Public Information Notice No. 13/61

Public Information Notice: IMF Executive Board Discusses Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework

May 23, 2013

On May 20, 2013, the Executive Board of the International Monetary Fund (IMF) discussed a staff paper on “Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework.”

Background

There have been important developments in sovereign debt restructuring since the last Board review of the subject in 2005. In 2012, Greece launched the largest sovereign debt restructuring in history. Other recent restructurings include Belize, Jamaica, and St. Kitts and Nevis. Separately, ongoing litigation against Argentina could have pervasive implications for future sovereign debt restructurings. There has also been active discussion of debt restructuring issues in international fora.

Against this backdrop, the staff paper reviews the recent application of the Fund’s policies and practices on sovereign debt restructuring. Specifically, the paper draws together 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. The paper reviews how this framework has been applied in the context of Fund-supported programs. It does not provide reform proposals, but identifies issues that could be studied further through follow-up staff work to assess whether the Fund’s framework for debt restructuring should be adapted. The paper also describes recent initiatives in various fora aimed at promoting orderly sovereign debt restructuring, highlighting differences with the Fund’s existing framework.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss recent developments in sovereign debt restructuring and review their implications for the Fund’s legal and policy framework in this area. They welcomed the preliminary nature of the discussion, which allowed them to express initial views on the merits of revisiting certain aspects of the Fund’s policies. Directors broadly supported staff plans to proceed on the four areas for follow-up work identified in the paper.

Directors noted the staff’s observation that debt restructurings have often been too little and too late in recent crisis cases, thus failing to re-establish debt sustainability and market access in a durable way. They recognized that delays in debt restructuring may arise from concerns about financial stability and contagion. At the same time, Directors emphasized that these concerns should not compromise the Fund’s judgment or undermine its effectiveness in helping members resolve their underlying balance-of-payments problems. In this context, they welcomed staff plans for further analysis to better understand why debt restructurings have often been delayed, including the role played by the availability of large-scale official financing. Most Directors saw merit in exploring ways to facilitate effective debt restructurings where debt is unsustainable and the extent of feasible economic adjustment and available new financing are not sufficient to restore viability. In doing so, a number of Directors cautioned against too rigid an approach, and there was also recognition of the benefits of seeking views from external experts. Directors expressed a range of preliminary views on possible measures to involve private creditors and on whether the exceptional access policy should be modified. Some Directors called for an in-depth analysis of the implications of debt restructurings in currency unions, given close economic and financial linkages among union members and potential for spillover risks. Some also felt that it would be useful to study success cases in which debt restructurings had been avoided. Directors noted that efforts to facilitate effective sovereign debt restructurings should not undercut incentives for countries to implement necessary economic adjustments. Directors stressed that the Fund’s effectiveness in helping members address their debt problems depends on the quality of the underlying debt sustainability analysis. In this context, they welcomed recent changes to the Fund’s debt sustainability framework, as embodied in the recently issued staff guidance note, which they hoped would provide for more rigorous and transparent analysis of public debt sustainability. They encouraged staff to continue working in this area, including by looking further at aspects related to restoring market access and growth.

Directors generally noted that the contractual, market-based approach, notably the use of collective action clauses (CACs) in sovereign bonds, has worked reasonably well in securing creditor participation and avoiding protracted negotiations in recent debt restructurings. They observed, however, that such an approach could become less effective in dealing with collective action problems, especially in pre-default cases. A number of Directors noted that the ongoing litigation against Argentina in U.S. courts could have implications for future sovereign debt restructurings. Directors saw the benefits of focusing further work in this area on options to strengthen the existing contractual framework, although they recognized that collective action problems could, in principle, be addressed under a statutory framework, which in the view of some Directors could be worth exploring. In addressing the holdout problem, Directors supported the view that consideration could be given to a more robust form of aggregation clause. Most were also open to further examination of the merits and feasibility of possible modalities for linking Fund support to the resolution of collective action problems. In taking the work forward, Directors encouraged staff to pay due regard to creditor rights, inter-creditor equity issues, and other unintended adverse consequences. The need for appropriate flexibility to accommodate country-specific aspects was also highlighted.

Directors noted that the growing role and changing composition of official lending and the lack of a specific standard for securing program financing commitments from non-Paris Club creditors may lead to uneven practices across country cases and could create safeguards risks for the Fund. Similarly, they took note of the staff’s assessment that arrears to private and official creditors are currently treated asymmetrically under Fund policy, creating the risk that Fund financing could be held hostage to holdout official bilateral creditors. In light of these developments, most Directors saw merit in clarifying the framework for official sector involvement to ensure a more consistent, evenhanded, and transparent approach. In this regard, a number of Directors would support the extension of the membership of the Paris Club. A number of Directors stressed the need to weigh carefully the costs and benefits of any change to the Fund’s treatment of official bilateral arrears. Directors raised some specific issues for emphasis, including the need for consultations with the Paris Club and other official bilateral creditors, a review of cases co-financed by regional financing arrangements, and the importance of preserving the Fund’s preferred creditor status.

Directors generally shared the view that the collaborative, good-faith approach to resolving external private arrears embedded in the Fund’s lending-into-arrears (LIA) policy remains the most promising way to regain market access post-default. Nevertheless, they saw scope for improving the application of the LIA policy, in particular with regard to how a member’s adherence to the underlying guiding principles of the good faith criterion should be assessed. Directors were open to consideration of a review of the LIA policy that could include an assessment of its objectives and effectiveness.

With regard to recent initiatives in various fora aimed at promoting orderly debt restructurings, Directors took note that, while the Principles for Stable Capital Flows and Fair Debt Restructuring and its Addendum contain elements that can contribute to financial stability, they are not fully consistent with existing Fund policies and practices on sovereign debt restructuring. Directors recognized that the Fund, as an independent international financial institution, is bound by its own legal and policy framework.

In today’s discussion, Directors raised several important issues that are relevant for the four broad areas identified for further work in the staff paper. They encouraged staff to approach these issues with an open mind and pragmatism, finding the right balance between flexibility and predictability. Directors looked forward to follow-up papers providing further analysis and outlining options for each strand of work, based on thorough, objective assessments of pros and cons of each option, and drawing on a broader set of recent country examples. Directors supported the two-stage work program that would begin with issues related to the timeliness and adequacy of debt restructurings and collective action problems, followed by the framework for official sector involvement and the LIA policy in later stages. Directors considered that, although the work on this complex subject is still in its initial stage, the Fund has important contributions to make to the ongoing debate on sovereign debt restructuring.