Questions and Answers on Sovereign Debt Issues

Last Updated: September 3, 2020

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Recent debt developments

How big is the current debt problem and how is the COVID-19 pandemic affecting countries’ debt burdens?

  • Debt levels were elevated before the crisis. For example, before the onset of the COVID-19 crisis, an IMF paper published in February found that half of low-income countries (LICs) (36 of 70 countries) were at high risk of debt distress or already in debt distress. Many emerging market economies were also at significant risk of debt distress. And by early March, both Argentina and Lebanon had announced that they would seek debt restructurings.
  • The COVID-19 pandemic is adding to spending needs as countries seek to mitigate the health and economic effects of the crisis, while revenues are falling due to lower growth, together raising debt burdens. Some vulnerable countries are also facing higher financing costs. As a result, the pandemic has adversely affected both the solvency and liquidity indicators of most if not all emerging market- and developing economies.
  • The ultimate extent of the debt distress will depend on how deep and prolonged the impact of the pandemic will be, which will vary from country to country depending on the importance of commodity and oil exports, tourism, and remittances. Countries with higher debt burdens will face an even more difficult trade-off between scaling up much-needed health- and social safety net spending and public investment to meet ambitious development objectives on the one hand, and containing debt vulnerabilities on the other.

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The G20 Debt Service Suspension Initiative (DSSI) and the IMF’s role in this initiative.

What does the Debt Service Suspension Initiative (DSSI) mean? 
How much debt service relief will be provided? 
How long will this debt service suspension last? Is this long enough? 
Will all official bilateral creditors comply, or just the G20? 
What progress has been made on getting the private sectors to agree on a debt standstill? 
Do countries need to qualify for IMF financing in order to have access to the G20 debt service suspension initiative (DSSI)?
What is the IMF’s role in supporting the implementation of the G20 DSSI? 
The poorest countries are offered temporary debt service relief, but many of them are already in debt distress or at high risk of debt distress. Wouldn’t it be better to restructure their debt? 
This initiative provides relief to the poorest countries. What about the middle-income countries that also need debt relief? 
Debt service due to the multilateral official creditors (the IMF and the World Bank) is about the same size as to bilateral official creditors. Why not suspend debt service payments to the IMF? 


What does the Debt Service Suspension Initiative (DSSI) mean?

  • The Debt Service Suspension Initiative (DSSI) means that bilateral official creditors will, during a limited period, suspend debt service payments from the poorest countries (73 low- and lower middle-income countries) that request the suspension. It is a way to temporarily ease the financing constraints for these countries and free up scarce money that they can instead use to mitigate the human and economic impact of the COVID-19 crisis.
  • The DSSI helps address immediate liquidity needs but does not mean that existing debt sustainability problems in some of these countries will be resolved. Before the onset of the COVID-19 crisis, debt vulnerabilities had become elevated in many IDA countries, with more than 50 percent being classified as either in or at high risk of debt distress. But DSSI does help by providing more time to properly assess and address debt sustainability on a country-by-country basis.


How much debt service relief will be provided?

  • The overall amount of relief will depend on how many countries request to benefit from the DSSI. It is still too early to say exactly how many countries will take advantage of the DSSI but,  as of mid-August 2020, almost 60 percent of the eligible countries have made requests. We expect some further requests over time.
  • According to G20 creditor data as of July 18, 2020, the requests from countries to benefit from the DSSI received thus far will amount to an estimated $5.3 billion of 2020 debt service to be deferred. The larger estimate of up to $11.5 billion in debt service relief from official bilateral creditors during this year on the World Bank’s DSSI website relates to the whole group of eligible low-income countries, and it may include some debts that are classified as commercial by official bilateral creditors.


How long will this debt service suspension last? Is this long enough?

  • For now, bilateral official creditors have agreed to provide relief until the end of 2020. The purpose is to give quick liquidity relief during the COVID-19 pandemic. The IMF, together with the World Bank, have expressed support for extending DSSI. We will report to the G20 in the Fall on whether there is a need to extend the DSSI beyond end 2020, and we stand ready to help support the potential extension of the DSSI.


Will all official bilateral creditors comply, or just the G20?

  • Broad-based and equitable participation is important. The G20 and Paris Club creditors (who have also agreed to participate) hold the lion’s share of outstanding debt to official bilateral creditors in most country cases. The G20 indicated that all official bilateral creditors will participate, so we hope other official bilateral creditors also contribute to debt relief on equal terms.


What progress has been made on getting the private sectors to agree on a debt standstill?

  • We hope that private creditors will provide relief on equal terms. The recommendation by the International Institute of Finance , the IIF, that private creditors voluntarily grant debt payment forbearance in a similar way, is a welcome development. On May 28, the IIF released Terms of Reference (ToR) to facilitate voluntary private sector involvement in the DSSI after extensive discussions and collaboration with private sector creditors. The IIF’s ToR provide a flexible framework to allow sustained progress in the conversations between sovereign borrowers and creditors.
  • The G20 expects private creditors to use the IIF framework to provide debt service relief on broadly comparable terms as the official sector. By supporting low income countries at this time, private creditors can facilitate their efforts to cope with and recover from the pandemic, which is also in their long-term commercial interest.


Do countries need to qualify for IMF financing in order to have access to the G20 debt service suspension initiative (DSSI)?

  • In order to apply for the DSSI, a country either needs to be in an IMF financing arrangement, or it needs to have requested financing (including emergency financing) from the IMF. However, a request is enough. This means that even countries that could not have access to IMF financing because their debts are not sustainable can still benefit from the DSSI.


What is the IMF’s role in supporting the implementation of the G20 DSSI?

  • The IMF and the World Bank staffs are providing technical support to the Debt Service Suspension Initiative (DSSI), with our country teams working to inform countries about the initiative and also by supporting the provision of information requested by the G20 such as monitoring the use of the resources released by the DSSI to address the pandemic shock.
  • The IMF staff stands ready to play a similar role in relation to a potential extension of the DSSI.


The poorest countries are offered temporary debt service relief, but many of them are already in debt distress or at high risk of debt distress. Wouldn’t it be better to restructure their debt?

  • For those countries that have unsustainable debts, the IMF is precluded from lending unless the member takes steps to restore debt sustainability (including a debt restructuring). Already, the IMF is working with a number of countries to conduct the debt sustainability analysis (DSA) to determine the financing envelope necessary to restore debt sustainability and underpin member’s efforts to gain the debt relief needed to enable a lasting economic recovery.
  • But assessing debt sustainability takes times, especially in the current situation of immense uncertainty about the economic impact of the pandemic. Countries need immediate relief. The DSSI helps to temporarily ease the financing constraints for the poorest countries by freeing up scarce money that they can use to mitigate the human and economic impact of the COVID-19 crisis.
  • Once the impact of the pandemic becomes clearer, it will likely be evident that DSSI is not enough for some countries, so there will be a shift to deeper debt restructuring in those cases. Even in these cases, DSSI does help by providing more time to properly assess and address debt sustainability.


This initiative provides relief to the poorest countries. What about the middle-income countries that also need debt relief?

  • The initiative focuses on IDA countries, because they are the poorest countries and are in urgent need of relief in order to increase health spending and address other needs related to the COVID-19 pandemic.
  • But it is true that some middle-income countries that do not qualify for the G20 official bilateral debt service suspension are also facing severe falls in growth and large impacts on their fiscal and debt positions. The IMF has been providing rapid support through its emergency financing facilities and we are ready to provide further support to a wider range of middle-income countries if needed.


Debt service due to the multilateral official creditors (the IMF and the World Bank) is about the same size as to bilateral official creditors. Why not suspend debt service payments to the IMF?

  • In supplying new financing to member countries, the IMF, like many other IFIs, provides these member countries with much needed resources to deal with emergency situations like this. While most official bilateral creditors have agreed to at least maintain their overall outstanding lending to the beneficiary countries, the IMF and the World Bank are substantially increasing their overall outstanding lending, and this lending is on favorable terms compared to the market.
  • The provision of this additional financing is already well under way. As of September 2, 2020, the IMF Executive Board has approved emergency financing to 47 LICs, totaling about $10.5bn, and support for more is proposed to be approved. More financing may be made available to countries who request additional financing through the Fund’s regular concessional financing facilities.
  • In addition, the IMF is providing debt forgiveness through the Catastrophe Containment and Relief Trust (CCRT). The IMF Executive Board has now approved debt relief to 29 of its poorest and most vulnerable member countries on their IMF obligations for the next six months through this trust. We are working with donors to increase funds for further debt relief through this trust, so that we can extend the duration of grant-based debt relief to our most vulnerable members to up to two years.

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Debt relief

Why does the IMF not utilize its gold holdings, which have recently increased in value, to finance debt relief for low income- as well as middle income countries?
Why can’t the IMF provide more debt forgiveness beyond the Catastrophe Containment Relief Trust? The IMF and WB have forgiven debt before—with the Heavily Indebted Poor Countries Initiative—and the crisis now is much greater than then, so why not?
How do the IMF’s current debt forgiveness efforts compare to previous ones undertaken by the institution?

 

Why does the IMF not utilize its gold holdings, which have recently increased in value, to finance debt relief for low income- as well as middle income countries?

  • Gold provides fundamental strength to the Fund’s balance sheet, benefiting both creditors and debtors alike and enabling the Fund to play its effective role as a crisis lender.
  • This role is particularly important at present when the Fund is undertaking exceptionally large support for its membership in the wake of the COVID-19 pandemic so the Fund has no plans to sell gold at this time.
  • The Fund is focused on what can be done quickly to help the Fund’s poorest members. It is therefore raising additional resources from donor countries to support its capacity to expand concessional lending.
  • Reaching an agreement on gold sales requires a very broad consensus—approval by an 85 percent majority of the total voting power—and this is not a realistic option to help the Fund’s poorest members at this time.

Why can’t the IMF provide more debt forgiveness beyond the Catastrophe Containment Relief Trust? The IMF and WB have forgiven debt before—with the Heavily Indebted Poor Countries Initiative—and the crisis now is much greater than then, so why not?
  • The IMF under its charter is not permitted to simply cancel claims or write off debt. Instead, the IMF’s ability to provide debt forgiveness on its loans to members is based on the availability of grants for the repayment of those loans. The IMF can mobilize these grants from donors, and the IMF does this through trust funds such as the Catastrophe Containment and Relief Trust (CCRT).
  • The CCRT allows the IMF to provide debt relief for the poorest and most vulnerable countries hit by catastrophic natural or public health disasters. In April, 2020, the IMF expanded its provision of debt service relief under the CCRT to cover exceptional balance of payments needs arising from the COVID-19 pandemic, by freeing up financial resources of the Low Income Countries (LICs) to respond to the pandemic.
  • The CCRT is providing grant-based debt service relief to the 29 poorest LICs with outstanding credit to the IMF, for an initial period of 6 months. Efforts are underway, through a fundraising campaign, to request grants from a broad range of donors and to extend the duration of grant-based debt relief to these members to up to two years.
  • The IMF has also temporarily increased access limits under its concessional emergency lending facility, the Rapid Credit Facility (RCF) under the PRGT, to respond more effectively to LICs’ urgent needs. It has accelerated approval procedures for emergency financing. The IMF is currently seeking additional donor support to expand its PRGT concessional lending for low-income countries.

How do the IMF’s current debt forgiveness efforts compare to previous ones undertaken by the institution?
  • The Catastrophe Containment and Relief Trust (CCRT) allows the IMF to provide debt relief for the poorest and most vulnerable countries hit by catastrophic natural disasters or public health disasters. Financed by resources that include donor contributions, it provides grants to pay for debt service to the IMF for a limited time. A new feature in the current CCRT debt relief initiative is to provide grant-based debt relief in tranches so that debt relief can be immediately available to all eligible countries hit by the COVID-19 pandemic without having to wait until the CCRT receives sufficient resources. The up-front grants for an initial tranche covering eligible debt falling due to the IMF within a period not exceeding six months were already disbursed in April, and additional tranches would be provided within the next two years when the CCRT is expected to receive further financial contributions.
  • In April 2020, the IMF expanded its provision of debt service relief under the CCRT to cover exceptional balance of payment needs arising from COVID-19, to help low-income countries create space for urgent spending needs to address the pandemic. Debt service relief in response to the COVID-19 pandemic was mobilized faster than under previous debt relief initiatives, and efforts are currently underway to expand CCRT resources for longer periods of up to two years.
  • Debt relief was previously also provided under the Multilateral Debt Relief Initiative (MDRI), which complemented the Heavily Indebted Poor Countries Initiative (HIPC) by providing additional resources to help eligible countries achieve the United Nations Millennium Development Goals.
  • The IMF Executive Board adopted the MDRI in November 2005, and it became effective on January 5, 2006. The IMF delivered MDRI debt relief of SDR 2.3 billion to 30 qualifying countries. In contrast to the CCRT, which provides grants to pay for debt service for a limited time, the HIPC Initiative and the MDRI provided grants to cancel the debt (as specified in the respective initiatives). However, it also took much longer to put them in place, both in mobilizing the needed resources and in implementation. There is no longer any outstanding IMF debt eligible for MDRI debt relief, and the MDRI trust accounts have been unwound.

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Sovereign Debt Restructuring

Do you foresee a wave of countries having to restructure their debt in the wake of the crisis?
For the large share of LICs that are in debt distress or at high risk of debt distress, will IMF financial support require debt restructurings?
Shouldn’t the IMF ask a country’s external creditors to forgive their loans? Can’t the IMF force creditors to do this?
Is it time to rethink the Sovereign Debt Restructuring Mechanism?

 

Do you foresee a wave of countries having to restructure their debt in the wake of the crisis?
  • During the process of providing emergency financing to countries in response to the COVID-19 crisis, we have seen a significant increase in the debt vulnerabilities of many countries. In some cases, the IMF is advising countries to take steps to ensure that their debt remains sustainable, such as fiscal consolidation in the years after the pandemic. Of course, there are some cases where a deeper debt restructuring will be needed to enable the country to recover from this crisis and restore debt sustainability, and their number may rise if the global slump is deeper and more prolonged. Currently, our main goal is to support the international community in working together to avoid such a scenario.

For the large share of LICs that are in debt distress or at high risk of debt distress, will IMF financial support require debt restructurings?
  • IMF financial support can only be provided for countries with sustainable debt. In some cases, debt sustainability can be restored through sufficient access to concessional financing, while in others, a restructuring of the debt is needed to reduce debt or extend debt service over a longer period.
  • For countries with unsustainable debt, IMF financing may proceed before a debt restructuring is fully completed if: (i) official bilateral creditors provide the IMF with adequate assurances that they will take steps to help restore debt sustainability; and (ii), in cases where a restructuring of debt to private creditors is needed, if the member has taken credible steps towards completing the debt restructuring process in a way that will achieve debt sustainability.

Shouldn’t the IMF ask a country’s external creditors to forgive their loans? Can’t the IMF force creditors to do this?
  • The IMF cannot interfere in debt contracts between countries and their creditors. These are contracts to which the IMF is not a party.
  • It is always the member country’s decision whether to restructure its debt or not, and the IMF advises members to stay current on their obligations to the extent possible. The IMF cannot lend if a country’s debt is unsustainable unless the country is taking steps to restore debt sustainability.
  • The debt restructuring negotiations, and the specific terms of the debt restructuring, as well as the decision on what debt to include in the restructuring, are left to the authorities and their legal and financial advisors.
  • In the context of a sovereign debt restructuring, based on a realistic debt sustainability analysis (DSA), the IMF’s role is to determine the financing envelope that needs to be filled with financing/debt relief. The IMF’s objectives are that the debt restructuring achieves high creditor participation and restores debt sustainability consistent with the DSA. The IMF does not manage the debt restructuring process.


Is it time to rethink the Sovereign Debt Restructuring Mechanism?

  • The IMF has endorsed key features of enhanced collective action clauses and encouraged their inclusion in international bond contracts to facilitate orderly debt restructurings. Nonetheless, the resolution of sovereign debt distress can still be challenging given the diversity of creditors and debt instruments. The IMF with substantial expertise is in the process of reviewing the international architecture.
  • The Fund supports a contractual approach to sovereign debt restructuring. The Sovereign Debt Restructuring Mechanism did not command the requisite majority support in the IMF membership in the early 2000s.