IMF Survey : IMF Launches Discussion of Sovereign Debt Restructuring

IMF News, May 23, 2013

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Canonical URL: IMF Survey : IMF Launches Discussion of Sovereign Debt Restructuring

IMF developing a new work program on sovereign debt restructuring in response to fallout from the global crisis and recent country cases.
Study: "Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework" serves as the starting point for future IMF work and outlines a range of policy proposals.
Study scope includes recent restructurings and issues that have emerged; future work will expand case-history analysis and policy options.

IMF lending mandate: lend to help countries resolve balance of payments problems within a timeframe that allows return to medium-term viability and repayment to the Fund.
The IMF cannot lend when debt is assessed to be unsustainable; thus IMF financing often becomes the trigger for a country to restructure.
Debt sustainability analysis by the IMF "effectively determines the parameters of that restructuring by indicating how much debt relief is needed."
The IMF does not micromanage restructurings but plays an important role when restructurings occur in the context of IMF-supported programs requiring creditor support and restoration of debt sustainability.

Reviewed nine new restructuring cases that have taken place since the last comprehensive review in 2005.
Finding 1: Restructurings often come "too late and are too limited to really restore debt sustainability," which can be very costly:
- Debt overhang hinders market access and growth, damages confidence, and deters investment.
- If debt is unsustainable and obvious to markets, private investors may exit while official sector—including the IMF—provides financing, resulting in official money going in while private creditors’ money goes out.
- This dynamic can be inconsistent with IMF lending principles by failing to solve the underlying problem.
Finding 2: The current contractual, market-based approach (increasingly relying on collective action clauses in debt contracts) "may be becoming less potent in overcoming collective action problems."
- The contractual approach has been working reasonably well, but recent cases show signs of reduced effectiveness in preventing holdouts.

The IMF will remain centrally involved because of its "lender of last resort" role.
Key policy tensions:
- Need flexibility in sovereign debt restructuring cases versus avoiding policies that encourage undue procrastination.
- Need ability to provide large amounts of financing in truly critical situations.
- Difficulty of setting a rigid framework of rules; consideration of better defined criteria to guide IMF discretion.
Approaches to collective action problems:
- A statutory approach (e.g., sovereign debt restructuring mechanism discussed in 2003) is a possible solution, but "there is not sufficient support in the international community for this type of approach."
- Therefore, near-term focus will be on strengthening the contractual approach.

Executive Board agreed staff should do further work, including:
- More extensive study of case histories of both countries that restructured and those that resolved problems without restructuring.
- A 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 lending-into-arrears policy.
- Follow-up papers with further analysis and policy options for each strand of work, based on objective assessments and broader recent country examples.
Anticipated timeline: "We envisage that it could be a year or so from now before the IMF’s Board is ready to consider possible modifications to Fund policies in this area."

Source: IMF Survey : IMF Launches Discussion of Sovereign Debt Restructuring, May 23, 2013.