Press Release: IMF Executive Board Approves Exceptional Access Lending Framework Reforms
IMF News, January 29, 2015
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- Published: January 29, 2015
Summary of decision and objectives
- Press Release No. 16/31; January 29, 2016.
- The Executive Board approved reforms to the IMF’s exceptional access lending framework (governing access above the Fund’s normal financing limits) to make it more calibrated to members’ debt situations while avoiding unnecessary costs for members, creditors, and the financial system.
- Reforms were put forward in a 2015 staff paper “The Fund’s Lending Framework and Sovereign Debt – Further Considerations.”
- The Board’s January 20, 2016 decision follows a preliminary Board discussion in June 2014 (Press Release No. 14/294).
- Approved reforms include:
- elimination of the “systemic exemption” introduced in 2010;
- increased flexibility where debt is assessed to be sustainable but not with high probability;
- clarification to the criterion related to market access.
Context and prior work program
- In May 2013, the Executive Board endorsed a four-pronged work program and asked staff to present options for reform (Public Information Notice No. 13/61).
- Two of the four components already concluded:
- (i) strengthening the contractual framework to address collective actions problems (Press Release No. 14/459);
- (ii) reforming the IMF’s policy on the non-toleration of arrears to official creditors (Press Release No. 15/555).
- Additional work on private sector involvement in debt restructurings, including the lending-into-arrears policy, will begin shortly.
Executive Board assessment — rationale and intended effects
- Directors supported the broad objectives: modify the framework to allow responses better calibrated to a member’s debt vulnerabilities, promoting more efficient resolution of sovereign debt problems and avoiding unnecessary costs.
- Key reasons for removal of the systemic exemption:
- Using the systemic exemption to delay remedial measures risks impairing members’ prospects for success and undermining safeguards for the Fund’s resources.
- Replacement of maturing private sector claims with official claims (including Fund credit) effectively subordinates remaining private sector claims in a restructuring.
- The systemic exemption aggravates moral hazard and may exacerbate market uncertainty in periods of sovereign stress.
- Invoking the systemic exemption leaves underlying debt vulnerabilities unaddressed and may not reliably limit contagion.
Operational approach under the reformed framework
- Three debt-assessment cases and corresponding IMF approaches:
- When the Fund is confident that debt is sustainable with high probability:
- Continue to provide financing in support of a strong adjustment program that envisages payment of outstanding obligations as they fall due (includes cases where a member may have lost market access temporarily).
- When debt is clearly unsustainable:
- Prompt and definitive debt restructuring to restore debt sustainability with high probability is the least-cost approach.
- When debt is assessed to be sustainable but not with high probability:
- Requiring a definitive debt restructuring could incur unnecessary costs; exceptional access may be granted if the member also receives financing from other sources during the program on a scale and terms such that program-supported policies and associated financing improve debt sustainability and sufficiently enhance safeguards for Fund resources.
Options and case-by-case considerations where debt is sustainable but not with high probability
- No presumption for any single option; choice depends on case circumstances and must be justified.
- Possible options include:
- If the member retains market access, or the volume of private claims falling due during the program is small:
- Maintain sufficient private exposure without restructuring private claims.
- If the member has lost market access and private claims falling due during the program would be a significant drain:
- Reprofiling of existing claims (short extension of maturities falling due during the program, normally no reduction in principal or coupons) would typically be appropriate; likely less costly than definitive restructuring.
- Scope of debt to be reprofiled determined case-by-case; not advisable to reprofile a category of debt if costs (including risks to domestic financial stability) outweigh potential benefits.
- Notably, short-term debt instruments (by original maturity), trade credits, and local currency-denominated debt had not been included in most past restructurings.
- Financing from official bilateral creditors:
- Could be provided through extension of maturities on existing claims and/or new financing commitments.
- Timing:
- Ideally, reprofiling should be undertaken before approval of the Fund arrangement.
- There may be circumstances warranting more flexibility so the conclusion of the debt operation is contemplated at a later date; Fund support would not necessarily be held up until complete clarity regarding terms of this financing.
Rare tail-risk cases and official financing backstops
- If any restructuring of private claims, even a reprofiling, poses unmanageable risks to domestic financial stability or cross-border spillovers, the reformed framework allows the Fund to approve exceptional access without such restructuring if:
- Official sector partners are willing to provide necessary financing on terms sufficiently favorable to improve sustainability and enhance safeguards for Fund resources; and
- There are assurances that terms could be modified in future if the debt sustainability outlook deteriorates significantly.
- If official creditors are unwilling to provide such assurances, financing terms would need to be sufficiently generous upfront to restore debt sustainability with high probability.
- In circumstances where debt is unsustainable, official bilateral financing would similarly need terms sufficiently favorable to restore debt sustainability with high probability (e.g., loans with long tenors and concessional rates, grants, or other instruments).
- Directors noted these requirements would be implemented flexibly and that political commitments could backstop debt sustainability without all modalities needing to be fully specified upfront.
- Directors viewed this alternative as more effective than the systemic exemption for addressing debt problems and mitigating contagion at its source, while noting moral hazard concerns and the expectation that the approach be used only rarely and evenhandedly.
Role of debt sustainability assessments and judgement
- The Fund’s assessment of debt sustainability remains central to exceptional access decisions.
- Determinations are inherently forward-looking and will involve significant judgment, taking into account:
- country-specific information on prospects for policy implementation;
- growth opportunities;
- contingent liabilities;
- the nature of the creditor base;
- indicators of investor confidence;
- outlook for the global economic environment.
- Levels of debt consistent with sustainability could vary significantly across programs.
Market access criterion: clarification and application
- Directors supported that the market access condition must be met even when there are open-ended official support commitments beyond the program period.
- Resolution of a member’s balance of payments problem and achievement of medium-term external viability is a key objective; a member’s ability (distinct from its need) to access private capital markets is inherent to this resolution.
- Official financing commitments can provide a backstop against downside risk but do not render the market access criterion moot; staff should consider positive impacts of official support commitments on market access on a case-by-case basis.
- Clarification on timeframe: Directors supported staff’s clarification that the Fund has generally expected a member to gain or regain market access within a timeframe that facilitates repayment of all of its obligations to the Fund — not just the last one that is due, as the current wording of the third criterion might suggest.
Implementation and next steps
- Changes enter into effect immediately and apply to all future completion of reviews under existing arrangements or approval of new Fund arrangements.
- Directors called on staff to continue work on ensuring the Fund’s lending toolkit is effective in addressing systemic crises and contagion.
- Directors look forward to upcoming review of debtor-creditor engagement issues, including the Fund’s lending into arrears policy, to complete the work program aimed at facilitating timely and orderly resolution of sovereign debt problems.
International Monetary Fund — Press Release No. 16/31; January 29, 2016.