case-by-case basis and only where: - (iii) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and - (iv) the member is pursuing appropriate policies, the member is making a good faith effort to facilitate a collaborative agreement between private debtors and their creditors, and a good prospect exists for the removal of exchange controls. - Greater clarity on “good faith” dialogue and debt transparency: - Directors agreed that greater clarity about the good faith dialogue between a debtor and its creditors during the restructuring process and enhanced debt transparency could help provide better guidance about the application of the Fund’s LIA policy. - Clarifications should preserve flexibility to accommodate case characteristics and should not impair market discipline. - Principles to guide dialogue between debtor and private creditors: - First, when a member judges that a restructuring is necessary, it should engage in an early dialogue with creditors, continuing until restructuring is complete. - Second, the member should share relevant information with all creditors on a timely basis, generally aligned with what the member would be required to share under the Debt Limits Policy, normally including: - an explanation of the economic problems and financial circumstances that justify a debt restructuring; - a briefing on the broad outlines of a viable economic program to address the underlying problems and its implications on the broad financial parameters shaping the envelope of resources available for restructured claims; and - the provision of a comprehensive picture of the outstanding debt stock and its terms, and the proposed treatment of all claims on the sovereign, including those of official bilateral creditors; the perimeter of claims subject to the envisaged debt restructuring; and the elaboration of the basis on which the debt restructuring would restore medium-term debt sustainability, bearing in mind that not all categories of claims may need to be restructured. - Third, the member should provide creditors an early opportunity to give input on restructuring strategies and the design of individual instruments. - Fourth, any terms offered to creditors by the member should be consistent with the parameters of the Fund-supported program. - Expectations on creditor committees and negotiations: - Where creditors form a representative committee on a timely basis, the member is expected to enter into good faith negotiations with that committee, taking account of unique case characteristics. - Judgments will be required on representativeness of creditor committees and reasonable time for their formation; absent committees, engagement through less structured dialogue is expected. - The Fund retains flexibility to continue support if negotiations stall because creditors request terms inconsistent with Fund-established adjustment and financing parameters. - Preemptive restructuring cases: - Current practice remains appropriate: where a contribution from external private creditors is needed to restore debt sustainability, restructuring should ideally be undertaken before Fund arrangement approval, but flexibility allows conclusion later, normally by the first review under the arrangement. - Financing may be provided only if the Fund has adequate assurances that a credible restructuring process is underway that will result in sufficient creditor participation to restore debt sustainability within program parameters. - Relevant considerations include engagement of legal and financial advisors, launching consultations with creditors, and design of restructuring strategy and instruments. - Expectation that the member shares relevant information with all private creditors on a timely basis as defined under the LIA policy. - Emergency situations: - In emergencies (e.g., natural disaster) where insufficient time exists for good faith efforts to reach agreement with creditors, the Fund may provide financing under the Rapid Credit Facility (RCF) or the Rapid Financing Instrument (RFI) despite private creditor arrears. - Such support should help advance normalization with private creditors; subsequent Fund arrangements would again be subject to the LIA policy. - Oversight: - All purchases and disbursements made while a member has outstanding arrears to private creditors will continue to be subject to financing reviews to monitor debtor–creditor relations and inform the Board. - The policy outlined supersedes all previous policies regarding lending into arrears to private creditors. - LIOA policy and Common Framework (CF): - Directors broadly agreed that the Fund’s non-toleration of arrears policy in non-OSI cases and the policy on lending into sovereign arrears to official bilateral creditors in OSI cases continues to be appropriate and no amendments are needed. - Most Directors agreed more experience is needed with the Common Framework (CF) and welcomed staff’s plan to closely monitor the CF’s evolution and revert to the Board on whether it emerges as a new representative standing forum. *International Monetary Fund — REVIEWS OF THE FUND’S SOVEREIGN ARREARS POLICIES AND PERIMETER (excerpt)* ### 17. The LIOA policy is as follows: ### 17. The LIOA policy is as follows: ### Overview - If an agreement is reached through the Paris Club that is adequately representative, the Fund would rely on its current practices—i.e., arrears would be considered eliminated (for purposes of the application of this policy) for both participating and non-participating creditors when financing assurances are received from the Paris Club in anticipation of an Agreed Minute. - Should another representative standing forum emerge, the Fund would be open to engaging with such a forum. ### Lending into arrears to official bilateral creditors when no adequately representative Paris Club agreement - The Fund would consider lending into arrears owed to an official bilateral creditor only in circumscribed circumstances where all the following criteria are satisfied: - Prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies; - The debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and - The decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. ### Guidance on application and Board judgment - In applying the above criteria, the Fund will need to exercise judgment based on case-specific circumstances. In exercising this judgment, the Board will be guided by the following considerations: - First, an agreement will be considered “adequately representative” when it provides a majority of the total financing contributions required from official bilateral creditors over the program period. “Contribution” here comprises, and is limited to, debt relief and new financing (e.g. loans, bond financing, guarantees, and grants). - Second, in assessing whether a debtor is acting in good faith, the Fund will consider, inter alia, whether the debtor has: - approached the creditor to which it owes arrears either bilaterally or through a relevant grouping of official bilateral creditors, recognizing that the latter may take several forms, including ad hoc creditor committees; - offered to engage in substantive dialogue with the creditor and has sought a collaborative process with the creditor to reach agreement; - provided the creditor relevant information on a timely basis consistent with the Fund’s policy on confidentiality of information; and - offered the creditor terms that are consistent with the parameters of the Fund-supported program. - If the debtor requested terms from an official bilateral creditor that would result in financing contributions that exceeded the requirements of the program it would generally not indicate good faith. - An assessment of the second criterion would also take into consideration the extent to which a creditor is being asked to make a contribution that is disproportionate relative to other official bilateral creditors. - Third, in assessing whether the Fund’s decision to lend into arrears owed to an official bilateral creditor would have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases, the Fund will consider the signal that such a decision would send to official bilateral creditors as a group, given the specific circumstances of the case. - In particular, this criterion would normally not be satisfied where the creditor or group of creditors that has not reached agreement with the debtor accounts for an adequately representative share, i.e., a majority, of total financing contributions required from official bilateral creditors over the program period, as defined above. - Separately, an assessment of whether the third criterion is satisfied would take into consideration the creditor’s track record of providing contributions in past debt restructurings under Fund-supported programs, even if the creditor does not account for an adequately representative share of total financing contributions. ### Creditor consent and exceptional circumstances - An official bilateral creditor may choose to consent to Fund financing notwithstanding arrears owed to it. In such cases, the Board would not need to make a judgment as to whether the three criteria above are satisfied. The Fund would nevertheless continue to encourage the parties to come to an agreement during the program. - Emergency situations (e.g., aftermath of a natural disaster): the Fund may provide financing under the Rapid Credit Facility (RCF) or the Rapid Financing Instrument (RFI) despite arrears owed to official bilateral creditors and without assessing whether the three criteria above have been satisfied or obtaining the creditor’s consent. - It would be expected that Fund support in such cases would help advance normalization of relations with official bilateral creditors and the resolution of arrears, so that approval of any subsequent Fund arrangement would again be subject to all three criteria set out above. ### Ongoing verification during arrangements - So long as unresolved arrears owed to official bilateral creditors are outstanding, every purchase or disbursement made available after the approval of the arrangement will be subject to a financing assurances review by the Board and verification that all three criteria are satisfied to determine whether this policy continues to be met for the further use of the Fund’s resources in the member’s circumstances. ### Application to International Financial Institutions (IFIs) - First, Fund financing in the face of arrears to the World Bank Group should continue to require an Agreed Plan between the debtor and the World Bank to clear the arrears over a defined period. - Fund financing in the face of arrears to any other IFI should continue to require that a Credible Plan be in place in cases where a contribution from the official sector is not required in order to restore debt sustainability (non-OSI cases). A Credible Plan is a plan that is credible to the Fund, and the creditor’s concurrence is not required. - In OSI cases (where a contribution from the official sector is required to restore debt sustainability): - The Fund should only provide financing when a Credible Plan is in place in cases in which arrears are owed to (i) regional financing arrangements and reserve currency union central banks that form part of the global financial safety net or IFIs with global membership as defined in the staff paper, or (ii) IFIs being excluded from the scope of debt restructuring by official bilateral creditors through a creditor committee based on a representative standing forum recognized under the LIOA policy—either in the case at hand or as expected based on previous cases if no decision has been made in the current case. - When arrears are owed to an IFI that does not fall under the previous bullet, the Fund’s LIOA policy on lending into official bilateral arrears should be expanded to apply to these cases mutatis mutandis, including flexibility in extraordinary circumstances for emergency financing cases consistent with the Fund’s LIOA policy on lending into official bilateral creditors arrears. - In such latter cases, the Fund would consider lending into arrears owed to an IFI creditor only in circumscribed circumstances where all the following criteria are satisfied: - Prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies; - The debtor is making good faith efforts to reach agreement with the IFI creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and - The decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. ### Good faith assessment and IFI creditor consent - In assessing whether a debtor is acting in good faith with respect to an IFI creditor, the Fund will consider, inter alia, whether the debtor has: - approached the IFI creditor bilaterally; - offered to engage in substantive dialogue with the IFI creditor and sought a collaborative process with the creditor to reach agreement; - provided the creditor relevant information on a timely basis consistent with the Fund’s policy on confidentiality of information; and - offered the creditor terms that are consistent with the parameters of the Fund-supported program. - If the debtor requested terms from an IFI creditor that would result in financing contributions that exceeded the requirements of the program it would generally not indicate good faith. - An IFI creditor may choose to consent to Fund financing notwithstanding arrears owed to it. Such consent could be conveyed to the Fund either through an Executive Director designated by the IFI or an authorized executive of the IFI to the Managing Director. In such cases, the Executive Board would not need to make a judgment as to whether the three criteria above are satisfied. ### Verification and ongoing review for IFI arrears - So long as arrears to IFI creditors remain outstanding, purchases or disbursements will be subject to a financing assurances review where the Executive Board will verify that all three criteria are satisfied and the policy continues to be met for the further use of the Fund’s resources in the member’s circumstances. ### Perimeter and classification of claims - Direct Bilateral Claims will continue to be defined as those claims that are (a) held by a government, or an agency acting on behalf of a government; and (b) originate from an underlying transaction where the creditor government, or an agency acting on behalf of the government, provided or guaranteed financing to the debtor member. - Operationalizing this definition: - Use the creditor member’s budgetary process to determine which entities form part of the creditor government. - For entities that fall outside the government, a case-by-case analysis, taking into account the totality of the circumstances, would be required to determine whether the entity is “acting on behalf of the government.” - Secondary market purchases of claims by official bilateral creditors would not qualify as Direct Bilateral Claims, as they would not directly extend financing to the debtor member. - Two amendments to classification of official claims: - To the extent that the IFI purchases securities in the secondary market as part of the global financial safety net, such claims can be treated as claims subject to the Fund’s arrears policies as applicable to IFIs; the Fund would rely on the IFI’s own representation in this regard. - Any Direct Bilateral Claims or claims held by IFIs that are contractually part of a pooled voting mechanism with private creditors shall be subject to the LIA policy. ### Effectiveness and review - The above amendments and new policies will enter into effect immediately and will apply to all future purchases and disbursements (including under existing arrangements), with respect to existing and future arrears. - [Directors] agreed that the Fund’s arrears policies should be reviewed on an as needed basis. *Source: ppea2022023 - 17. The LIOA policy is as follows:* ### 4. Directors also agreed that Fund lending into non-sovereign arrears stemming from the ### ppea2022023 - 4. Directors also agreed that Fund lending into non-sovereign arrears stemming from the ### Lending into non-sovereign arrears from exchange controls - Fund lending into non-sovereign arrears stemming from the imposition of exchange controls should continue to be on a case-by-case basis and only where: - (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and - (ii) the member is pursuing appropriate policies, the member is making a good faith effort to facilitate a collaborative agreement between private debtors and their creditors, and a good prospect exists for the removal of exchange controls. ### Lending into sovereign arrears to private creditors (LIA) — objectives and general approach - Greater clarity about the good faith dialogue between a debtor and its creditors during the restructuring process and enhanced debt transparency could help provide better guidance about the application of the lending into sovereign arrears policy LIA policy and promote a better framework for debtor–creditor engagement. - Clarification should: - strengthen capacity of investors to assess recovery values under alternative scenarios; - facilitate pricing of risk and improve functioning of capital markets; - retain flexibility in applying the “good faith” criterion to accommodate case-specific characteristics, avoid disadvantaging debtors in negotiations, and avoid prolonged negotiations that could hamper timely Fund assistance. - Any clarification should primarily support difficult case-by-case judgments and be operationalized without impairing market discipline. - The policy outlined supersedes all previous policies regarding lending into arrears to private creditors. ### Principles to guide debtor–creditor dialogue (balance between clarity and flexibility) - First: When a member has judged that a debt restructuring is necessary, it should engage in an early dialogue with its creditors, which should continue until the restructuring is complete. - Second: The member should share relevant, non-confidential information with all creditors on a timely basis, generally aligned with Debt Limits Policy requirements, and normally include: - an explanation of the economic problems and financial circumstances that justify a debt restructuring; - a briefing on the broad outlines of a viable economic program to address the underlying problems and its implications on the broad financial parameters shaping the envelope of resources available for restructured claims; - the provision of a comprehensive picture of the outstanding debt stock and its terms, and the proposed treatment of all claims on the sovereign, including those of official bilateral creditors; the perimeter of claims subject to the envisaged debt restructuring; and the elaboration of the basis on which the debt restructuring would restore medium-term debt sustainability, bearing in mind that not all categories of claims may need to be restructured. - Third: The member should provide creditors with an early opportunity to give input on the design of restructuring strategies and the design of individual instruments. - Fourth: Any terms offered to creditors by the member should be consistent with the parameters of the Fund-supported program. - Directors favored an approach that implements the above principles while retaining flexibility; most Directors considered the third approach suggested in the staff paper an appropriate operational basis. ### Formal negotiating framework and creditor committees - In cases where creditors have formed a representative committee on a timely basis, there is an expectation the member would enter into good faith negotiations with that committee, considering unique case characteristics. - This formal negotiating framework would include: - sharing of confidential information needed to enable creditors to make informed decisions on restructuring terms (subject to adequate safeguards); - agreement to a standstill on litigation during the restructuring process by creditors represented in the committee. - Where creditor committees have not organized within a reasonable period, or where a formal framework would not be effective, the member is expected to engage creditors through a less structured dialogue. - Judgments will be required on the complexity of the case, representativeness of creditor committees, and whether a reasonable period has elapsed for committee formation. ### Operational judgments, stalled negotiations, and emergencies - Negotiation judgments will use considerations laid out in the staff paper as flexible inputs. - If negotiations stall because creditors request terms inconsistent with adjustment and financing parameters of a Fund-supported program, the Fund should retain flexibility to continue to support members notwithstanding lack of progress with creditors. - There may be circumstances where, following default, the debtor engages in good faith discussions with creditors prior to approval of a Fund arrangement; creditors may express views, but decisions on macroeconomic framework and financing plan remain in the sole purview of the Fund. - Emergency situations (e.g., aftermath of a natural disaster) may justify Fund financing under the Rapid Credit Facility (RCF) or the Rapid Financing Instrument (RFI) despite arrears owed to private creditors, where insufficient time exists for good faith creditor efforts. Such support is expected to advance normalization of relations with private creditors and resolution of arrears; subsequent Fund arrangements would again be subject to the LIA policy. - All purchases and disbursements made while a member has outstanding arrears to private creditors will continue to be subject to financing reviews to inform the Executive Board early and assess whether adjustment efforts are undermined by creditor–debtor relations. ### Preemptive restructuring cases (codifying existing practice) - Current practice remains appropriate: if a contribution from external private creditors in the form of a debt restructuring is needed to restore debt sustainability, the restructuring should ideally be undertaken before approval of the Fund arrangement. - Flexibility may allow conclusion of debt operation later, normally by the first review under the arrangement. The Fund may provide financing only if it has adequate assurances that restructuring will be successful. - Such assurances require a judgment that a credible restructuring process is underway and will result in sufficient creditor participation to restore debt sustainability and close financing gaps within program macroeconomic parameters, taking into account official sector commitments. - Relevant factors for the judgment may include engagement of legal and financial advisors, launching consultations with creditors, and design of restructuring strategy, including terms of new instruments and use of inducements for creditor participation. - Directors welcomed adding an expectation that the member share relevant information as defined under the LIA policy with all private creditors on a timely basis. ### Lending Into Arrears to Official Bilateral Creditors (LIOA) policy - Directors broadly agreed the Fund’s non-toleration of arrears policy in non-Official Sector Involvement (OSI) cases and the policy on lending into sovereign arrears to official bilateral creditors in OSI cases continues to be appropriate; no amendments are needed. - More experience with the Common Framework (CF) is needed; staff will monitor CF evolution and revert to the Board on whether it emerges as a new representative standing forum. ### LIOA policy details and criteria - If an agreement is reached through the Paris Club that is adequately representative, the Fund would rely on current practices: arrears would be considered eliminated for both participating and non-participating creditors when financing assurances are received from the Paris Club in anticipation of an Agreed Minute. - If an adequately representative agreement has not been reached through the Paris Club, the Fund would consider lending into arrears owed to an official bilateral creditor only in circumscribed circumstances where all the following criteria are satisfied: - Prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies; - The debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and - The decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. - In applying these criteria, the Fund will exercise judgment guided by the following considerations: - First: An agreement is “adequately representative” when it provides a majority of the total financing contributions required from official bilateral creditors over the program period. “Contribution” comprises, and is limited to, debt relief and new financing (e.g., loans, bond financing, guarantees, and grants). - Second: In assessing whether a debtor is acting in good faith, the Fund will consider, inter alia, whether the debtor has approached the creditor bilaterally or through a relevant grouping of official bilateral creditors (including ad hoc creditor committees); has offered to engage in substantive dialogue and sought a collaborative process; has provided the creditor relevant information on a timely basis consistent with the Fund’s confidentiality policy; and has offered terms consistent with the parameters of the Fund-supported program. Requesting terms that would result in financing contributions that exceeded program requirements would generally not indicate good faith. The assessment will also consider whether the creditor is being asked to make a contribution disproportionate relative to other official bilateral creditors. - Third: In assessing whether lending into arrears would have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases, the Fund will consider the signal to official bilateral creditors as a group. This criterion would normally not be satisfied where the creditor or group of creditors that has not reached agreement accounts for an adequately representative share, i.e., a majority, of total financing contributions required from official bilateral creditors over the program period. The creditor’s track record of providing contributions in past restructurings under Fund-supported programs will also be considered. - An official bilateral creditor may consent to Fund financing notwithstanding arrears owed to it; in such cases the Board need not judge whether the three criteria are satisfied. The Fund will still encourage agreements during the program to regularize arrears. - Emergency situations (e.g., natural disaster aftermath) may permit the Fund to provide financing under the RCF or the RFI despite arrears owed to official bilateral creditors and without assessing the three criteria or obtaining creditor consent. Such support is expected to advance normalization of relations with official bilateral creditors; subsequent Fund arrangements would again be subject to all three criteria. - This policy will enter into effect immediately and will apply to all future purchases or disbursements (including under existing arrangements), with respect to existing and future arrears. - So long as unresolved arrears owed to official bilateral creditors are outstanding, every purchase or disbursement made after arrangement approval will be subject to a financing assurances review by the Board and verification that all three criteria are satisfied to determine whether the policy continues to be met for further use of Fund resources in the member’s circumstances. ### Additional operational notes - Directors concurred that new Fund-supported programs should continue to incorporate the assumption that old OSI-related claims would be restructured in line with the terms stipulated in the original Fund-supported program. - Directors noted the importance of monitoring experience with lending into arrears and keeping the policy under review to ensure it achieves its objectives. - Directors underscored the importance of strengthening debtor–creditor dialogue in good times to provide a base for negotiation frameworks in times of stress. *International Monetary Fund* ### 19. Directors agreed that application of the non-toleration of arrears policy with respect to ### 19. Directors agreed that application of the non-toleration of arrears policy with respect to ### Overview - Application of the non-toleration of arrears policy with respect to multilaterals has worked well, but needs updating to: - clarify how the policy applies to new International Financial Institutions (IFIs); and - ensure that the special treatment multilateral creditors receive under the Fund’s arrears policy is not diluted. - IFIs are defined as international financial institutions with at least two sovereign members (and no non-sovereign member). ### Endorsement and approach - Many Directors preferred staff’s original proposal (in SM/22/47) for reduced discretion and greater clarity, but some Directors could not support it. - Most Directors endorsed the alternative approach set out in Supplement 1, in light of staff’s expectation that implementation would not fundamentally differ from the original proposal. - Directors endorsed the following operational treatments. ### Application to World Bank Group and other IFIs (non-OSI vs OSI) - First: - Fund financing in the face of arrears to the World Bank Group should continue to require an Agreed Plan between the debtor and the World Bank to clear the arrears over a defined period. - Fund financing in the face of arrears to any other IFI should continue to require that a Credible Plan be in place in cases where a contribution from the official sector is not required in order to restore debt sustainability (non-OSI cases). - In this context, a Credible Plan is a plan that is credible to the Fund, and the creditor’s concurrence is not required. - Second, in cases where a contribution from the official sector is required in order to restore debt sustainability (OSI cases): - Where the member is in arrears to an IFI, the Fund should judge whether a Credible Plan to resolve such arrears is required as a condition for lending. - Factors informing the Fund’s judgment will include: - (i) global, rather than regional, membership of the institution; - (ii) whether the institution is a regional financing arrangement or a reserve currency union central bank that forms part of the global financial safety net; - (iii) the Paris Club’s treatment of the institution; - (iv) participation of the institution in the Heavily Indebted Poor Countries (HIPC) Initiative; and - (v) whether the institution is being excluded from the scope of debt restructuring by official bilateral creditors through a creditor committee based on a representative standing forum recognized under the LIOA policy in the case at hand. - When arrears are owed to an IFI that does not fall under the previous bullet, Directors agreed that the LIOA policy should be expanded to apply to these cases mutatis mutandis. - In these latter cases, the Fund policy will also provide for the flexibility in extraordinary circumstances for emergency financing cases consistent with the LIOA policy. ### Circumscribed circumstances for lending into arrears to an IFI creditor - The Fund would consider lending into arrears owed to an IFI creditor only where all the following criteria are satisfied: - Prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies; - The debtor is making good faith efforts to reach agreement with the IFI creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and - The decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases. ### Assessing good faith by the debtor - In assessing whether a debtor is acting in good faith, the Fund will consider, inter alia, whether the debtor: - has approached the IFI creditor to which it owes arrears bilaterally; - has offered to engage in substantive dialogue with the IFI creditor and has sought a collaborative process with the creditor to reach agreement; - has provided the creditor relevant information on a timely basis consistent with the Fund’s policy on confidentiality of information; and - has offered the creditor terms that are consistent with the parameters of the Fund-supported program. - If the debtor requested terms from an IFI creditor that would result in financing contributions that exceeded the requirements of the program it would generally not indicate good faith. ### Assessing undue negative effects on Fund’s mobilization of official financing - In assessing whether the Fund’s decision to lend into arrears owed to an IFI creditor would have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases, the Fund will consider the signal that such a decision would send to IFI creditors, or to official creditors more generally, as a group, given the specific circumstances of the case. ### IFI consent and Executive Board implications - An IFI creditor may choose to consent to Fund financing notwithstanding arrears owed to it. - Such consent could be conveyed either through an Executive Director designated by the IFI or an authorized executive of the IFI to the Managing Director. - In such cases, the Executive Board would not need to make a judgment as to whether the three criteria above are satisfied. - The Fund would nevertheless continue to encourage the parties to come to an agreement during the program, since the regularization of arrears is an objective of any Fund-supported program and important for the functioning of the international financial system at large. ### Financing assurances review - So long as arrears to IFI creditors remain outstanding, purchases or disbursements will be subject to a financing assurances review where the Executive Board will verify that all three criteria are satisfied and the policy continues to be met for the further use of the Fund’s resources in the member’s circumstances. ### Perimeter: definitions and operationalization - For the purpose of determining the application of the Fund’s arrears, financing assurances and debt sustainability policies, Directors broadly agreed with the approach proposed by staff. - Direct Bilateral Claims will continue to be defined as those claims that are: - (a) held by a government, or an agency acting on behalf of a government; and - (b) originate from an underlying transaction where the creditor government, or an agency acting on behalf of the government, provided or guaranteed financing to the debtor member. - In operationalizing this definition, Directors supported using the creditor member’s budgetary process to determine which entities form part of the creditor government. - For entities that fall outside the government, a case-by-case analysis, taking into account the totality of the circumstances, would continue to be required to determine whether the entity is “acting on behalf of the government.” - Directors recognized that secondary market purchases of claims by official bilateral creditors would not qualify as Direct Bilateral Claims, as they would not directly extend financing to the debtor member. ### Endorsed amendments to classification of official claims - Directors endorsed two amendments: - First, to the extent that the IFI purchases securities in the secondary market as part of the global financial safety net, such claims can be treated as claims subject to the Fund’s arrears policies as applicable to IFIs; however, the Fund would rely on the IFI’s own representation in this regard. - Second, any Direct Bilateral Claims or claims held by IFIs that are contractually part of a pooled voting mechanism with private creditors shall be subject to the LIA policy. ### Effectiveness and reviews - The above amendments and new policies will enter into effect immediately and will apply to all future purchases and disbursements (including under existing arrangements), with respect to existing and future arrears. - Directors agreed that the Fund’s arrears policies should be reviewed on an as needed basis. *Source: ppea2022023 - 19.* --- _Source: https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022023.pdf_