## _wp12244

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---

### I. Introduction and initial conditions
- Jamaica faced prolonged low growth and high public debt:
  - Real GDP growth averaged around 1 percent over the past decade.
  - By 2009, public debt was at nearly 140 percent of GDP.
  - Interest payments averaged 52 percent of fiscal revenues during FY2005/06–FY2008/09.
  - A late-1990s financial-sector bailout increased domestic debt stock by 37 percent, accounting for 27 percent of GDP.
- Holdings of government direct debt (percent of total government direct debt):
  - Sec. Dealers and Merchant Banks: 27%
  - Pension funds: 4%
  - Insurance: 11%
  - BOJ: 9%
  - Domestic individuals: 5%
  - Foreign holders of eurobonds: 6%
  - Official creditors: 16%
  - Petrocaribe: 6%
  - Other: 3%
  - Commercial Banks: 13%
- Public debt by instrument (percent of total public debt):
  - External Fixed: 34%
  - External Variable: 7%
  - Domestic Fixed: 19%
  - Domestic Variable: 34%
  - PetroCaribe: 5%
- Impact of the 2008–2009 global crisis:
  - Tourism receipts declined by an estimated 15 percent in 2009:Q1; stay-over arrivals remained flat.
  - Remittances fell by 15 percent in 2009:Q1 (previously growing at 12 percent y-o-y in 2008:H1).
  - Bauxite/alumina production and exports fell by 30 percent.
  - Net international reserves fell from US$2.4 billion in August 2008 to US$1.6 billion in February 2009.
  - Currency depreciated by 22 percent against the U.S. dollar between September 2008 and February 2009.
  - Policy rate increased by over 600 basis points to 21 percent; treasury bill rates exceeded 20 percent and jumped to almost 25 percent by year-end.
  - Rapid growth in NPLs since December 2008 eroded bank buffers; securities dealers held concentrated government bond positions and faced maturity mismatch risks.

### II. Rationale and design of the Jamaica Debt Exchange (JDX)
- Objectives of the JDX (launched January 14, 2010):
  - Offer relief to fiscal accounts through sizable reduction of coupon rates and extension of maturities on most domestically issued bonds.
  - Be par-neutral while providing a cap on interest payments on public debt.
  - Create budgetary space for growth-enhancing public investment and lower private-sector borrowing costs.
  - Safeguard financial-system stability given high domestic holdings of public debt.
- Design features and legal groundwork:
  - Attention to financial stability: centralized support measures to ring-fence the financial system.
  - Voluntary exchange emphasized to reduce legal challenge risk; Attorney General ruled the proposed exchange would not violate the Constitution.
  - Stress-testing by Bank of Jamaica indicated an orderly exchange was absorbable by banks, though selective-default risk weighting could impair capital adequacy; distressed exchange could overwhelm the system.
- Allocation rules and constraints:
  - Reduce share of variable-rate and US$-denominated debt; increase maturity.
  - Holders of fixed-rate instruments could swap only into other fixed-rate instruments.
  - Holders of variable-rate and US$-denominated instruments required to swap into some new fixed-rate and inflation-indexed bonds.
  - Only holders of old US$-denominated debt could acquire new US$-denominated securities.
  - Coupon rates on variable bonds were fixed for first three to 12 months at 11.75 percent (coupon on new one-year fixed-rate bonds).
  - New bonds (except variable rate) stripped of call options.

### III. Fiscal measures, market pressures, and risks
- Fiscal consolidation package (targeted reduction in financing needs: 2.5 percentage points of GDP) included:
  - (i) a freeze on most civil service wages and salaries;
  - (ii) a reduction in capital spending;
  - (iii) an increase in the gasoline tax; and
  - (iv) a broadening of the VAT base.
- Divestment of certain state assets expected to reduce financing needs by about 1 percent of GDP.
- Measures proved insufficient:
  - Revenues below projections due to weaker activity.
  - Interest bill rose from 12.2 percent of GDP in FY2008/09 to a projected 16.2 percent of GDP in FY2009/10 (60 percent of revenues).
  - Financing needs remained very high (in excess of 25 percent of GDP per year over the medium term).
- Downside fiscal and financial risks:
  - Further interest-rate increases, collapse of the domestic bond market, or sharp decline in international reserves.
  - Possible rollover difficulties as investors switched to foreign-currency assets, potentially triggering runs on the currency and financial institutions.
  - Rating agency downgrades in July 2009 and October 2009 compounded short-run debt sustainability concerns.

### IV. JDX implementation, instruments, and initial outcomes
- Timetable:
  - JDX launch: January 14, 2010.
  - Offer Expiration Date: January 26 (extended to February 3).
  - Settlement Date: February 16 (extended to February 24).
  - Citi acted as adviser to the Government of Jamaica.
- Scope and portfolio characteristics:
  - Eligible old bonds totalled US$7.8 billion, equivalent to 65 percent of GDP.
  - J$-denominated debt average interest rate: 19 percent.
  - US$-denominated debt average interest rate: 9 percent.
  - Initial average yield on new J$-denominated bonds: 12.5 percent.
  - Initial average yield on new US$-denominated bonds: 7 percent.
- Structure:
  - Face-value (FV)-neutral exchange of domestically issued bonds for new bonds with reduced coupons and extended maturities; external bonds excluded.
  - New benchmark: 25 bonds (11 fixed, nine variable, three US$-denominated, two CPI-indexed), replacing over 350 securities.
- Participation and immediate market reaction:
  - Participation rate: 99.2 percent (vs. expected 80 percent).
  - The exchange was FV-neutral but initially resulted in a 15–20 percent reduction in net present value (NPV), depending on bond specifics; NPV losses reversed within weeks as interest rates fell below new coupons.
  - Prices on domestic bonds and eurobonds rallied and continued to trade above par post-JDX.
- Quantitative effects:
  - Average maturity of domestic debt extended from 4.7 years before the exchange to 8.3 years after the exchange.
  - Projected amortization during 2010–2012 reduced by J$300 billion.
  - A small amount of eligible debt not tendered was called and redeemed for cash at face value in May 2010.
- Changes in debt composition (percent of total eligible stock):
  - Pre-JDX: Variable Rate 54, Fixed Rate 34, US$ 12, CPI-Indexed 0
  - Post-JDX: Variable Rate 46, Fixed Rate 39, US$ 12, CPI-Indexed 3
  - Difference: Variable Rate -8, Fixed Rate 5, US$ 0, CPI-Indexed 3
- Interest-rate and refinancing exposures (As of March 2010):
  - Variable rate debt (percent): Domestic 56.4, External 20.2, Total 39.3
  - Debt maturing in <1 year (percent): Domestic 10.1, External 2.9, Total 6.7

### V. International support, FSSF, and regulatory measures
- IMF and multilateral support:
  - IMF Executive Board approved a 24-month US$1.27 billion Stand-By Arrangement (approved February 4, 2010).
  - Pledged assistance from World Bank, IDB, and Caribbean Development Bank, together with other multilateral support, totaled approximately 20 percent of GDP.
- Financial Sector Support Fund (FSSF):
  - Established with US$950 million of IMF funds as contingent liquidity support.
  - Access conditions:
    - Available only to institutions that exchanged at least 90 percent of their old government bonds.
    - Managed by the Financial Regulatory Council (FRC), chaired by BoJ.
    - Borrowings to be repaid within 6 months or face a punitive rate.
    - Borrowing above a threshold (as percent of capital) would trigger increased regulatory intervention and reporting.
    - Government to report to Fund staff once 50 percent of FSSF funds disbursed, triggering a review.
  - Conditionality for accessing institutions included enhanced monitoring, five-year business plans (deposit-taking and nonbank institutions) by December 2010 and December 2011, and GOJ capitalization support with board representation and intensified oversight.
- Prudential and regulatory changes:
  - A two-year period for 100 percent risk weighting of GoJ foreign-currency bonds was introduced as a structural benchmark for the IMF-supported program; required parliamentary amendment to implement.
  - No change in risk weighting for J$-denominated government securities.

### VI. Financial-sector impacts, lessons, and remaining vulnerabilities
- Financial-sector responses and outcomes:
  - Securities dealers repositioned books toward shorter-term liabilities; net interest margins largely remained unchanged.
  - Commercial banks reduced deposit rates, introduced new fees, and implemented cost-cutting measures.
  - Bank deposits remained stable; liquidity pressures in SD sector did not materialize as feared.
- Lessons identified for successful design and execution:
  - Careful operational design (stress tests, legal review, consideration of bondholders’ balance-sheet needs).
  - Burden sharing perceived across society improved acceptability.
  - Communication strategy integrated the exchange within a broad macroeconomic and structural reform program.
  - IMF involvement was critical to participation and credibility (JDX was a precondition for IMF support).
- Remaining vulnerabilities and medium-term outlook:
  - JDX did not eliminate the debt overhang; without complementary structural fiscal and growth reforms, public debt approached 140 percent of GDP again.
  - JDX did not trigger meaningful fiscal consolidation beyond the interest-bill reduction; fiscal space pressures (e.g., on public wages) risked entrenching permanent fiscal pressures.
  - Contingent liabilities remained critical:
    - Stock of debt guaranteed by the central government held by public enterprises: US$1.44 billion (12 percent of GDP) as of 2010; most denominated in foreign currency (US$1.1 billion).
    - Non-guaranteed loans of public enterprises: US$883 million (7 percent of GDP).
  - Continued need for:
    - Strong commitment to structural fiscal and growth reforms.
    - Effective debt management strategies to contain interest-rate, rollover, and currency risks.
    - A multi-year credible fiscal adjustment framework underpinned by strengthened expenditure management and liability management (including public entities).

### Selected new benchmark securities (examples from prospectus)
- FR 6.75% USD BM Notes 2013 — Currency USD — Issue Date 24/02/2010 — Maturity Date 22-Feb-13 — Initial Interest Rate 6.75 — Call Option Non-call life — Prudential Treatment Liquid Asset
- FR 7.00% USD BM Notes 2014 — Currency USD — Issue Date 24/02/2010 — Maturity Date 24-Feb-14 — Initial Interest Rate 7.00 — Call Option Non-call life — Prudential Treatment None
- FR 7.25% USD BM Notes 2016 — Currency USD — Issue Date 24/02/2010 — Maturity Date 24-Feb-16 — Initial Interest Rate 7.25 — Call Option Non-call life — Prudential Treatment None
- VR BM Investment Note 2011 — Currency JMD — Issue Date 24/02/2010 — Maturity Date 24-Aug-11 — Initial Interest Rate 11.75 — Reset Margin 1.00 — Reset Basis 1mth-TB — Call Option Any time — Prudential Treatment Liquid Asset
- Benchmark CPI 2022 Notes — Currency JMD — Issue Date 24/02/2010 — Maturity Date 24-Feb-22 — Initial Interest Rate 2.00 — Reset Basis JI — Call Option Non-call life — Prudential Treatment None
- BMI Notes 2040 — Currency JMD — Issue Date 24/02/2010 — Maturity Date 24/02/2040 — Initial Interest Rate 13.25 — Call Option Non-call life — Prudential Treatment None
- (Full prospectus contains 25 benchmark instruments with exact issue dates, maturity dates, initial interest rates, reset margins, reset bases, call options, and prudential treatment as presented in the source.)

- Key headline statistics and milestones:
  - Eligible bonds: US$7.8 billion (65 percent of GDP)
  - Participation rate: 99.2 percent
  - J$ average pre-exchange interest rate: 19 percent
  - US$ average pre-exchange interest rate: 9 percent
  - Initial average yield on new J$ bonds: 12.5 percent
  - Initial average yield on new US$ bonds: 7 percent
  - Average maturity: 4.7 years (pre-JDX) → 8.3 years (post-JDX)
  - Projected amortization reduction (2010–2012): J$300 billion
  - IMF Stand-By Arrangement: US$1.27 billion (24 months)
  - FSSF size: US$950 million
  - Contingent liabilities (guaranteed public enterprise debt): US$1.44 billion (12 percent of GDP) as of 2010
  - Non-guaranteed public enterprise loans: US$883 million (7 percent of GDP)

*Source: _wp12244 - IMF PDF.*

### 1. JDX Processing Timetable ............................................................................................

### 1. JDX Processing Timetable

### I. Introduction
- Jamaica has long struggled with the twin challenges of low economic growth and high public debt.
- Real GDP growth has hovered around 1 percent on average over the past decade.
- By 2009, public debt was at nearly 140 percent of GDP.
- Interest payments averaged 52 percent of fiscal revenues during FY2005/06–FY2008/09.
- A costly financial sector bailout in the late 1990s increased the domestic debt stock by 37 percent, accounting for 27 percent of GDP.
- Holdings of government direct debt (in percent of total government direct debt):
  - Sec. Dealers and Merchant Banks: 27%
  - Pension funds: 4%
  - Insurance: 11%
  - BOJ: 9%
  - Domestic individuals: 5%
  - Foreign holders of eurobonds: 6%
  - Official creditors: 16%
  - Petrocaribe: 6%
  - Other: 3%
  - Commercial Banks: 13%
- Public debt by instrument and variability (In percent of total public debt):
  - External Fixed, 34%
  - External Variable, 7%
  - Domestic Fixed, 19%
  - Domestic Variable, 34%
  - PetroCaribe, 5%

### II. Rationale and Design of the Jamaica Debt Exchange (JDX)
- The JDX was launched in January 2010.
- Primary objectives:
  - Offer relief to fiscal accounts through a sizable reduction of coupon rates and extension of maturities on most domestically issued bonds.
  - Be par-neutral while providing a cap on interest payments on public debt.
  - Create budgetary space for growth-enhancing public investment and lower borrowing costs for the private sector.
  - Safeguard stability and integrity of the financial system given that most public debt was held by domestic financial institutions.
- Design features:
  - Attention to financial stability was a distinctive element of the JDX.
  - Centralized support measures were devised to ring-fence the financial system against tail risk.
  - Bank of Jamaica (BoJ) stress-testing suggested the financial sector could withstand an orderly debt exchange, but additional support measures were considered necessary.

### III. Initial Conditions: Impact of the Global Crisis (as presented)
- The global crisis of 2008–2009 significantly increased pressure on Jamaica.
- Tourism receipts declined by an estimated 15 percent in 2009:Q1.
- Stay-over arrivals remained flat in the same period.
- Remittances, which had been growing at 12 percent (y-o-y) in 2008:H1, plummeted by 15 percent in 2009:Q1.
- Bauxite/alumina production and exports fell by 30 percent due to plant closures from global oversupply.
- A eurobond payment maturing in early 2009 was paid using financing from multilateral development banks.
- The banking system had been highly profitable prior to the crisis due mostly to high interest rates on government securities.
- Rapid growth in NPLs since December 2008 eroded bank buffers.
- Securities dealers (SDs) held most assets in government bonds, making them vulnerable to conventional face value haircut restructurings and subject to maturity mismatch and rollover risks.
- The “retail repo” product used by SDs was akin to a deposit with guaranteed return for customers, leaving dealers exposed to confidence shocks and illiquid government bond portfolios.

### IV. Initial Policy Response
- Between September 2008 and February 2009, the BoJ intervened in the foreign exchange market and sharply tightened monetary conditions.
- The policy rate was increased by over 600 basis points to 21 percent.
- The interest rate on treasury bills settled in excess of 20 percent and jumped to almost 25 percent by year-end.
- The currency depreciated by 22 percent against the U.S. dollar between September 2008 and February 2009.
- International reserves fell from US$2.4 billion in August 2008 to US$1.6 billion in February 2009.
- The government found it increasingly difficult to issue longer-dated domestic securities; investors demanded mainly shorter-dated variable rate and exchange rate indexed securities.
- For the March 2009 budget, the authorities introduced deficit cutting measures equivalent to some (text truncated in source).

### V. Outcomes, Limitations, and Remaining Vulnerabilities
- The JDX provided progress (described elsewhere in the document), but benefits appear ephemeral without complementary reforms.
- In the absence of structural fiscal and growth measures, outstanding public debt is again approaching 140 percent of GDP.
- Jamaica’s debt sustainability requires:
  - Strong commitment to structural fiscal and growth reforms.
  - Effective debt management strategies to contain risks emanating from the debt.
- The remainder of the paper is structured to cover: Section II (overview of macroeconomic and financial conditions preceding the debt exchange and authorities’ policy measures), Section III (rationale behind the exchange), Section IV (operational design of the exchange), Section V (remaining vulnerabilities and conclusion).

*Source: _wp12244 - 1. JDX Processing Timetable (IMF PDF).*

### 2.5 percentage points of GDP. Most notably, these included (i) a freeze on most civil service

### _wp12244 - 2.5 percentage points of GDP. Most notably, these included (i) a freeze on most civil service

### Fiscal measures and fiscal outcomes
- Fiscal consolidation package aimed to reduce financing needs by 2.5 percentage points of GDP. Most notably, measures included:
  - (i) a freeze on most civil service wages and salaries;
  - (ii) a reduction in capital spending;
  - (iii) an increase in the gasoline tax; and
  - (iv) a broadening of the VAT base.
- Divestment of certain state assets was expected to reduce financing needs by about 1 percent of GDP.
- Measures proved insufficient to achieve the fiscal target:
  - Revenues came in below projections because of lower-than-projected economic activity.
  - Sharp jump in interest rates caused the interest bill to rise from 12.2 percent of GDP in FY2008/09 to a projected 16.2 percent of GDP in FY2009/10, or 60 percent of revenues.
  - Financing needs remained very high (in excess of 25 percent of GDP per year over the medium term).

### External reserves, market interventions, and interest rates (figures noted in source)
- Net BOJ intervention is shown as (+) Buy foreign exchange / (-) Sell foreign exchange.
- Net International Reserves and Net BOJ Intervention are tracked (US$ billions) over Sept-07 to Mar-09 (figure axis shown in source).
- Jamaican public bond yields and T-Bill/OMO (180-day) series depicted (2007M12 to 2009M4).
- Jamaican interest rates series (January 2005 to August 2009) shown for:
  - Fed Funds
  - EMBI+
  - JAM Eurobonds
  - JAM T-Bill
- Definitions provided:
  - Fed Funds - Effective US Federal Reserve Federal Funds rate
  - EMBI+ - JP Morgan weighted averaged of emerging market debt instruments
  - JAM Eurobond - JP Morgan Jamaica Blended yield to maturity
  - JAM T-Bill - Bank of Jamaica auction results for the182 days Treasury Bills

### Risks to fiscal and financial stability
- Deteriorating fiscal situation raised concerns about possibility of a fiscal crisis.
- Downside risks included:
  - Further increases in interest rates;
  - A collapse of the domestic bond market;
  - A possible sharp decline in international reserves.
- Rising uncertainties about external and fiscal sustainability could have resulted in difficulties rolling over maturing domestic debt as investors switched to foreign-currency assets.
- Extreme scenario could have unraveled into a crisis, possibly involving a run on the currency and on financial institutions, including nonbanks.
- Financial system vulnerability:
  - Large holdings of government securities by Jamaican financial institutions made commercial banks and especially securities dealers (SDs) vulnerable to the government’s weakening fiscal position.
  - Given the relative size of the SD sector and inter-linkages within financial conglomerates, pressures within the SD sector had potential to spill over to the financial system.
- Rating agency downgrades:
  - Downgrades of sovereign debt in July 2009 and October 2009 heightened short-run debt sustainability concerns.
  - Markets had effectively closed for Jamaica prior to the July 2009 downgrade—Jamaican bonds were trading at over 1,000 bps above those of other emerging economies since late 2008.
  - The October 2009 sovereign downgrade was followed by the downgrade of a large commercial bank with sizable exposure to the government and large margin calls to two securities dealers.

### Rationale for the debt exchange
- Core considerations:
  - Jamaica had a very strong record of servicing its debt and had never reneged on debt payments, raising concerns about efficacy and reputational costs of restructuring.
  - The debt exchange was motivated by the government’s severely affected ability to pay rather than willingness to pay.
  - Large holders of Jamaica’s public debt recognized the government’s precarious position and showed openness to discuss the situation.
  - It was believed that, if accompanied by a comprehensive fiscal reform strategy, a debt exchange would preserve Jamaica’s reputation and be beneficial for the economy and stakeholders.
  - Absent a credible plan to address the debt overhang, ability to service obligations would remain in serious doubt and financial instability risk would stay high.
- Legal issues:
  - Jamaica’s constitution contains provisions making government’s debt payments senior to other expenditure categories; implications for restructuring were unclear.
  - The voluntary nature of the debt exchange was emphasized to fend off potential legal challenge; a thorough legal review was initiated to minimize and potentially eliminate sources of contention.
  - The Attorney General’s formal opinion was sought on constitutionality of proposed features and the final plan to minimize risk of court challenges.
  - In response to MOF’s query, the Attorney General ruled that the proposed debt exchange would not violate the Constitution.

### Financial sector impact assessment and stress test findings
- Stress tests by the Bank of Jamaica revealed:
  - Banks would likely have been able to fully absorb losses from an orderly debt restructuring operation, but capital adequacy would be impaired if government credit rating was set at selective default and new risk weighting standards enforced.
  - An orderly debt operation was likely to impair the capital base in some SDs, possibly creating sizable short-term funding gaps; some degree of regulatory forbearance would be necessary to mitigate immediate impact.
  - A distressed exchange—triggering widespread capital flight and/or a deposit run—could overwhelm the system.

### Safeguards, incentives, and program support
- Measures to address risks and encourage participation:
  - Legal considerations: Attorney General’s opinion sought and obtained.
  - Financial sector stability: Detailed analyses and institution-by-institution stress tests for banking, SDs, and insurance sectors.
  - Stakeholder buy-in: Debt exchange presented as part of a broader comprehensive medium-term economic strategy; consultations held with bond holders about balance sheet needs to increase take-up.
- Mechanisms to encourage participation and limit holdouts:
  - Communication with bond holders emphasized efforts to prevent competitive advantage for opt-outs; government indicated it would consider measures to reduce incentives to holdout, including introducing tax surcharge on interest income earned from old bonds and exercising call options embedded in old bonds.
  - The potential for an IMF Stand-By Arrangement played a positive role; by late 2009 sentiment was that, without an IMF-supported program, Jamaica would quickly tumble into crisis. Government announced no IMF agreement unless there was a debt exchange.
  - IMF-funded Financial System Support Fund established by multilateral institutions to provide liquidity support (at non-punitive rates) for financial institutions negatively affected by the debt exchange. Access to the Fund (with new bonds as eligible collateral) was to be open only to institutions that exchanged over 90 percent of the old government bonds in their portfolios. Access seen as particularly important for nonbanks (SDs and insurance companies) since they had no formal access to BoJ discount window in event of liquidity shortfall.
  - Regulatory forbearance:
    - A 100 percent risk weighting of GoJ foreign currency bonds (standard practice after an exchange with selective default rating) was to be introduced through a two-year period (a structural benchmark for the IMF-supported program).
    - This required a parliamentary amendment of bank capital rules to allow implementation of risk weights on government’s foreign currency instruments, previously capped at 20 percent.
    - No change in risk weighting for J$-denominated government securities took place.
    - While committed to two-year time frame for 100 percent, BoJ subsequently requested an amendment to the IMF program requirement of equal installments to allow flexibility if a financial institution has difficulty meeting the target.
- Access to BoJ discount window for banks was expected to remain unchanged, requiring liquid collateral.

### The Jamaica Debt Exchange (JDX): Launch and design
- JDX launch and timetable:
  - JDX was launched on January 14, 2010.
  - Offer Expiration Date: January 26 (extended to February 3).
  - Settlement Date: February 16 (extended to February 24).
  - Citi acted as adviser for the Government of Jamaica.
- Structure of the transaction:
  - FV-neutral exchange of all Government of Jamaica domestically issued bonds for newly issued bonds with reduced coupons and extended maturities.
  - Externally issued bonds were excluded.
- Scope and portfolio characteristics:
  - Old bonds targeted included local currency (fixed, variable, and US$-indexed) securities and US$-denominated debt.
  - In total these bonds amounted to US$7.8 billion, equivalent to 65 percent of GDP.
  - The J$-denominated debt had an average interest rate of 19 percent, while the US$-denominated debt had an average interest rate of 9 percent.
  - Initial average yield on the new J$-denominated bonds was set to 12.5 percent across instruments and maturities.
  - Initial yield on the new US$-denominated bonds was set to an average of 7 percent.
- Allocation rules (objectives and constraints):
  - Ensure (i) reduction in the share of variable rate and US$-denominated debt to lower exchange rate and interest rate risk; and (ii) increase in maturity of the debt stock post-exchange.
  - Holders of fixed-rate instruments permitted to swap only into other fixed-rate instruments.
  - Holders of variable rate [and US$-denominated] instruments required to swap into some new fixed-rate and inflation-indexed bonds.
  - Only holders of old US$-denominated debt permitted to acquire new US$-denominated securities.
  - All debt had to be exchanged for new portfolios having a longer average maturity.
  - Coupon rates on variable bonds were fixed for the first three to 12 months (depending on maturities) at 11.75 percent—the coupon rate on new one-year fixed rate bonds.
  - With the exception of variable rate bonds, new bonds were to be stripped of call options.

### Outcome (initial summary included in source)
- The results of the debt exchange were substantially better than originally expected.
- The amount of eligible bonds was significantly broader and the participation rate was higher than envisaged (99.2 vs. 80 percent), resulting in significantly larger fiscal savings (approximately [text truncated in source]).

*Source: _wp12244 - excerpt from IMF PDF*

### 3.5 percent of GDP). Furthermore, the average maturity of domestic debt was significantly

### _wp12244 - 3.5 percent of GDP). Furthermore, the average maturity of domestic debt was significantly

### JDX design, immediate quantitative effects, and market reaction
- Average maturity of domestic debt extended from 4.7 years before the exchange to 8.3 years after the exchange.
- Projected amortization during 2010–2012 was reduced by J$300 billion.
- A small amount of eligible debt not tendered was called and redeemed for cash at face value in May 2010.
- The exchange was FV-neutral but initially resulted in a 15–20 percent reduction in net present value (NPV), depending on bond specifics.
- Initial NPV losses were reversed within weeks as interest rates dropped below coupon rates on the new securities.
- Prices on both domestic bonds and eurobonds rallied significantly upon launch of the JDX and continued to trade above par in the post-JDX period.

### International financial support and liquidity implications
- On February 4, 2010, the IMF Executive Board approved a 24-month US$1.27 billion Stand-By Arrangement with Jamaica.
- Pledged assistance from the World Bank, IDB, and Caribbean Development Bank, together with other multilateral support, totaled approximately 20 percent of GDP.
- Debt service relief from the JDX, together with international financial support, significantly reduced liquidity risks in the short term.

### Changes in debt composition and remaining portfolio risks
- Distribution of bonds subjected to JDX (in percent of total eligible stock):
  - Pre-JDX: Variable Rate 54, Fixed Rate 34, US$ 12, CPI-Indexed 0
  - Post-JDX: Variable Rate 46, Fixed Rate 39, US$ 12, CPI-Indexed 3
  - Difference: Variable Rate -8, Fixed Rate 5, US$ 0, CPI-Indexed 3
- Interest rate and refinancing risks (As of March 2010):
  - Variable rate debt (percent): Domestic 56.4, External 20.2, Total 39.3
  - Debt maturing in <1 year (percent): Domestic 10.1, External 2.9, Total 6.7
- The existing debt stock remained exposed to sizable interest rate risk (proxied by share of variable rate debt and debt maturing within a year) and currency risk (proxied by share of FX-denominated in total).
- If these risks materialized, they could lead to significant increases in debt servicing and a substantial increase in the debt-to-GDP ratio in the future.

### Market structure, securities consolidation, and rating agency actions
- The new benchmark bonds: 25 in total, comprised of 11 fixed, nine variable, three US$-denominated, and two CPI-index bonds; these replaced over 350 different securities in circulation.
- Rating agency actions around the exchange:
  - S&P moved its long-term foreign and local-currency sovereign credit ratings on Jamaica to B-.
  - Moody’s raised Jamaica’s government bond ratings to B3 from Caa1 (foreign currency) and Caa2 (local currency).
  - Fitch Ratings moved its rating to B-.
  - The consensus outlook was seen as positive by all three rating agencies.

### Financial sector impacts and institutional responses
- Financial institutions were proactive to minimize interest income losses and enhance balance sheet robustness.
- Securities dealers repositioned books toward shorter-term liabilities (e.g., 30- and 90-day contracts) in the lead-up to the exchange, allowing rapid pass-through of reduced interest earnings to clients.
- Net interest income margins largely remained unchanged relative to the pre-JDX period.
- Commercial banks reduced deposit rates and introduced new fees, and adopted cost cutting and efficiency measures, including downsizing and compensation reform.
- Positive market developments (bonds trading above par) provided an important boost to institutions’ balance sheets and underlying capital positions.
- Bank deposits remained stable and liquidity pressures in the securities dealers sector did not emerge.

### FSSF (Financial Sector Support Fund): design and conditionality
- A Financial Sector Support Fund (FSSF) was established with US$950 million of IMF funds as a contingent measure to address possible negative impacts of the debt exchange on the financial sector.
- Access conditions and operational rules:
  - Available to individual institutions (banks, securities dealers, insurance companies) that participated at a rate of at least 90 percent in the debt exchange.
  - Managed by the Financial Regulatory Council (FRC), chaired by BoJ.
  - Primary use: provide liquidity support in the event of external funding calls or pressure on deposits or assets under management attributable to the debt exchange.
  - Interest rate on FSSF borrowings set to avoid fiscal costs.
  - Any borrowing to be repaid within 6 months or a punitive rate would begin to apply.
  - Liquidity support above a threshold (as a percent of capital) would trigger increased regulatory intervention; regulatory circular to specify supervisory actions at predefined trigger levels.
  - Government required to report to Fund staff once 50 percent of FSSF funds had been disbursed, triggering a review of FSSF use.
- Conditionality for institutions accessing capital support:
  - Enhanced monitoring by BOJ or FSC.
  - Deposit-taking and nonbank institutions required to submit a five-year business plan by December 2010 and December 2011 respectively.
  - GOJ capitalization support to include board representation, intensified supervisory oversight, more demanding reporting requirements, and possible operational restrictions.

### Lessons learned and medium-term outlook
- Key factors behind JDX outcome:
  - Operational design: stress testing for financial-system integrity, consideration of bondholders’ balance sheet needs, legal implications (including constitutional issues), and potential rating agency reactions.
  - Burden sharing: perception that the burden was shared across society, aiding acceptability of accompanying fiscal consolidation.
  - Communication strategy: exchange presented as part of a broad macroeconomic program including comprehensive structural reforms; holdouts were signaled not to gain competitive advantage.
  - IMF involvement: perceived as critical for addressing current account sustainability concerns, achieving high participation (JDX was a precondition for Fund support), and ensuring adherence to fiscal consolidation and structural reform.
- Going forward:
  - JDX did not directly resolve the debt overhang problem; the stock of debt and its structure continued to pose risks for fiscal sustainability.
  - JDX did not trigger meaningful fiscal consolidation beyond reduction of the interest bill; lower interest bill created fiscal space that led to pressures on public wages, building permanent pressures into the fiscal outlook and weakening the medium-term net impact of the exchange.
  - Contingent liabilities remained a critical vulnerability:
    - Stock of debt guaranteed by the central government held by public enterprises amounted to US$1.44 billion, equivalent to 12 percent of GDP as of 2010; most of this debt is denominated in foreign currency (US$1.1 billion).
    - Non-guaranteed loans of public enterprises amounted to US$883 million, equivalent to 7 percent of GDP, which could have implications for public debt if servicing is taken over by the government.
  - Urgent need for policies to restore debt sustainability and investor confidence and safeguard financial sector stability.
  - A multi-year credible fiscal adjustment framework required to put the debt ratio on a downward trajectory, underpinned by strengthened expenditure management and expanded public liability management (including public entities).

### New government benchmark securities post-JDX (selected exact entries from the prospectus table)
- Instrument 1: FR 6.75% USD BM Notes 2013 — Currency USD — Issue Date 24/02/2010 — Maturity Date 22-Feb-13 — Initial Interest Rate 6.75 — Call Option Non-call life — Prudential Treatment Liquid Asset
- Instrument 2: FR 7.00% USD BM Notes 2014 — Currency USD — Issue Date 24/02/2010 — Maturity Date 24-Feb-14 — Initial Interest Rate 7.00 — Call Option Non-call life — Prudential Treatment None
- Instrument 3: FR 7.25% USD BM Notes 2016 — Currency USD — Issue Date 24/02/2010 — Maturity Date 24-Feb-16 — Initial Interest Rate 7.25 — Call Option Non-call life — Prudential Treatment None
- Instrument 4: VR BM Investment Note 2011 — Currency JMD — Issue Date 24/02/2010 — Maturity Date 24-Aug-11 — Initial Interest Rate 11.75 — Reset Margin 1.00 — Reset Basis 1mth-TB — Call Option Any time — Prudential Treatment Liquid Asset
- Instrument 13: Benchmark CPI 2022 Notes — Currency JMD — Issue Date 24/02/2010 — Maturity Date 24-Feb-22 — Initial Interest Rate 2.00 — Reset Basis JI — Call Option Non-call life — Prudential Treatment None
- Instrument 24: BMI Notes 2040 — Currency JMD — Issue Date 24/02/2010 — Maturity Date 24/02/2040 — Initial Interest Rate 13.25 — Call Option Non-call life — Prudential Treatment None
- Full prospectus table contains 25 benchmark instruments with exact issue dates, maturity dates, initial interest rates, reset margins, reset bases, call options, and prudential treatment entries as presented in the source.

*Source: _wp12244 (excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12244.pdf_