IMF Survey : IMF Reforms Policy for Exceptional Access Lending

IMF News, January 29, 2016

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IMF Survey : IMF Reforms Policy for Exceptional Access Lending

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• Published: January 29, 2016

Overview

• The IMF approved a reform to its policy on lending to countries requesting large-scale financing.
• Purpose: promote more efficient resolution of sovereign debt problems and avoid unnecessary costs for the member, its creditors, and the overall system.
• Part of a broader IMF work program to resolve sovereign debt crises and prevent their occurrence.

Evolution of the “exceptional access” framework

• Late 1990s and early 2000s: IMF provided financing in capital account crises, sometimes involving “exceptional access” (financing exceeding normal IMF lending limits).
• 2002: IMF established a comprehensive exceptional access policy framework requiring all four conditions to be met for large-scale financing; one of these was a “high probability” that the member country’s debt is sustainable (the second exceptional access criterion).
• Under the 2002 framework:
  • If the “high probability” bar was met, IMF could lend without requiring any debt operation.
  • If not met, a sufficiently deep debt restructuring was typically required before lending.
  • No intermediate option existed for cases where debt was “sustainable but not with high probability.”

Shortcomings revealed (systemic exemption experience)

• 2010 Greece program: because Greece’s debt was not assessed sustainable with high probability, the 2002 framework required upfront debt reduction; a “systemic exemption” was created to allow financing without debt reduction when there was a high risk of systemic international spillovers.
• Shortcomings of the systemic exemption:
  • It did not prove reliable in mitigating contagion.
  • It increased “subordination risk” for private creditors by replacing maturing private claims with official claims.
  • It entailed substantial costs and risks for the member country and the IMF: delayed restoration of debt sustainability, impaired prospects of program success, and eroded safeguards for IMF resources.
  • It had the potential to aggravate “moral hazard” in the international financial system.

The reformed, more calibrated, but appropriately flexible framework

• Developed by IMF staff in papers in 2013, 2014 and 2015.
• Two main improvements:
  • Removal of the “systemic exemption” created in 2010.
  • Greater flexibility to make financing conditional on a broader range of debt operations, including “debt reprofiling” (short extension of maturities falling due during the program, normally with no reduction in principal or coupons).

• Treatment by debt-assessment zones:
  • Green zone (debt clearly sustainable): IMF provides financing without requiring any debt operation.
  • Red zone (debt clearly unsustainable): a prompt and definitive debt restructuring required to restore debt sustainability with “high probability”.
  • Gray zone (debt sustainable but not with high probability): IMF may grant exceptional access without requiring debt reduction upfront if the member also receives financing from other creditors (official or private) during the program. This financing must:
  • (i) help improve the member’s debt sustainability prospects, without necessarily bringing debt sustainability to the green zone at the outset; and
  • (ii) provide sufficient safeguards for IMF resources.

• Choice of debt treatment in the gray zone:
  • No automatic presumption that reprofiling or any particular option would be implemented.
  • Option selection depends on member’s specific circumstances.
  • If market access retained or private claims falling due during the program are small, private exposure may be maintained without restructuring.
  • If market access lost and private claims falling due during the program are a significant drain, a reprofiling of existing claims would typically be appropriate.
  • Reprofiling is a form of restructuring but likely less costly than a definitive debt restructuring.
  • Scope of debt to be reprofiled determined case-by-case; short-term instruments (by original maturity), trade credits, and local currency-denominated debt have typically not been included in most past restructurings.
  • Official bilateral creditor financing can be provided through extension of maturities on existing claims and/or new financing commitments.

• Tail-event cases:
  • In rare “tail-event” cases where even a reprofiling is untenable because of contagion risks so severe they cannot be managed, the IMF could still provide large-scale financing without a debt operation.
  • Condition: official partners must provide financing on terms sufficiently favorable to backstop debt sustainability and safeguard IMF resources, potentially with assurances that terms could be modified in the future if downside risks materialize.
  • If such assurances cannot be provided (or if debt is unsustainable at the outset), official financing terms would have to be sufficiently favorable to bring debt to the green zone.

Modifications to other exceptional access criteria

• Third (“market access”) criterion:
  • Remains binding even when there are open-ended commitments of official support for the post-program period.
  • Clarified that the timeframe within which a member is expected to gain/regain market access must be consistent with the start of repayment of its obligations to the IMF, not just when the last obligation is due.

Putting it all together — broader sovereign debt work program

• The reform is a central component of a four-pronged work program on sovereign debt crisis resolution endorsed by the IMF’s Executive Board in 2013.
• Prior components completed before this reform:
  • October 2014: Executive Board endorsed key features of enhanced collective action clauses in international sovereign bond contracts.
  • December 2015: Board approved reform of the IMF’s policy on non-toleration of arrears to official bilateral creditors, allowing the IMF to lend in the presence of arrears to official bilateral creditors under carefully circumscribed circumstances.
• Remaining component:
  • Later in the year, the IMF will consider the final component addressing debtor-creditor engagement, including the IMF’s lending-into-arrears policy for private creditors.
• Expected outcome: Together, the four workstreams aim to facilitate resolution of sovereign debt crises and benefit the international financial system as a whole.

IMF Survey : IMF Reforms Policy for Exceptional Access Lending, January 29, 2016.

Content in this bundle

• 040915pdf (PDF)

References

• https://www.imf.org/en/News/country-focus
• PRESS CENTER
• Policy
• Sovereign debt reform
• Fund’s lending framework and sovereign debt (2014)
• Managing sovereign debt
• Factsheet: IMF lending
• Factsheet: IMF crisis lending
• 2013
• endorsed key features of enhanced collective action clauses
• https://www.imf.org/en/home