Sovereign Debt Restructuring - Recent Developments and Implications for the Fund's Legal and Policy Framework

Policy Papers, April 26, 2013

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This paper reviews the recent application of the Fund’s policies and practices on sovereign debt restructuring.
Scope:
- Recaps in a holistic manner the various policies and practices that underpin the Fund's legal and policy framework for sovereign debt restructuring, including on debt sustainability, market access, financing assurances, arrears, private sector involvement (PSI), official sector involvement (OSI), and the use of legal instruments.
- Reviews how this framework has been applied in the context of Fund-supported programs and highlights the issues that have emerged in light of recent experience with debt restructuring.
- Describes recent initiatives in various fora aimed at promoting orderly sovereign debt restructuring, highlighting differences with the Fund’s existing framework.

Debt restructurings have often been too little and too late, thus failing to re-establish debt sustainability and market access in a durable way.
Creditor participation has been adequate in recent restructurings, but:
- The current contractual, market-based approach to debt restructuring is becoming less potent in overcoming collective action problems, especially in pre-default cases.
The growing role and changing composition of official lending call for a clearer framework for official sector involvement, especially regarding non-Paris Club creditors.
The collaborative, good-faith approach to resolving external private arrears embedded in the lending into arrears (LIA) policy remains the most promising way to regain market access post-default, but:
- A review of the effectiveness of the LIA policy is in order given recent experience and the increased complexity of the creditor base.
- Consideration could be given to extending the LIA policy to official arrears.

First: Causes of insufficient and delayed restructurings and potential responses
- Increased rigor and transparency of debt sustainability and market access assessments.
- Exploring ways to prevent the use of Fund resources to simply bail out private creditors.
- Measures to alleviate the costs associated with restructurings.
Second: Collective action problems and contractual framework
- Consideration could be given to making the contractual framework more effective, including through the introduction of more robust aggregation clauses into international sovereign bonds.
- Any such contractual changes should bear in mind the inter-creditor equity issues that such an approach may raise.
- The Fund may also consider ways to condition use of its financing more tightly to the resolution of collective action problems.
Third: Official sector involvement (OSI)
- The modality for securing program financing commitments could be tightened, particularly with regard to non-Paris Club creditors.
Fourth: Lending into arrears (LIA) policy
- Review the effectiveness of the LIA policy given recent experience and the increased complexity of the creditor base.
- Consider extending the LIA policy to official arrears.

Source: Sovereign Debt Restructuring - Recent Developments and Implications for the Fund's Legal and Policy Framework (April 26, 2013).