The IMF reviews its approach to sovereign debt restructuring in a April 26, 2013 report, the first update of this policy since 2005.
There have been important developments in sovereign debt restructuring since the last Executive Board discussion of the subject in 2005. Since the last Board review, Greece launched the largest sovereign debt restructuring in history in February 2012. Other recent restructurings includ e Belize (2007, 2013), Jamaica (2010, 2013), St. Kitts and Nevis (2012), and Grenada which has announced the intention to restructure its public debt. Separately, on going litigation against Argentina could have pervasive implications for futu re sovereign debt restructurings by increasing leverage of holdout creditors. There has also been active discussion of debt restructuring issues in international fora and the Institute for In ternational Finance has recently issued an annex to its Principles in light of th e restructuring experience in Greece.
Against this backdrop, this paper review s the recent application of the Fund's policies and practices on sovereign debt restructuring. Specifically, the paper:
- recaps in a holistic manner the various policies and practices that underpin the Fund's legal and policy framework for sove reign debt restructuring, including on debt sustainability, market access, financ ing assurances, arrears, private sector involvement (PSI), official sector involvemen t (OSI), and the use of legal instruments;
- reviews how this framework has been app lied in the context of Fund-supported programs and highlights the issues that hav e emerged in light of recent experience with debt restructuring; and
- describes recent initiatives in various fo ra aimed at promoting orderly sovereign debt restructuring, highlighting differences with the Fund's existing framework.
Based on this stocktaking, the paper identifies issues that could be considered in further depth in follow-up work by sta ff to assess whether the Fund's framework for debt restructuring should be adapted :
- first, debt restructurings have often been too little and too late, thus failing to re- establish debt sustainability and market a ccess in a durable way. Overcoming these problems likely requires action on severa l fronts, including (i) increased rigor and transparency of debt sustainability and ma rket access assessments, (ii) exploring ways to prevent the use of Fund resource s to simply bail out private creditors, and (iii) measures to alleviate the costs associated with restructurings;
- second, while creditor particip ation has been adequate in recent restructurings, the current contractual, market-based approach to debt restructuring is becoming less potent in overcoming collective action prob lems, especially in pre-default cases. In response, consideration could be given to making the contractual framework more effective, including through the introducti on of more robust aggregation clauses into international sovereign bonds bearing 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 reso lution of collective action problems;
- third, the growing role and changing comp osition of official lending call for a clearer framework for official sector involvem ent, especially with regard to non-Paris Club creditors, for which the modality for securing program financing commitments could be tightened; and
- fourth, although 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, a review of the effectiveness of the LIA policy is in order in light of rece nt experience and the increased complexity of the creditor base. Consideration could also be given to extending the LIA policy to official arrears.