## 15. Both restructurings emerged as a consequence of weak fiscal and debt situations, which

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### Key findings and summary
- Both restructurings emerged as a consequence of weak fiscal and debt situations, which became unsustainable soon after external shocks hit the island economy.
- The two restructurings provided liquidity relief, with the second one involving a principal haircut.
- The first restructuring was not able to secure long-term debt sustainability.
- Grenada’s restructuring experience shows the importance of:
  - (1) establishing appropriate debt restructuring objectives;
  - (2) committing to policy reforms and maintaining ownership of the restructuring goals; and
  - (3) engaging closely and having clear communications with creditors.

### Context and drivers of restructurings
- Triggers and indicators:
  - Over-indebtedness and cash illiquidity; market risk indicators (bond spreads, CDS spreads, rating changes) signaled vulnerability.
  - External shocks: Hurricane Ivan (September 2004) with damages estimated at US$900 million, equivalent to 200 percent of GDP.
- Debt and fiscal metrics (selected):
  - Total public debt rose from 35 to 80 percent of GDP between 1999 and 2002.
  - Public debt stood at 130 percent of GDP at end-2004.
  - IMF projected public debt would continue upward dynamics, reaching nearly 150 percent by 2010.
  - Growth observations: 2001 growth at 2 percent of GDP; 2002 at 3½ percent; 2003 at 9½ percent; 2004 at -1 percent.
- Market signals and ratings:
  - Government issued a US$100 million international bond in June 2002 (nearly 25 percent of GDP) priced at 475 basis points above the 10-year US Treasury’s; bond yield 9.5 percent.
  - Standard & Poor’s rated foreign currency debt BB- with a stable outlook in March 2002 and reaffirmed in June 2004; later ratings actions culminated in SD in 2004–13 period.

### Grenada 2004–06 restructuring — process, terms, and outcomes
- Announcement and scope:
  - October 1, 2004: government sought cooperation of creditors to address debt sustainability and reconstruction needs.
  - Targeted government bond indebtedness, external commercial loans, and guaranteed debt; T-bills and multilateral claims excluded.
- Participation and coordination:
  - April 2005 creditor committee represented about 70 percent of eligible commercial external debt (equivalent to US$171.6 million).
  - Participation achieved: 91 percent of eligible debt owed to private creditors (93 percent external; 86 percent domestic).
- Deal structure and key terms (exchange completion on November 15, 2005; figures preserved):
  - Coverage: commercial debt restructuring covered approximately 47 percent of the total public debt.
  - No principal haircut (par-bonds).
  - Approximately US$248 million of new EC$-denominated and US$-denominated bonds issued without face-value reduction.
  - Maturity extended by 11.7 years on average; final maturity 2025; amortization starting in 2020.
  - Step-up coupon structure starting in 2011; coupon schedule: 1 percent until 2008, 2.5 percent until 2011, 4.5 percent until 2013, 6 percent until 2015, 8 percent until 2017, 8.5 percent until 2018, and 9 percent until maturity.
  - Repayment style: amortizing (constant share of remaining outstanding).
  - NPV and market haircuts: Using discount rate of 8.9 percent, the NPV haircut was 38.4 percent, market haircut 40.5 percent.
  - Minimum participation requirement: at least 85 percent of total principal outstanding of eligible claims.
- Selected deal-table figures (exact):
  - Face value (US$ mil.): 155.7 (External, US$), 16.0 (External, EC$), 5.5 (Domestic, US$), 71.3 (Domestic, EC$); total 248.5.
  - Face-value haircut: 0% for all new instruments.
  - Maturity of new consolidated instrument: 2025.
  - Grace period (years) for consolidated instrument: 15.
  - Remaining maturity (years) for consolidated instrument: 20.
  - Coupon for consolidated instrument: Step-up coupon.
  - Repayment style for consolidated instrument: Amortizing.
  - Present value in 12/2005 (by category): 98% (External US$), 102% (External EC$), 92% (Domestic US$), 94% (Domestic EC$), 59% (Consolidated).
  - NPV haircut (by category): 39% (External US$), 42% (External EC$), 35% (Domestic US$), 36% (Domestic EC$).
  - Discount rate used for NPV calculations: 8.9 percent (first transaction-day yield after the completion of the exchange on 12/30/2005).
- Outcomes and limitations:
  - Cash flow relief over first five years relative to original obligations: US$93 million.
  - Average time to maturity: 18 years; weighted average coupon rate: 6 percent.
  - The restructuring provided liquidity relief but no principal reduction; subsequent weak growth and adverse shocks meant sustainability was not secured—realized average growth of -0.6 percent during 2005–15 vs projected 4.5 percent, leading to expanding public debt ratio despite large NPV haircut.

### Grenada 2013–15 restructuring — process, terms, and outcomes
- Announcement and scope:
  - March 8, 2013: government announced intention to pursue a “comprehensive and collaborative” debt restructuring; RGSM T-bills and multilateral debt excluded.
  - IMF staff-level agreement March 14, 2014; Board approval of three-year ECF-supported program in June 2014.
- Indicative scenarios published April 2014 (April 2014 options preserved exactly):
  - Option 1:
    - Face value haircut: 60%
    - Grace period (years): 0
    - Final maturity (years): 15
    - Coupon: 6.5%
    - Repayment style: Equal installments
    - Interest arrears: 60% reduction, 40% capitalized
  - Option 2:
    - Face value haircut: 50%
    - Grace period (years): 2
    - Final maturity (years): 20
    - Coupon: 5%
    - Repayment style: Increasing installments
    - Interest arrears: 50% reduction, 50% capitalized
- Private-sector deal (2015 exchange; formal closing announced November 12, 2015):
  - Tender outcomes: Tenders representing 94 percent of the US$ 2025 bond and 100 percent of the EC$ 2025 bond outstanding and eligible to vote were received; entirety exchanged for new 2030 bonds.
  - Face-value reduction: 50 percent for external and non-NIS domestic bonds; 0 percent for NIS domestic bonds.
  - Coupon rates for new instruments: fixed at 7 percent for external and non-NIS domestic bonds and 3 percent for NIS domestic bonds.
  - Maturity extension: extended by five years for external and non-NIS domestic bonds and 10 years for NIS domestic bonds on average.
  - NPV haircuts using discount rate of 13.9 percent:
    - 49 percent for external and non-NIS domestic bonds
    - 59 percent for NIS domestic bonds
  - Use of CACs and no exit consent: CACs on US$-denominated bonds were triggered.
  - Two contractual innovations: Hurricane clause and Citizenship by Investment Program revenue sharing clause.
  - Pre-CACs participation rate (%): 94 (US$), 100 (EC$); Post-CACs participation rate (%): 100 (US$).
  - Average NPV and market haircuts: Using discount rate of 13.9 percent, the NPV haircut was 50.3 percent on average, while the market haircut was 62.5 percent.
- Official-sector restructuring highlights:
  - Ex-Im Bank of Taiwan agreement (January 7, 2015): restructure US$36.6 million with 50 percent nominal principal reduction (47 percent at closing, 3 percent contingent on successful conclusion of IMF-supported program).
  - Paris Club agreement (November 19, 2015): debt rescheduling of US$7.7 million; total claims US$11 million as of November 1, 2015; NPV haircuts on official loans estimated to be 3.2 percent using discount rate of 2.8 percent (OECD CIRR); included a Paris Club hurricane clause (first time Paris Club creditors agreed to such a provision), though relatively weak compared with private sector clause.
- Outcomes and debt dynamics:
  - Combined cash flow relief provided by private sector creditors over 2016–20: US$8 million.
  - Total fiscal adjustment over three years of the ECF-supported program: more than 8½ percent of GDP.
  - Savings expected to contribute to reducing public debt to 85 percent of GDP by end-2016, and to below 60 percent of GDP by 2020 (IMF 2016b).
  - Bond price recovery from 27 (pre-restructuring) to 55–60 cents on the dollar.
  - As of January 2017, no reassignment of credit ratings or new issuance; S&P ratings remain NR (assigned October 2014); prior to NR, S&P had assigned SD since March 2013.
  - Post-restructuring refinancing risk reduced by face-value haircuts and lengthening of domestic maturities, but risks remain (need to lengthen average maturity of domestic debt; interest rates on 12 percent of total debt portfolio would reset within next year; about 60 percent of total debt portfolio denominated in foreign currency).

### Comparison of the two restructurings (2004–06 vs 2013–15)
- Structural differences (selected metrics preserved exactly):
  - Face-value haircut: 0% (2004–06) vs 50% (2013–15) (0% noted parenthetically).
  - NPV haircut: 38% (2004–06) vs 50% (2013–15).
  - Maturity extension (years): 11.7 (2004–06) vs 5 (10) (2013–15).
  - CACs triggered: No (2004–06) vs Yes (2013–15).
- Cash flow relief comparison:
  - 2004–06 restructuring provided US$93 million in cash flow relief over the first five years compared to original obligations.
  - 2013–15 restructuring provided US$8 million in cash flow relief over the first five years.
- Debt sustainability implications:
  - Restructuring without nominal principal reduction can restore sustainability only if future real economic growth exceeds the real interest rate; outcomes highly sensitive to growth and interest-rate assumptions.
  - Simulations:
    - First restructuring (2004–06): projected medium-term growth of 4.5 percent in 2005 vs realized average growth of -0.6 percent during 2005–15; with realized growth lower than real effective interest rate, public debt ratio expands despite large NPV haircut.
    - Second restructuring (2013–15) with principal reduction: debt trajectory remains below original level under all assumptions except extreme adverse growth shock averaged at -0.6 percent combined with high financing costs at 7 percent.

### Innovations and contractual design (hurricane clause, CBI clause, CACs)
- Hurricane clause (commercial bonds and Ex-Im Bank; Appendix II details):
  - Trigger: verifiable trigger measured by CCRIF SPC parametric measures; CCRIF SPC modelled losses exceeding US$15 million typically.
  - Changes to cash flow: deferred payments for up to two payment periods, no nominal principal or interest rate reduction; deferred interest capitalized; deferred principal distributed equally on top of scheduled payments until final maturity.
  - Maximum number of triggers: up to three times for private bondholders and Taiwan; Paris Club unspecified.
  - Cash flow relief estimates: one-off trigger could provide cash flow relief up to 2.6 percent of GDP depending on timing; if three events triggered, total cash flow relief could be as much as 7.4 percent of GDP.
  - Hurricane clause designed so an “event” is distinct from an “event of default.”
- Citizenship-by-Investment (CBI) revenue sharing clause:
  - Provides holders of new 2030 bonds opportunity to receive portion of eligible CBI revenues after completion of current IMF program.
  - Conditions include: (1) second step haircut occurred; (2) more than US$15 million in eligible CBI revenues received by Grenada in any given year; (3) cumulative limit (NPV of cumulative CBI revenue sharing cannot exceed 35 percent of face value of new 2030 bonds) not reached.
- CACs and exit consent:
  - 2004–06: No use of CACs and exit consent.
  - 2013–15: CACs on US$-denominated bonds were triggered; no exit consent used in private-sector deal.

### Financing during restructurings and market mechanics
- Financing sources and flows (exact figures preserved where given):
  - During 2004–06: multilateral institutions provided US$15 million in net new credit (two thirds from the CDB); the IMF-supported program provided additional SDR 10.5 million; bilateral creditors provided US$20 million in net new loans.
  - During 2013–15: World Bank, CDB, and IMF provided US$57 million in new credit.
  - Cumulative net financing through 91-day and 365-day T-bills on the RGSM during 2013–15 was EC$29 million and EC$12 million, respectively, for cumulative total T-bills contribution of EC$41 million.
- T-bill issuance examples (as presented):
  - 91-day T-bills new issuance examples: 15, 0, 0, 0, 0, 0, 0, 0, 34, 24, 39, 59, 54 (by year in table).
  - 91-day T-bills net issuance examples: 15, -15, 0, 0, 0, 0, 0, 0, 0, -10, 15, 19, -5 (by year in table).
  - 365-day T-bills new issuance examples: 0, 24, 21, 23, 34, 35, 46, 55, 56, 47, 49, 56, 58 (by year in table).
  - 365-day T-bills net issuance examples: 0, 24, -3, 2, 11, 0, 12, 8, 1, -9, 3, 7, 2 (by year in table).
  - Total T-bills net issuance row examples: 15, 9, -3, 2, 11, 0, 12, 8, 35, -19, 18, 26, -3 (by year in table).

### Counterfactual and robustness insights
- Box 3 (“Too Little, Too Late?”) counterfactual:
  - Using exit yield of 8.9 percent, the NPV haircut for the original 2004–06 restructuring was 35 percent.
  - For combined 2004–06 and 2013–15 restructurings, using the same exit yield, the NPV haircut was 51 percent.
  - Using exit yield prevailing at 2015 restructuring (13.9 percent), the NPV reduction of the combined restructuring was 69 percent.
  - Interpretation: a larger NPV haircut with principal reduction in 2005 (about 51 percent with 8.9 percent discount) might have reduced the likelihood of a later restructuring.

### Lessons learned and policy recommendations (preserved emphasis)
- Establish clear and appropriate debt restructuring objectives:
  - Distinguish whether the problem is liquidity or solvency; 2004–06 treated as liquidity-dominated, producing frontloaded cash-flow relief without sufficient debt stock reduction.
- Set a clear perimeter for restructuring:
  - Clarify which debt is subject to restructuring; 2013 announcement explicitly excluded multilateral institutions and RGSM T-bills (about 30 percent of public debt in 2013).
- Commit to credible policy reform and maintain ownership:
  - Fiscal measures to reduce expenditures and strengthen revenue collection while protecting vulnerable sectors are key to securing creditor agreement.
  - Strong ownership of reforms is critical to secure support from creditors and development partners.
- Link restructuring to IMF program where appropriate:
  - IMF acts as independent assessor; IMF-supported program cannot proceed if debt is not sustainable under existing policies.
  - In 2013–15, second nominal principal reduction was contingent on completion of three-year ECF-supported program, aligning incentives.
- Design robust restructuring scenarios and legal clauses:
  - Scenario analysis should vary future borrowing costs and growth assumptions; step-up coupons problematic unless growth exceeds coupon rates.
  - Early principal reduction can lessen possibility of future restructurings.
  - Consider natural-disaster downside risks and include clauses like hurricane clause.
- Engage creditors with clear communications:
  - Continuous engagement, timely sharing of fiscal and balance of payments data, and transparency support efficient resolution.
  - Financial and legal advisors help gather information and communicate proposals.

### Figures, appendices, and broader regional context (high-level points)
- Figures and appendices illustrate:
  - Sensitivity of debt trajectories to growth and interest-rate assumptions (Figure A2 normalized at 2005/2015 = 100 percent).
  - That only the 2013–15 restructuring achieved meaningful debt reduction supported by strong fiscal consolidation; 2004–06 provided liquidity but insufficient debt stock reduction.
  - Innovations in 2013–15 (two-step nominal haircut, hurricane clause, CBI revenue-sharing clause) and their precedents.
- Regional stylized findings (Appendix III):
  - Dominant drivers of unsustainable debt: fiscal slippages and output losses related to external shocks; many Caribbean restructurings were preemptive and short, but some (including Grenada 2013–15) were prolonged and post-default.
  - Cases with face-value reductions and NPV haircuts above 50 percent include Antigua and Barbuda (2008–12), Dominica (2003–04), Grenada (2013–15), and St. Kitts and Nevis (2011–12).
  - Debt sustainability concerns often remained unresolved after restructurings; many countries excluded from capital markets for prolonged periods.

_Italicized source: IMF Working Paper wp17171 (2017) — content excerpt provided._

### 15. Both restructurings emerged as a consequence of weak fiscal and debt situations, which

### 15. Both restructurings emerged as a consequence of weak fiscal and debt situations, which

### Key findings
- Both restructurings emerged as a consequence of weak fiscal and debt situations, which became unsustainable soon after external shocks hit the island economy.
- The two restructurings provided liquidity relief, with the second one involving a principal haircut.
- The first restructuring was not able to secure long-term debt sustainability.
- Grenada’s restructuring experience shows the importance of:
  - (1) establishing appropriate debt restructuring objectives;
  - (2) committing to policy reforms and maintaining ownership of the restructuring goals; and
  - (3) engaging closely and having clear communications with creditors.

### Authors and acknowledgments
- Tamon Asonuma is an economist in the Research Department.
- Mike Xin Li is an economist in the Western Hemisphere Department.
- Saji Thomas is a senior economist in the Fiscal Affairs Department.
- Michael G. Papaioannou and Eriko Togo are deputy division chief and a senior financial expert, respectively, in the Monetary and Capital Markets Department.
- The authors thank Trevor Alleyne, Julianne Ams, Tom Best, Xavier Debrun, Mark Joseph Flanagan, Daniel Hardy, Klaus P. Hellwig, Nicole L. Laframboise, Natasha Marquez-Sylvester, and Rafael Molina for helpful comments and suggestions.
- The authors also thank Christie Chea, Eneshi Irene Kapijimpanga, Chifundo Moya for helpful editorial suggestions.
- Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

### Structure of the content unit (major sections)
- I. Introduction
- II. Brief Literature Review
- III. Grenada’s 2004–06 Debt Restructuring
  - A. Background
  - B. Process
  - C. IMF Engagement
  - D. Outcomes
- IV. Grenada’s 2013–15 Debt Restructuring
  - A. Background: Over 2005–13
  - B. Process
  - C. IMF Engagement
  - D. Outcomes
- V. Comparison of Key Elements between Grenada’s 2004–06 Restructuring and 2013–15 Restructuring
  - A. Cash Flow Relief
  - B. Debt Sustainability Implications of the Debt Restructurings
  - C. Fiscal Consolidation and Debt Sustainability
  - D. Financing during the Debt Restructurings
- VI. Lessons Learned
- VII. Conclusion

### Figures and tables listed in the content unit
- Figures:
  - Figure 1: Grenada’s Public Debt, June 2004
  - Figure 2: Grenada’s Private Debt Restructuring, 2004–06: NPV Haircuts
  - Figure 3: Grenada’s Private Debt Restructuring, 2004–06: Debt Service
  - Figure 4: Grenada’s Private Debt Restructuring, 2004–06: Bond Yields and Credit Ratings
  - Figure 5: Grenada’s Private Debt Restructuring, 2013–15: NPV Haircuts
  - Figure 6: Grenada’s Private Debt Restructuring, 2013–15: Debt Service of External Old Instruments and Exchaange Instruments
  - Figure 7: Grenada’s Private Debt Restructuring, 2013–15: Bond Prices and Credit Ratings
- Tables:
  - Table 1: Grenada’s Commercial Debt Restructuring, 2004–06: Deal Structure
  - Table 2: Grenada’s Debt Restructuring, 2013–2015: Indicative Scenarios (April 2014)
  - Table 3: Grenada’s Private Debt Restructuring, 2013–2015: Deal Structure
  - Table 4: Comparison between 2004–06 and 2013–15 Private Debt Restructurings
  - Table 5: Cash Flow Relief from the 2004–06 and 2013–15 Debt Restructurings of the US$ and EC$ Commercial Bonds

### Lessons emphasized (as stated)
- Establish clear and appropriate debt restructuring objectives.
- Commit to policy reforms and maintain ownership of restructuring goals.
- Engage closely with creditors and ensure clear communications during restructuring.

*Source: wp17171 - 15. Both restructurings emerged as a consequence of weak fiscal and debt situations, which*

### 6. Treasury Bill Issuances and Redemptions on the Regional Government Securities ...........40

### 6. Treasury Bill Issuances and Redemptions on the Regional Government Securities ...........40

### I. Introduction — Purpose and focus
- Analyzes Grenada’s two sovereign debt restructurings during 2004–06 and 2013–15.
- Focus areas:
  - Why did the country restructure its debt? (macroeconomic indicators signaling vulnerability)
  - How did the debtor-creditor relationship develop? (modalities, negotiation length, communication with private, official bilateral and multilateral creditors, including an IMF-supported program; legal and operational characteristics)
  - Did the restructurings fully address debt sustainability concerns? (impact on liquidity and solvency after each restructuring; creditor loss and prospects for future market re-access)

### II. Determinants and context of sovereign debt restructurings (general)
- Common triggers and determinants:
  - Over-indebtedness (debt-to-GDP ratio) and cash illiquidity (rollover risks).
  - Exacerbating factors: political instability, external shocks (commodity price shocks, interest rate hikes).
- Market risk indicators as predictors:
  - Bond spreads, credit default swap (CDS) spreads, and rating changes.
- Associated outcomes:
  - Restructurings often follow or precede banking and currency crises and are associated with declines in output, trade, and capital inflows.
- Scope of haircuts:
  - Ranges documented from under 10 percent to over 80 percent in past restructurings.
  - Evidence: larger haircuts correlated with longer years of exclusion from capital markets and higher post-restructuring borrowing costs.

### III. IMF Debt Sustainability Analysis (DSA) and key variables
- DSA roles:
  - Public DSA: assesses primary balance needed to stabilize or reduce public debt-to-GDP.
  - External DSA: assesses current account balance needed to stabilize or reduce external debt-to-GDP.
- Two key variables driving DSA results:
  - Real interest rate (borrowing costs).
  - Real growth rate.
- Implication:
  - Larger interest-growth differential implies higher primary budget or current account balance required to stabilize debt-to-GDP ratios.
- Other indicators informing DSA:
  - Gross financing needs, debt structure, and macro-realism.

### IV. Risk spillovers and financial-sector linkages
- Sovereign restructuring can cause "top-down" spillovers:
  - Losses to banks, investment funds, and pension funds holding government debt or short positions via sovereign CDSs.
- Policy responses in past cases:
  - Establishment of financial sector stability funds pre-restructuring (examples: Jamaica 2010; St. Kitts and Nevis 2011–12).

### V. Legal, contractual, and creditor-participation features
- Collective Action Clauses (CACs):
  - Present in majority of international bonds; can facilitate restructuring but do not guarantee quick or high-participation exchanges.
- Other legal features affecting outcomes:
  - Exit consents, aggregation clauses, minimum participation thresholds.
- Creditor participation and holdouts:
  - Most exchanges completed within one or two years with high participation rates (more than 90 percent in recent exchanges).
  - Few cases with large shares of holdouts (Argentina 2005; Dominica 2004).
  - Litigation and successful attachments of sovereign assets remain relatively rare.

### VI. Domestic vs external bond restructurings
- Similarities in process and outcomes, but differences in creditor structure:
  - Domestic financial institutions may be most affected in domestic restructurings.
  - Domestic investors have also held large shares of external bonds in cases such as Argentina (2005) and Uruguay (2003).
- Timing and participation:
  - Domestic exchanges often implemented quicker than external exchanges.
  - Creditor participation on average lower for domestic exchanges compared to external exchanges, while haircut sizes were similar.

### VII. Grenada’s 2004–06 debt restructuring — key background facts
- Growth and volatility:
  - Growth averaged 4½ percent over 1980–99.
  - Average growth slowed to 4 percent over 1999–2004.
  - Growth observations: 2001 growth at 2 percent of GDP; 2002 at 3½ percent; 2003 at 9½ percent; 2004 at -1 percent.
- Debt dynamics and fiscal policy:
  - Total public debt rose from 35 to 80 percent of GDP between 1999 and 2002.
  - Interest payments doubled in 2002 over 1999.
- Major bond issuance:
  - Government issued a US$100 million international bond in June 2002 (nearly 25 percent of GDP).
  - Bond yield: 9.5 percent; priced at 475 basis points above the 10-year US Treasury’s.
  - External debt rose by over 20 percentage points of GDP to 62 percent at end-2002.
- Domestic market issuances:
  - Late 2003: EC$15 million in 91-day Treasury bills at 5.5 percent on the Regional Government Securities Market (RGSM).
  - 2004: EC$24 million 365-day T-bill at 5.5 percent; net borrowing in RGSM of EC$9 million.
  - December 2002: EC$15 million domestic bond, coupon rate 9.75 percent, maturity 11 years.
  - February 2004: US$5.5 million bond, coupon rate 7.5 percent, maturity 10 years.
- Hurricane damages and fiscal impact:
  - Hurricane Ivan (September 2004) damages estimated at US$900 million, equivalent to 200 percent of GDP (OECS assessment).
  - About two-thirds of damages to housing stock; only 30 percent had some form of insurance coverage.
  - Public debt stood at 130 percent of GDP at end-2004.
  - IMF projected public debt would continue upward dynamics, reaching nearly 150 percent by 2010.
- Ratings:
  - Standard & Poor’s (S&P) rated Grenada’s foreign currency debt at BB- with a stable outlook in March 2002 and reaffirmed the rating in June 2004.

### VIII. Grenada’s 2004–06 restructuring — process and features
- Announcement and objectives:
  - October 1, 2004: government announced intention to seek “the cooperation of creditors” to address debt sustainability and major reconstruction needs.
  - Sought assistance from CDB, the IMF, and the World Bank; initiated discussions with official bilateral creditors.
- Payment status and advisers:
  - Government remained current until interest payments on the international bond were missed in December 2004; S&P downgraded to “selective default” (SD).
  - January 2005: government contracted legal and financial advisors.
- Scope and exclusions:
  - Targeted restructuring of government’s bond indebtedness, external commercial loans, and guaranteed debt.
  - T-bills excluded from restructuring because they were needed to finance daily government operations during negotiations.
  - Multilateral claims considered senior and excluded from the exchange.
- Official bilateral creditors:
  - Authorities asked bilateral creditors for full debt forgiveness or at minimum relief on comparable terms with commercial creditors.
  - Bilateral creditors preferred an IMF-supported program proceeding with a debt relief operation.
- Creditor coordination and transparency:
  - April 2005: creditor committee formed representing about 70 percent of eligible commercial external debt (equivalent to US$171.6 million).
  - Authorities maintained open dialogue with creditor committee and transparency in dissemination of macroeconomic data.
  - Negotiations focused on near-term cash flow relief to address reconstruction needs.
- DSA and program scenario:
  - Authorities released a DSA in May 2005 showing financing gaps through the medium term, broadly in line with IMF staff assessment.
  - Under the program scenario, public debt was expected to decline from 120 percent of GDP in 2005 to 60 percent of GDP.

*Source: wp17171 - 6. Treasury Bill Issuances and Redemptions on the Regional Government Securities ...........40*

### 2015. A large part of this adjustment was to be achieved during the program period, so that

### wp17171 - 2015. A large part of this adjustment was to be achieved during the program period, so that

### Background and context
- Objective: by end-2008 the public debt would amount to less than 95 percent of GDP.
- Drivers of expected decline: sharp improvement in the primary balance during 2006–08 and a pickup in GDP growth.
- Risks noted: failure to adhere to program targets could rapidly result in an unsustainable debt trajectory; a significant external shock, such as another major hurricane, could have a similar adverse effect.
- Debt-restructuring proposal launched on September 9, 2005, after intensive dialogue with private creditors.
- The debt exchange operation was initially scheduled to close on October 7, 2005, and later extended to October 14, 2005.

### Composition of eligible commercial claims
- Domestic claims: US$76.8 million (US$5.5 million US$-denominated claims and US$71.0 million EC$-denominated claims).
  - Domestic US$-denominated claims comprised one bond, whereas EC$-denominated claims comprised nine bonds, six commercial loans, and one guaranteed claim.
- External claims: US$171.6 million (US$155.7 million in US$-denominated claims and US$16 million EC$-denominated claims).
  - External US$-denominated claims comprised five bonds, two commercial loans, and four guaranteed claims, whereas EC$-denominated claims comprised two bonds.
- Past-due interest: capitalization of past-due interest accrued over the 10 months prior to the restructuring was included.

### New instruments and legal framework
- Issuance and law:
  - EC$-denominated bond issued under domestic law.
  - US$-denominated bond issued under foreign law (New York law).
- Instrument characteristics:
  - Both bonds were par-bonds (that is, no principal haircut).
  - Final maturity in 2025; amortization starting in 2020.
  - Step-up coupon structure starting in 2011; government anticipated increases in debt services in 2012.
- Repayment structure change:
  - Maturity was extended by 11.7 years on average.
  - Contrary to payments due at maturity for all old instruments (100 percent of total outstanding), the new bond is an amortizing bond commencing in September 2020 (constant share of remaining outstanding).

### Deal structure and terms (as of exchange completion on November 15, 2005)
- Coverage: the commercial debt restructuring covered the equivalent of approximately 47 percent of the total public debt.
- Key terms:
  - No principal haircut. Approximately US$248 million of new EC$-denominated and US$-denominated bonds (excluding those for guaranteed loans) were issued without face-value reduction.
  - Capitalization of past-due interest: Past-due interest on any eligible claims is included as a portion of tendered eligible claims.
  - Coupon rate reduction: Due to a step-up coupon structure, average coupon rates of the new bond over the life of the bond are lowered by 2.3 percent.
    - Coupon rates for new instruments: 1 percent until 2008, 2.5 percent until 2011, 4.5 percent until 2013, 6 percent until 2015, 8 percent until 2017, 8.5 percent until 2018, and 9 percent until maturity.
  - NPV and market haircuts:
    - Using a discount rate of 8.9 percent, the NPV haircut was 38.4 percent, while the market haircut was 40.5 percent.
    - There was only a marginal difference (3 percent) in NPV haircuts between domestic and external creditors.
  - No use of CACs and exit consent.
  - Minimum participation requirement specified as at least 85 percent of total principal outstanding amount of eligible claims.

### Participation, incentives, and outcomes
- Participation achieved: 91 percent participation of eligible debt owed to private creditors.
  - Participation rate by claim type: 93 percent on the external claims and 86 percent on the domestic claims.
- Creditor motivations to accept the offer:
  - The return profile was rewarding enough based on a risk-adjusted assessment of the positive outlook of Grenada’s economy and the then-favorable global environment.
  - Potential costs of holding out were high and it was less attractive to take legal actions, even with the expectation of an ultimate success.
  - The original bonds had become illiquid, and thus any outright sales would be difficult.
- Despite high participation, there were holdouts.

### Deal table highlights (selected figures preserved exactly as in source)
- Face value (US$ mil.): 155.7 (External, US$), 16.0 (External, EC$), 5.5 (Domestic, US$), 71.3 (Domestic, EC$); total 248.5.
- Face-value haircut: 0% for all new instruments.
- Maturity of new consolidated instrument: 2025.
- Grace period (years) for consolidated instrument: 15.
- Remaining maturity (years) for consolidated instrument: 20.
- Coupon for consolidated instrument: Step-up coupon.
- Repayment style for consolidated instrument: Amortizing.
- Present value in 12/2005 (by category): 98% (External US$), 102% (External EC$), 92% (Domestic US$), 94% (Domestic EC$), 59% (Consolidated).
- NPV haircut (by category): 39% (External US$), 42% (External EC$), 35% (Domestic US$), 36% (Domestic EC$).
- Discount rate used for NPV calculations: 8.9 percent (first transaction-day yield after the completion of the exchange on 12/30/2005).

*Source: wp17171 - 2015. A large part of this adjustment was to be achieved during the program period, so that*

### Box 1. Collective Action Clause and Exit Consent

### Box 1. Collective Action Clause and Exit Consent

### Collective Action Clauses (CACs)
- CACs can be classified into two broad categories (IMF, 2002b):
  - “Majority restructuring” provisions, which allow a qualified majority of bondholders of an issuance to change the bonds’ financial terms (principal, interest, and maturity) and to bind in all other holders of that issuance, either before or after default.
    - For the most recently issued bonds with CACs, a supermajority is reached when bondholders holding a certain percentage of the total outstanding debt agree (for example, 75 percent).
  - “Majority enforcement” provisions, which can limit the ability of minority bond holders to enforce their rights following a default.
    - In practice, this means that a qualified majority can prevent individual bondholders from (1) declaring the full amount of the bond due and payable (“acceleration”) and (2) commencing litigation against the sovereign.

### Exit consents
- Exit consents are a legal technique used to amend the nonfinancial terms of old bonds in an exchange (a “stick feature” to render the old bonds unattractive or illiquid).
- Exit consents allow a simple majority of bondholders to modify non-financial bond provisions, such as:
  - a waiver of sovereign immunity,
  - financial covenants (for example, cross-default clauses and acceleration clauses), or
  - listing requirements.
- By stripping away favorable bond features and creditor rights, the old bonds become less attractive, thus inducing bondholders to participate in the exchange into new bonds (Das and others 2012).
- Exit consents can be particularly useful for restructuring bonds that do not contain CACs.
  - Instead of changing the financial characteristics of existing bonds via majority restructuring provisions, exit consents can be used to alter nonpayment terms, for example, legal features that affect the bond’s liquidity or the holder’s ability to litigate.
  - Most commonly, exit consents include:
    1. the delisting of the outstanding bonds to reduce liquidity,
    2. the removal of cross-default clauses, and
    3. the removal of acceleration clauses.

*Source: wp17171 - Box 1. Collective Action Clause and Exit Consent*

### 2012. The government’s cash flows also came under severe pressure with growing financing

### wp17171 - 2012. The government’s cash flows also came under severe pressure with growing financing

### Macroeconomic and fiscal background
- At the start of the IMF-supported program in 2014, the public debt ratio was projected to reach over 134 percent of GDP by 2020 without fiscal adjustment and debt restructuring (IMF, 2014a).
- Grenada’s external debt (public and private) had increased by about 40 percent of GDP since 2007, to almost 150 percent of GDP in 2012.
- By end-2013, overall arrears increased to 15.3 percent of GDP, of which 10.7 percentage points were on external obligations and about 4.6 percentage points on domestic obligations.
- Grenada had not regained market access since the 2005 debt exchange; external financing was limited to multilateral and bilateral official sources with no new external commercial debt issued since the 2005 debt restructuring.
- In 2011 Grenada issued a new serial bond totaling EC$11.5 million with a coupon rate of 6 percent; the bond was sold mostly to the National Insurance Scheme (NIS) and domestic insurance companies through private placements.

### Financing in 2014–15 and multilateral support
- Disbursed loans from the Caribbean Development Bank (CDB), the IMF, and the World Bank (WB) totaled more than US$30 million annually in 2014 and 2015.
- Disbursements of contracted but undisbursed loans from the WB and the CDB to finance ongoing projects provided necessary liquidity to the government.

### Process: Announcement and creditor engagement
- On March 8, 2013, Grenada announced intention to pursue a new “comprehensive and collaborative” debt restructuring; debt issued in the RGSM and multilateral debt were excluded.
- The announcement stated Grenada’s intention was not to make coupon payments due on March 15, 2013, on the US$ and EC$ 2025 bonds.
- S&P actions: lowered foreign currency credit ratings to SD/SD from B-/B and local currency ratings to CCC+/C from B-/B on October 8, 2012; foreign currency rating raised to CCC+/C with negative outlook on October 16, 2012; on March 12, 2013, foreign and local currency ratings were again lowered to SD/SD.
- The government contracted financial and legal advisors immediately following the announcement; bondholder groups formed by April 2013 included a steering committee (approximate exposure US$168 million) and an ad-hoc committee (approximate exposure US$32 million), together holding just over 75 percent of the outstanding US$ and EC$ 2025 bonds.
- The bondholder’s group controlled almost 90 percent of the US$ 2025 bond; bondholders contracted Broadspan Capital to represent them.

### Initial financing estimates and scope (March–April 2014)
- In March 2014 Grenada published initial financing estimates following a staff level agreement on March 14, 2014, as the backbone of the anticipated Extended Credit Facility (ECF) arrangement.
- Publication explained homegrown reform program: fiscal consolidation, overhaul of fiscal framework legislation, structural reforms, measures to strengthen financial system stability, and comprehensive restructuring of public debt.
- Publication stated public and publicly guaranteed debt owed to both private and official sector creditors—with the exception of the T-bills listed on the RGSM, overdraft facilities, and multilateral claims—would fall within the scope of the debt restructuring.
- In April 2014 Grenada published two indicative debt restructuring options as background for discussions with holders of its EC$2025 bond; the IMF Staff Report published in July 2014 indicated the published scenarios were consistent with achieving debt sustainability and reducing near-term debt servicing obligations.

### Indicative scenarios (April 2014)
- Option 1:
  - Face value haircut: 60%
  - Grace period (years): 0
  - Final maturity (years): 15
  - Coupon: 6.5%
  - Repayment style: Equal installments
  - Interest arrears: 60% reduction, 40% capitalized
- Option 2:
  - Face value haircut: 50%
  - Grace period (years): 2
  - Final maturity (years): 20
  - Coupon: 5%
  - Repayment style: Increasing installments
  - Interest arrears: 50% reduction, 50% capitalized

### Private sector restructuring: deal structure and terms (2015 exchange)
- In March 2015 the Government reached financial agreements with private creditors on the US$ and EC$ bonds; offering memorandum circulated October 5, 2015; formal closing announced November 12, 2015.
- Tender outcomes:
  - Tenders representing 94 percent of the US$ 2025 bond and 100 percent of the EC$ 2025 bond outstanding and eligible to vote were received before the expiration date of the offer.
  - Entirety of those bonds were exchanged for new Grenada US$ and EC$ bonds due 2030 (the “2030 bonds”).
- Key financial and legal terms:
  - Face-value reduction: 50 percent for external and non-NIS domestic bonds; 0 percent for NIS domestic bonds.
  - Capitalization of past-due interest: Past-due interest due on any eligible claims was included as a portion of tendered eligible claims.
  - Coupon rates for new instruments: fixed at 7 percent for external and non-NIS domestic bonds and 3 percent for NIS domestic bonds.
  - Maturity extension: extended by five years for external and non-NIS domestic bonds and 10 years for NIS domestic bonds on average.
  - NPV haircuts using a discount rate of 13.9 percent:
    - 49 percent for external and non-NIS domestic bonds
    - 59 percent for NIS domestic bonds
  - Use of CACs and no exit consent: CACs on US$-denominated bonds were triggered, and no exit consent was used.
  - Minimum participation requirement: at least 75 percent of the total principal outstanding amount of eligible claims.
  - Two contractual innovations: Hurricane clause and Citizenship by Investment Program revenue sharing clause.
- Tabled deal structure figures (selected, as presented):
  - Face value (US$ mil.) 1/: External US$ 193.5; Domestic EC$ 34.0; Domestic, NIS EC$ 34.1; External/Domestic, Non-NIS US$ / EC$ 143.3 (215.2); Domestic EC$ 37.4
  - Face-value haircut 2/: External 50% (25%); Domestic, non-NIS 50% (25%); Domestic, NIS 0%
  - Maturity: old instruments 2025; new instruments 2030 (external/non-NIS) and 2040 (Domestic, NIS)
  - Grace period (years): old 15; new 0.5 (external/non-NIS) and 10 (Domestic, NIS)
  - Remaining maturity (years): 10 (old) and 15 or 25 (new)
  - Coupon 3/: new 7% (external/non-NIS), 3% (Domestic, NIS)
  - Present value in 11/2015 4/: External 75%; Domestic, non-NIS 75%; Domestic, NIS 75% (external/domestic mix showed 39% and 31% in other columns)
  - NPV haircut 4/ 5/: External 49%; Domestic, non-NIS 49%; Domestic, NIS 59%
  - Pre-CACs participation rate (%): 94 (US$), 100 (EC$)
  - Post-CACs participation rate (%): 100 (US$)
  - CACs triggered: Yes (US$)
- Average NPV and market haircuts:
  - Using a discount rate of 13.9 percent, the NPV haircut was 50.3 percent on average, while the market haircut was 62.5 percent.
  - Both the US$ and EC$ 2025 bonds (excluding the EC$ holdings by the NIS) were treated symmetrically with a NPV haircut of 49.0 percent.
  - Domestic NIS holders of the EC$ 2025 experienced a NPV haircut of 58.7 percent despite no face-value reductions.
- Note: Restructuring agreements were signed on several other domestic debt instruments (including with banks and on T-bills), including NPV haircuts similar to those of the commercial bonds deal.

### Hurricane clause and Citizenship-by-Investment (CBI) revenue sharing clause (Box 2)
- Hurricane clause: liquidity relief instrument that enables changes to scheduled debt service payments upon realization of an exogenous natural disaster event; key features include:
  - Verifiable trigger event measured by an independent entity (CCRIF SPC parametric measures); if CCRIF insurance is triggered, the hurricane clause in the bond contract is also triggered.
  - Changes to cash flow: deferred payments for up to two payment periods, no nominal principal or interest rate reduction; deferred interest is capitalized and deferred principal is distributed equally on top of scheduled payments until final maturity.
  - Maximum number of triggers: up to three times.
- Cash flow relief estimates:
  - One-off trigger could provide a cash flow relief of up to 2.6 percent of GDP, depending on timing (compares with about 1.5 percent of GDP for the probable maximum loss from an event that occurs once every 25 years in Grenada, and the average annual loss experienced in Grenada of 9.87 percent of GDP).
  - If three events are triggered, the total cash flow relief could be as much as 7.4 percent of GDP.
- The hurricane clause is designed so an “event” is distinct from an “event of default,” helping ensure nonpayment under the clause does not trigger an event of default.
- Citizenship program revenue sharing clause:
  - Exchange offer provides holders of the new 2030 bonds an opportunity to receive a portion of eligible revenues received by Grenada under its Citizenship-by-Investment (CBI) program after completion of its current program with the IMF.
  - Conditions to trigger the clause include: (1) the second step haircut has occurred; (2) more than US$15 million in eligible CBI revenues has been received by Grenada in any given year; and (3) the cumulative limit (NPV of cumulative CBI revenue sharing cannot exceed 35 percent of the face value of the new 2030 bonds) for CBI payment amounts has not been reached.

### Official sector restructuring: Ex-Im Bank of Taiwan (selected events)
- On March 4, 2013, the Ex-Im Bank filed a lawsuit in a New York federal court seeking specific performance of the pari passu provision and an order preventing payment on outstanding bond debt unless Grenada simultaneously made payments on the defaulted loans.
- The dispute involved an unpaid judgment worth US$32 million against Grenada; discovery ordered to move forward.
- On January 7, 2015, the government announced an agreement to restructure US$36.6 million in debt owed to the Ex-Im Bank.
  - The agreement resulted in a 50 percent nominal principal reduction, with 47 percent reduction taking effect at closing and 3 percent upon the successful conclusion of the IMF-supported program.

*Italicized source: wp17171 - 2012. The government’s cash flows also came under severe pressure with growing financing*

### 2017. Under the terms of the agreement, the post-haircut balance on the loan will be

### wp17171 - 2017. Under the terms of the agreement, the post-haircut balance on the loan will be

### Debt restructuring terms and hurricane clauses
- Ex-Im Bank loan post-haircut:
  - Repayable over 15 years, which includes a grace period of three and a half years.
  - Interest rate of 7 percent.
  - Restructuring resulted in a NPV haircut of 62 percent.
  - Decline in the public debt stock of 1.8 percent of GDP.
  - Ex-Im Bank withdrew its court case, ending the lawsuit based on the pari passu contractual clause.
  - Ex-Im Bank clause provided automatic deferral of debt service for two periods of debt service following a qualifying hurricane (comparison reference).
- Paris Club agreement (November 19, 2015):
  - Debt rescheduling of US$7.7 million, comprising:
    - Treatment of arrears as of October 31, 2015: US$5.7 million.
    - Treatment of maturities falling due from November 1, 2015, to June 30, 2017: US$2.0 million.
  - Total claims by the Paris Club equaled US$11 million as of November 1, 2015; difference between US$11 million and US$7.7 million comprises maturities due after 2017.
  - Treatment under Classic terms:
    1. Repayment of non-ODA credits over 15 years, with an eight-year grace period.
    2. Repayment of ODA credits over 20 years, with a seven-year grace period.
  - NPV haircuts on official loans estimated to be 3.2 percent using a discount rate of 2.8 percent (OECD CIRR).
  - No principal reduction.
  - Paris Club included a hurricane clause (first time Paris Club creditors agreed to such a provision):
    - Allows creditors “to consider” further debt relief, such as deferral of debt service in the event of a natural disaster based on an independent assessment of damage and “imminent default.”
    - No automaticity or specifics provided in the Agreed Minute about independent assessment or assessment procedures.
    - Clause considered relatively weak compared with private sector/Ex-Im Bank clause.

### IMF engagement and program design
- Political context and program initiation:
  - New National Party came to power in February 2013 and declared default in March 2013.
  - Staff-level agreement reached March 2014; Board approval of a three-year ECF-supported program in June 2014.
- Objectives of the ECF arrangement (Home Grown Structural Adjustment Program, HGSAP):
  1. Enhance competitiveness to promote private sector growth and employment via structural reform.
  2. Secure fiscal and debt sustainability through fiscal adjustment, fiscal legislative reforms, and debt restructuring, while protecting social safety nets.
  3. Strengthen financial sector stability by enhancing regulation and supervision.
- Fiscal adjustment and targets:
  - Program envisaged fiscal consolidation totaling 7½ percent of GDP over 2014–16, balanced between revenue and expenditure measures.
  - Adjustment frontloaded.
  - Anchored by regional debt target of 60 percent of GDP and aim to achieve by 2020.
- Structural reforms and technical assistance:
  - Supported by technical assistance from IMF (headquarters and CARTAC), World Bank, and CANEC DMAS.
  - Focus on rules-based legislated fiscal policy framework, public financial management improvements, broadened tax base, improved revenue administration, transparent tax incentives system.
  - Medium-Term Debt Management Strategy approved in 2016 with IMF and WB TA support.
- Citizenship-by-Investment (CBI) receipts management:
  - CBI program revived in 2013; offers (1) donation to National Transformation Fund (NTF) and (2) investment in approved projects plus fee.
  - NTF regulations stipulate prioritization of public sources for debt reduction and contingency savings and refrain from funding recurrent government expenditure.

### Outcomes: debt stock, cash flow relief, and market indicators
- Effect on debt dynamics:
  - Face-value reductions (50 percent in two steps for the US$ and non-NIS EC$ 2025 bonds) drastically reduced debt service over the medium term, particularly from 2021 onward.
  - Short grace period resulted in new 2030 bonds having comparable near-term debt service obligations to old 2025 bonds.
  - Combined cash flow relief provided by private sector creditors over 2016–20: US$8 million.
  - Total fiscal adjustment over the three years of the ECF-supported program: more than 8½ percent of GDP.
  - Savings expected to contribute to reducing public debt to 85 percent of GDP by end-2016, and to below 60 percent of GDP by 2020 (IMF 2016b).
- Market and ratings:
  - As of January 2017, Grenada had not had a reassignment of credit ratings or issued in the international market; S&P ratings remain NR (assigned October 2014).
  - Prior to reallocation to NR, S&P had assigned SD since March 2013.
  - Bond price recovery from 27 (pre-restructuring) to 55–60 cents on the dollar.
  - Some external debt to non-Paris Club creditors remained un-restructured.
- Post-restructuring redemption profile:
  - Refinancing risk reduced due to sizable face-value haircuts and lengthening of domestic maturities.
  - Risks remaining:
    - Need to lengthen average maturity of domestic debt; otherwise refinancing risk could rapidly increase.
    - Interest rates on 12 percent of the total debt portfolio would reset within the next year (timing context preserved from source).
    - Continued issuance of only T-bills would increase interest rate risk on rollover at uncertain new rates.
    - Future variable-rate debt from multilateral institutions could increase interest rate risk with rising global rates.
    - About 60 percent of total debt portfolio denominated in foreign currency; exchange rate risk considered moderate due to exchange rate peg maintained since 1976; devaluation considered low-probability but high-impact.

### Comparison: 2004–06 vs 2013–15 restructuring — key elements
- Summary table highlights (as presented):
  - 2004–06 vs 2013–15
    - Domestic or external: Domestic / External (both episodes)
    - Face-value haircut: 0% (2004–06) vs 50% (2013–15) (0%) noted parenthetically.
    - NPV haircut: 38% (2004–06) vs 50% (2013–15).
    - Maturity extension (years): 11.7 (2004–06) vs 5 (10) (2013–15).
    - CACs triggered: No (2004–06) vs Yes (2013–15).
- Cash flow relief:
  - 2004–06 restructuring provided US$93 million in cash flow relief over the first five years compared to original obligations.
  - 2013–15 restructuring provided US$8 million in cash flow relief over the first five years.
  - 2004–06 average time to maturity: 18 years; weighted average coupon rate: 6 percent.
  - 2013–15 average time to maturity: eight years; coupon rate: flat 7 percent.
- Debt sustainability implications:
  - Debt restructuring without nominal principal reduction can restore sustainability only if future real economic growth exceeds the real interest rate; assessment highly sensitive to growth and interest rate assumptions.
  - Simulations (assumptions described in source):
    - First restructuring (2004–06): projected medium-term growth of 4.5 percent in 2005 vs realized average growth of -0.6 percent during 2005–15; with realized growth lower than real effective interest rate, public debt ratio expands despite large NPV haircut.
    - Second restructuring (2013–15) with principal reduction: debt trajectory remains below original level under all assumptions except extreme adverse growth shock averaged at -0.6 percent combined with high financing costs at 7 percent.
  - Maturity extension and step-up coupon structures provide benefits primarily under liquidity-shortage conditions and when supported by credible fiscal consolidation and structural reforms.

*Italic: IMF Working Paper wp17171 (2017) — content excerpt provided.*

### 2015. The debt ratio created is a hypothetical index with a starting point of 1. It extracts from the primary

### wp17171 - 2015. The debt ratio created is a hypothetical index with a starting point of 1. It extracts from the primary

### Debt ratio dynamics and refinancing
- The debt ratio index is hypothetical with a starting point of 1 and extracts from the primary balance, additional interest and principal repayments arising from other existing and new debt.
- The refinancing rate made little difference to the debt ratio for the 2005 debt restructuring because, by construction, the cash flows in the earlier period are limited.
- If GDP growth is not higher than the weighted average implied interest rate on the restructured (step-up coupon) debt, the debt ratio will increase.

### Fiscal consolidation and debt sustainability
- Phasing of fiscal adjustment materially affected outcomes:
  - 2006 program aimed at a 4½ percentage points of GDP improvement in the primary balance (excluding grants) to be “phased-in through 2008.”
  - Program envisaged a 2½ percent primary surplus target thereafter and assumed long-term growth of 4 percent; projection was debt-to-GDP to decline to 60 percent by 2015.
  - Actual outturn was an average primary deficit of 3 percent of GDP between 2006 and 2012, resulting in a debt-to-GDP ratio of 110 percent at end-2013.
  - 2014 program envisioned a 7¾ percent of GDP fiscal consolidation targeted over three years, with three quarters of the effort in the first two years; this adjustment would bring debt-to-GDP to 89 percent by 2020, to be complemented by a comprehensive restructuring to achieve the 60 percent regional target.

### Financing during the debt restructurings
- Forms of continuous financing during restructurings typically include:
  - New credit from creditors not subject to the restructuring.
  - Accumulation of arrears to suppliers and creditors.
  - Raising revenues and reducing nonessential expenditures to generate primary surpluses.
- Under an IMF-supported program:
  - New arrears to suppliers are generally not allowed.
  - The IMF will tolerate arrears to private creditors only when prompt support is considered essential and the member is pursuing appropriate policies and good faith creditor engagement.
- Grenada specific flows:
  - During 2004–06, multilateral institutions provided US$15 million in net new credit (two thirds from the CDB).
  - The IMF-supported program provided Grenada with additional SDR 10.5 million.
  - Bilateral creditors provided US$20 million in net new loans (with over half financed by Trinidad and Tobago; Belgium provided a good part of the remainder).
  - During 2013–15, the World Bank, the CDB, and the IMF provided US$57 million in new credit.
  - Bilateral credit experienced a net repayment overall, though the Kuwait Fund, the OPEC Fund, Trinidad and Tobago, and Venezuela provided new credit in 2012 prior to the restructuring.
- Domestic T-bills contribution:
  - Cumulative net financing through 91-day and 365-day T-bills on the RGSM during 2013–15 was EC$29 million and EC$12 million, respectively, for a cumulative total T-bills contribution of EC$41 million.
  - During 2004–06 there was effectively zero net financing from T-bills (the last 91-day T-bill on the RGSM was in November 2003 and not rolled over in February 2004).

### Box 3 — Counterfactual: “Too Little, Too Late?”
- Objective: assess NPV haircut in November 2005 that would make a single deeper restructuring in 2004–06 indifferent to the two restructurings (2004–06 and 2013–15).
- Method: compare present values of cash flows as of November 2005 using the exit yield prevailing at the time of the 2004–06 restructuring (8.9 percent) and at the time of the 2015 restructuring (13.9 percent).
- Key findings:
  - Using exit yield of 8.9 percent, the NPV haircut for the original 2004–06 debt restructuring was 35 percent.
  - For the combined 2004–06 and 2013–15 restructurings (the “combined” restructuring), using the same exit yield, the NPV haircut was 51 percent.
  - Interpretation: to have possibly avoided the second restructuring, a NPV haircut of 51 percent with a principal reduction would have been needed in November 2005 instead of the 35 percent that involved only maturity extension and early coupon relief.
  - Using the exit yield prevailing at the time of the 2015 restructuring (13.9 percent), the NPV reduction of the combined debt restructuring was 69 percent.
- Practical implication: the 2004–06 restructuring may have been “too little, too late,” and an early principal reduction could have reduced the likelihood of a later restructuring.

### T-bills and market mechanics (selected data)
- 91-day T-bills:
  - New issuance examples: 15, 0, 0, 0, 0, 0, 0, 0, 34, 24, 39, 59, 54 (by year in table).
  - Net issuance examples: 15, -15, 0, 0, 0, 0, 0, 0, 0, -10, 15, 19, -5 (by year in table).
- 365-day T-bills:
  - New issuance examples: 0, 24, 21, 23, 34, 35, 46, 55, 56, 47, 49, 56, 58 (by year in table).
  - Net issuance examples: 0, 24, -3, 2, 11, 0, 12, 8, 1, -9, 3, 7, 2 (by year in table).
- Total T-bills net issuance row examples: 15, 9, -3, 2, 11, 0, 12, 8, 35, -19, 18, 26, -3 (by year in table).

### Lessons learned and policy guidance
- Setting appropriate objectives
  - Government should clarify whether the problem is liquidity or solvency and the underlying causes; Grenada’s 2004–06 episode was treated as liquidity-dominated, producing frontloaded cash-flow relief without sufficient debt stock reduction.
- Setting a clear perimeter for restructuring
  - Clarity about which debt is subject to restructuring is essential; Grenada’s 2013 announcement explicitly excluded multilateral institutions and T-bills on the RGSM (accounting for about 30 percent of public debt in 2013).
- Policy and reform actions to anchor credibility
  - Fiscal measures that reduce expenditures and strengthen revenue collection while protecting vulnerable sectors are key to securing creditor agreement.
  - Strong ownership of reforms is critical to secure support from creditors and development partners.
- IMF role and program linkages
  - IMF acts as independent assessor; an IMF-supported program cannot proceed if debt is not sustainable under existing policies, potentially necessitating restructuring subject to IMF policies.
  - In the 2013–15 restructuring, the second nominal principal reduction was contingent on successful completion of Grenada’s three-year ECF-supported program, aligning incentives.
- Designing robust restructuring scenarios and legal clauses
  - Scenario analysis should vary future borrowing costs and growth assumptions; step-up coupons can be problematic unless growth exceeds coupon rates.
  - Early principal reduction can lessen the possibility of future restructurings.
  - Consideration of downside risks including natural disasters motivates clauses such as the hurricane clause.
- Engaging creditors with clear communication
  - Continuous engagement, timely sharing of fiscal and balance of payments data, and transparency (subject to confidentiality where needed) support efficient resolution.
  - Financial and legal advisors help gather and analyze information and communicate proposals to creditors.

### Conclusion and innovations in the 2013–15 restructuring
- Both Grenada restructurings arose from unsustainable debt driven by excessively expansionary fiscal policies and large external shocks.
- The 2004–06 restructuring provided liquidity but insufficient protection against adverse shocks; optimistic growth assumptions contributed to later unsustainability.
- The 2013–15 restructuring achieved substantial outright principal reductions that directly reduce public sector debt by more than 10 percent of GDP and indirectly lower future debt service.
- Innovations in 2013–15 included:
  - Two-step principal haircuts: first half implemented upon exchange, remaining half contingent on completion of the three-year ECF-supported program in 2017.
  - Inclusion of special warrants tied to Grenada’s Citizenship by Investment (CBI) Program entitling bondholders to a capped portion of CBI revenues above thresholds following successful completion of the ECF-supported program.
  - Inclusion of a hurricane clause allowing capitalization of interest and deferral of principal maturities for a specified period in the event of a qualifying natural disaster.
- Final policy emphasis: fiscal vigilance, building resilience and policy buffers, early warning monitoring of external vulnerabilities, and prudent, countercyclical fiscal policy to avoid spending overruns that jeopardize fiscal and debt sustainability.

*Source: wp17171 - 2015. The debt ratio created is a hypothetical index with a starting point of 1.*

### Appendix I. Additional Figures

### Appendix I. Additional Figures

### Overview of Figures A1–A5
- Figure A1: Grenada’s Selected Economic Indicators, 2000–17 — dotted lines represent the two private debt restructuring episodes in 2004–06 and 2013–15; shaded areas indicate projections. Sources: Grenadian authorities and staff estimates and projections.
- Figure A2: Grenada’s Illustrative Debt Trajectories under Different Growth and Interest Rate Assumptions (normalized at 2005/2015 = 100 percent). Sources: Authors' calculations based on Grenadian statistics.
- Figure A3: Primary Balance and Public Debt Developments around Debt Restructurings in the Caribbean. Sources: IMF World Economic Outlook and Asonuma and Trebesch (2016).
- Figure A4: Grenada’s Debt Trajectory — Program Projections versus Actual Outcomes. Sources: Grenadian authorities and authors' calculations.
- Figure A5: Grenada’s Redemption Profile Pre- and Post-Debt Restructuring (in millions of East Caribbean dollars). Sources: Authors' calculations based on Grenadian statistics.

### Key findings illustrated by the figures
- Both restructurings (2004–06 and 2013–15) managed to significantly lower debt service payments.
- Only the 2013–15 restructuring achieved meaningful debt reduction, supported by a strong fiscal consolidation effort that was largely absent during the 2004–06 restructuring.
- The 2013–15 restructuring coincided with a robust recovery in economic activity and improvements in external positions.
- Figure A2 demonstrates alternative debt trajectories under different growth and interest rate assumptions (normalized at 2005/2015 = 100 percent), illustrating sensitivity of debt dynamics to macroeconomic conditions.
- Figure A3 shows that, across Caribbean restructurings, primary balances and public debt developments often remained strained around restructuring episodes.
- Figure A4 compares program projections with actual outcomes for Grenada’s debt trajectory, highlighting deviations between projected and realized paths.
- Figure A5 presents the redemption profile pre- and post-debt restructuring in East Caribbean dollars, documenting shifts in repayment schedules.

### Implications from the figure set
- Debt sustainability outcomes are highly contingent on accompanying fiscal consolidation and post-restructuring economic recovery.
- Reductions in debt service do not always translate into sustainable debt levels absent face-value reduction and credible policy adjustment.
- Projections embedded in IMF-supported programs can differ materially from actual debt trajectories, underscoring uncertainty and implementation risk.

---

### Appendix II. Details of Grenada’s Hurricane Clause

### Comparison across creditor groups (Private Bondholders; Taiwan; Paris Club)
- Event definitions:
  - Private Bondholders: Hurricane insured under CCRIF Parametric Insurance Contract dated June 1, 2015.
  - Taiwan: Hurricane, earthquake, excess rainfall insured under CCRIF Parametric Insurance Contract dated June 1, 2012.
  - Paris Club: “Hurricanes” understood in the wider meaning of the word (including for example tropical storm) but causing serious damage.
- Trigger:
  - Private Bondholders: CCRIF SPC modelled losses exceeding US$15 million.
  - Taiwan: CCRIF SPC modelled losses exceeding US$15 million.
  - Paris Club: Assessment to be made on a case-by-case basis with no pre-defined set of indicators.
- Independent Body:
  - Private Bondholders: CCRIF SPC.
  - Taiwan: CCRIF SPC.
  - Paris Club: “Independent assessments” by IFIs, regional institutions or any organization that the PC Creditors, with the help of the Secretariat, will judge relevant, including the IMF, World Bank. CCRIF SPC, the CDB and the National Hurricane Center.
- Debts Affected:
  - Private Bondholders: Principal and accrued interest due on the deferral dates.
  - Taiwan: Principal and accrued interest due on the deferral dates.
  - Paris Club: Principal and accrued interest. Creditors will have the choice to decide on a bilateral basis whether or not to participate in a debt relief.
- Deferral Dates:
  - Private Bondholders:
    - Up to 6 months or one payment date (if CCRIF SPC payout is greater than US$15 million and less than US$30 million).
    - Up to 12 months or two payment dates (if CCRIF SPC payout is greater than US$30 million).
  - Taiwan: 12 months (two payment dates).
  - Paris Club: Unspecified.
- Repayment Terms:
  - Private Bondholders: Principal deferred and accrued interest deferred and capitalized; both repayable in equal semi-annual installments over the remaining term of the loan.
  - Taiwan: Principal deferred and accrued interest deferred and capitalized; both repayable in equal semi-annual installments over the remaining term of the loan.
  - Paris Club: Unspecified.
- Conditions:
  - Private Bondholders: Policy Payout by CCRIF SPC and submission of the deferral claim.
  - Taiwan: Policy Payout by CCRIF SPC and submission of the deferral claim.
  - Paris Club: Considerable damage and formal request.
- Maximum Numbers of Triggers:
  - Private Bondholders: Three.
  - Taiwan: Three.
  - Paris Club: Not stated.
- Reporting:
  - Private Bondholders: Progress reports on post-event relief, recover and reconstruction programs.
  - Taiwan: Progress reports on post-event relief, recover and reconstruction programs.
  - Paris Club: Not stated.

Sources: Grenadian authorities and Paris Club data.

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### Appendix III. Comparison of Debt Restructurings in the Caribbean

### Scope and episodes reviewed
- Episodes reviewed: Antigua and Barbuda in 2008–12, Belize in 2006–07 and 2012–13, Dominica in 2004, Dominican Republic in 2004–05, Jamaica in 2010 and 2013, and St. Kitts and Nevis in 2012–13.
- Table A1 provides detailed features of these debt restructurings (private and official restructurings, IMF involvement, durations, cuts, NPV haircuts, litigation and holdouts).

### Stylized regional findings
- Dominant drivers of debt accumulation to “unsustainable levels”:
  - Fiscal policy slippages and output losses related to external shocks, including hurricanes.
  - Lack of effective monetary policy under fixed exchange rate regimes, leading to countercyclical fiscal responses and rapid debt accumulation.
- Preemptive, collaborative restructurings are the majority:
  - Most restructurings were implemented preemptively and completed over short durations.
  - Exceptions with negotiations after missed payments (post-default): Antigua and Barbuda in 2008–12, Dominican Republic’s restructuring on external bank loans in 2004–05, and Grenada’s 2013–15 restructuring.
  - Antigua and Barbuda (2008–12) and Grenada (2013–15) had protracted negotiations lasting over 2.5 years due to litigation and the need for deep principal reductions.
- Sequencing with official restructurings and IMF programs:
  - Majority of countries (except Belize, Dominica, Jamaica) had both private and official sector debt restructurings in sequence, alongside an IMF-supported program.
  - Stand-alone private debt restructurings without official external debt restructurings: Belize in 2006–07 and 2012–13, Dominica in 2003–04, Jamaica in 2010 and 2013.
  - Belize (2006–07 and 2012–13) and Grenada (2004–06) restructurings were completed outside an IMF-supported program.
- Depth of relief:
  - About one-third of restructurings included sizable face-value reductions resulting in higher NPV haircuts.
  - Cases with face-value reductions and NPV haircuts above 50 percent: Antigua and Barbuda (2008–12), Dominica (2003–04), Grenada (2013–15), and St. Kitts and Nevis (2011–12).
  - Other cases involved maturity extension and coupon reduction without substantial face-value cuts.

### Outcomes and market access
- Debt sustainability concerns often remained unresolved after restructurings (see Figure A3).
- Public debt frequently remained elevated after exchanges despite settlements with private and official creditors.
- Many countries remained excluded from international capital markets for prolonged periods.
- Exceptional case: Dominican Republic’s 2004–05 restructuring regained market access after only five to 10 months.

### Innovations in Grenada’s 2013–15 restructuring
- Three notable innovations introduced in Grenada’s 2013–15 restructuring:
  1. A two-step nominal haircut in the commercial bond deal:
     - Half of the 50 percent haircut executed at the time of the exchange (2015).
     - The remainder contingent on successful completion of the IMF-supported program in 2017.
     - The first nominal haircut can be reversed if Grenada does not complete the IMF-supported program.
  2. A hurricane clause:
     - Introduced first in the Ex-Im Bank restructuring and also included in the commercial bond deal and Paris Club agreements.
     - Provides temporary debt service relief in the event of qualifying natural disasters (see Appendix II details).
  3. A clause to “claw back” some of the proceeds (up to a certain threshold) from the CBI program:
     - Provides upside potential for NPV recovery to promote participation.
- Historical notes on the innovations:
  - The first and third innovations had precedent in St. Kitts and Nevis restructuring.
  - Grenada was the first to introduce the hurricane-clause tool in its 2013–15 deal.

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### Table A1. Details of Debt Restructurings in the Caribbean — selected entries and metrics
- Dominica (Bonds): Domestic / External; Weakly Preemptive; Jul-03 to Jun-04; Total Duration (Months) 11; Debt Exchanged in US$ bn 0.115; Cut in Face Value 5.0%; NPV Haircut 54.0%; Participation rate n.a.; Number of Litigation Holdouts 72% / 1; IMF Program: PRGF (2003-06).
- Dominican Republic (Ext. Bonds): External; Strictly Preemptive; Apr-04 to May-05; Total Duration (Months) 13; Debt Exchanged in US$ bn 1.100; Cut in Face Value 0.0%; NPV Haircut 4.7%; CACs No; Participation Rate 94%; Number of Litigation Holdouts 0; IMF Program: SBA (2003-05, 2005-08).
- Grenada (Bonds/Loans) 2004–05: Domestic / External; Weakly Preemptive; Oct-04 to Nov-05; Total Duration (Months) 13; Debt Exchanged in US$ bn 0.210; Cut in Face Value 0.0%; NPV Haircut 33.9%; CACs No; Participation Rate 91%; Number of Litigation Holdouts 1; IMF Program: None.
- Grenada (Bonds) 2013–15: Domestic / External; Post-Default; Mar-13 to Nov-15; Total Duration (Months) 32; Debt Exchanged in US$ bn 320.26; Cut in Face Value 43.5%; NPV Haircut 50.3%; CACs Yes; Participation Rate 100.00%; Number of Litigation Holdouts No; IMF Program: PRGF (2014-17).
- St. Kitts and Nevis (Bonds/Loans): Domestic / External; Weakly Preemptive; Jun-11 to Apr-12; Total Duration (Months) 10; Debt Exchanged in US$ bn 0.143; Cut in Face Value 31.8%; NPV Haircut 68.4%; CACs Yes; Participation Rate 100%; Number of Litigation Holdouts No; IMF Program: SBA (2011-14).

Notes from Table A1 (as in source):
- 1/ Classification of domestic and external debt is based on jurisdiction, except for Grenada (2004-05) that is based on creditors' residence.
- 2/ Classification of preemptive or post-default restructuring is based on Asonuma and Trebesch (2016).
- 3/ According to Asonuma and Trebesch (2016), the start of a restructuring process is whenever (i) the government misses the first payment to private external creditors beyond the grace period (default month) or (ii) whenever a key member of government publicly announces a debt restructuring. The end of a restructuring is defined (i) as the month in which either an official signing ceremony took place (in the case of bank debt restructurings), or (ii) as the month in which the debt was ultimately exchanged in the market (in the case of bond restructurings). Duration of a restructuring is defined as the number of months from the start to the end of the restructuring.
- 4/ Total eligible debt to be restructured in the debt operation.
- 5/ Figures do not include past due interest.
- 6/ NPV haircuts for Dominica and Dominican Republic are from Cruces and Trebesch (2013); NPV haircuts for Belize 2006-07 and 2012-13 are from Asonuma and others (2017b); NPV haircuts for Saint Kitts and Nevis and Jamaica 2013 are from Asonuma and others (2017a); NPV haircuts for remaining cases are the authors' calculations.
- 7/ Indicates whether a private restructuring accompanies at least one official debt (Paris Club) restructuring over the period from 1 year prior to the start of the restructuring to 1 year after the end of the restructuring.
- 8/ Indicates whether a private restructuring accompanies an IMF-supported program over the period from the start of the restructuring to the end of the restructuring.
- 9/ Missed coupon payments were added to the face value of the new bond (approximately 7 percent of the original principal), resulting in a net face-value haircut of about 3 percent.
- 10/ The exchange was a par for par exchange, except for fixed rate notes (20 percent face-value reduction targeted to state-owned enterprises).
- 11/ Indicates settlement with holdout creditors.

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*Sources: Figures and tables as presented in "Appendix I. Additional Figures" and subsequent appendices; Grenadian authorities, authors' calculations, IMF World Economic Outlook, Asonuma and Trebesch (2016), and Paris Club data.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17171.pdf_