The Role of State-Contingent Debt Instruments in Sovereign Debt Restructurings
Staff Discussion Notes, November 19, 2020
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- The Role of State-Contingent Debt Instruments in Sovereign Debt Restructurings
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Bibliographic details
- Authors: Charles Cohen, Myrvin Anthony, Tom Best, Peter Breuer, Hui Miao, Alla Myrvoda, Eriko Togo
- Published: November 19, 2020
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9781513556482.006
Main findings and context
- The COVID-19 crisis may lead to a series of costly and inefficient sovereign debt restructurings.
- Restructurings are likely to occur during a period of great economic uncertainty, which may lead to protracted negotiations between creditors and debtors over recovery values.
- There is a risk of relapses into default post-restructuring.
- State-contingent debt instruments (SCDIs) could play an important role in improving the outcomes of these restructurings.
Subject areas and keywords
- Subject: Asset and liability management; Bonds; COVID-19; Debt restructuring; Environment; Financial crisis; Financial institutions; Financial instruments; Health; Natural disasters; Public enterprises; Securities; Sovereign debt defaults; Sovereign debt restructuring
- Keywords: Bonds; Caribbean; COVID-19; debt contract; Debt restructuring; debt stock; debt sustainability; Eurobond investor; GDP-linked debt; Global; Global financial crisis; GLW payment; investor appetite; investor participation; investor preference; natural disaster clauses; Natural disasters; natural disasters clauses; Pandemic; reference variable; sector debt suspension; Securities; Sovereign debt default; Sovereign debt restructuring; State-contingent debt instruments; trading partner; upside payout; value recovery instruments; VRI payout
Analytical implications
- Economic uncertainty around COVID-19 increases the likelihood of prolonged creditor–debtor negotiations and contested recovery valuations.
- The potential for post-restructuring relapse into default implies that fixes that do not incorporate state-contingent features may be fragile.
- SCDIs (including instruments tied to GDP or natural-disaster triggers) can align creditor and debtor interests by linking payments to realizations of economic or state variables, thereby improving sustainability and reducing renegotiation risk.
Policy implications and recommendations (implied)
- Consider incorporating state-contingent features into sovereign debt restructurings to improve outcomes amid high uncertainty.
- Use SCDIs to reduce the probability of protracted negotiations and to lower the chance of relapse into default after restructuring.
- Evaluate SCDIs alongside traditional instruments in restructurings arising from pandemic- or disaster-related economic shocks.
Staff Discussion Note: "The Role of State-Contingent Debt Instruments in Sovereign Debt Restructurings", Charles Cohen et al., November 19, 2020. DOI: https://doi.org/10.5089/9781513556482.006
Content in this bundle
- Staff Discussion Note