Public Information Notice: IMF Executive Board Discusses Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework
IMF News, May 23, 2013
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- Published: May 23, 2013
Background and context
- Public Information Notice (PIN) No. 13/61.
- May 20, 2013: Executive Board discussed staff paper “Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework.”
- May 23, 2013: Date of this Public Information Notice.
- Key historical references:
- Last Board review on sovereign debt restructuring: 2005.
- 2012: Greece launched the largest sovereign debt restructuring in history.
- Other recent restructurings cited: Belize, Jamaica, and St. Kitts and Nevis.
- Ongoing litigation against Argentina noted as having potential pervasive implications.
- Scope of the staff paper:
- Reviews recent application of the Fund’s policies and practices on sovereign debt restructuring.
- Draws together policies and practices underpinning the Fund’s legal and policy framework, including on debt sustainability, market access, financing assurances, arrears, private sector involvement (PSI), official sector involvement (OSI), and the use of legal instruments.
- Reviews application of this framework in Fund-supported programs.
- Does not provide reform proposals; identifies issues for potential follow-up staff work.
- Describes recent initiatives in various fora and highlights differences with the Fund’s existing framework.
Executive Board assessment — main findings
- General tone:
- Directors welcomed the discussion and its preliminary nature, enabling initial views on revisiting aspects of Fund policies.
- Broad support for staff plans to proceed on the four areas for follow-up work identified in the paper.
- Timeliness and adequacy of restructurings:
- Observation: Debt restructurings have often been “too little and too late” in recent crisis cases, failing to re-establish debt sustainability and market access durably.
- Recognized that delays may arise from concerns about financial stability and contagion; such concerns should not compromise the Fund’s judgment or effectiveness.
- Welcome for staff plans to analyze causes of delays, including the role of availability of large-scale official financing.
- Majority saw merit in exploring ways to facilitate effective restructurings where debt is unsustainable and feasible adjustment and available new financing are insufficient.
- Cautions against too rigid an approach; recognition of benefits of external expert views.
- Some Directors called for in-depth analysis of restructurings in currency unions and for studying success cases where restructurings were avoided.
- Debt sustainability analysis:
- Fund effectiveness depends on the quality of debt sustainability analysis.
- Directors welcomed recent changes to the Fund’s debt sustainability framework as embodied in the recently issued staff guidance note.
- Encouragement for staff to continue work, including aspects related to restoring market access and growth.
- Contractual framework and collective action:
- Directors generally noted the contractual, market-based approach (notably collective action clauses (CACs)) has worked reasonably well in securing creditor participation and avoiding protracted negotiations in recent restructurings.
- Concern that contractual approach could become less effective for collective action problems, especially in pre-default cases.
- Ongoing litigation against Argentina in U.S. courts seen as potentially influential for future restructurings.
- Support for focusing further work on options to strengthen the contractual framework; some Directors thought statutory frameworks could be worth exploring.
- Support for considering a more robust form of aggregation clause to address holdout problems.
- Openness to examining modalities for linking Fund support to resolution of collective action problems, with attention to creditor rights, inter-creditor equity, and unintended adverse consequences; need for flexibility for country-specific aspects.
- Official sector involvement (OSI) and official creditors:
- Noted growing role and changing composition of official lending and lack of a specific standard for securing program financing commitments from non-Paris Club creditors.
- Concern that uneven practices could create safeguards risks for the Fund.
- Staff assessment that arrears to private and official creditors are currently treated asymmetrically under Fund policy, risking that Fund financing could be held hostage to holdout official bilateral creditors.
- Most Directors saw merit in clarifying the framework for official sector involvement to ensure a more consistent, evenhanded, and transparent approach.
- Several Directors supported extension of membership of the Paris Club.
- Emphasis on weighing costs and benefits of changes to treatment of official bilateral arrears; need for consultations with Paris Club and other official bilateral creditors, review of cases co-financed by regional financing arrangements, and preserving the Fund’s preferred creditor status.
- Lending-into-arrears (LIA) policy:
- Directors generally viewed the collaborative, good-faith approach to resolving external private arrears embedded in the LIA policy as the most promising way to regain market access post-default.
- Saw scope for improving application of the LIA policy, particularly assessment of a member’s adherence to the guiding principles of the good faith criterion.
- Directors open to reviewing the LIA policy, including assessing its objectives and effectiveness.
- Interaction with other fora and initiatives:
- Directors noted that the Principles for Stable Capital Flows and Fair Debt Restructuring and its Addendum contain elements that can contribute to financial stability but are not fully consistent with existing Fund policies and practices.
- Recognition that the Fund is bound by its own legal and policy framework as an independent international financial institution.
Policy guidance, recommended follow-up, and next steps
- Directors encouraged staff to:
- Approach issues with open mind and pragmatism, balancing flexibility and predictability.
- Produce follow-up papers with further analysis and options for each strand of work, based on thorough, objective assessments of pros and cons and drawing on a broader set of recent country examples.
- Endorsed two-stage work program:
- Stage 1: Issues related to timeliness and adequacy of debt restructurings and collective action problems.
- Stage 2: Framework for official sector involvement and the LIA policy.
- Directors emphasized:
- Importance of preserving incentives for countries to implement necessary economic adjustments.
- Need to pay due regard to creditor rights, inter-creditor equity, and potential unintended adverse consequences.
- Importance of consultations with relevant official creditors and review of co-financed cases.
Public Information Notice: IMF Executive Board Discusses Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework; Public Information Notice No. 13/61; May 23, 2013. https://www.imf.org/en/news/articles/2015/09/28/04/53/pn1361