In my first post on the
topic, I have looked at Paris and London club principles and ended by
describing some fundamentals for bond
restructuring. Today, I will turn to two other institutions which are
also inevitable in sovereign debt restructurings, i.e. the
International Monetary Fund (IMF) and the Institute of International
Finance (IIF).
But first, let's have a
look at some numbers from recent sovereign debt restructurings.
Recent restructurings
took, on average, roughly eight months. On
average, the debtor country's debt/GDP ratio was 122 % before the
restructuring and meant to fall by 1/3 within five years after the
restructuring.
Dealing with the
IMF
 |
| IMF Headquarters in Washington |
In one way or another,
every defaulting sovereign will talk to the
IMF. Besides carrying out debt sustainability analysis, the IMF can
grant loans to states in difficulty, either on non-concessional or on
concessional terms. Non-concessional lending conditions are oriented
at arms’ length terms whereas concessional lending constitutes a
form of subsidy to low income countries (LIC).
“When
we [the IMF] lend, we like to see sovereign debt restructuring really
as the exception, not the rule.” (Sean
Hagan, IMF, 11 October 2013)
Non-concessional IMF
lending
“IMF
loans are meant to help member countries tackle balance of payments
problems, stabilize their economies, and restore sustainable economic
growth.” (IMF Website – Lending by the IMF)
The IMF provides five
types of non-concessional lending
facilities. They all come with confusing names and acronyms. To tick
the right box, the IMF asks two basic questions:
- Who can benefit?
- In which situation?
At this stage, I suggest
you click through some slides that I have prepared on the topic. My
hope is that this is easier to grasp than a detailed description of
each credit line.
From
the fund's [International Monetary Fund] perspective, when we lend,
we like to see sovereign debt restructuring really as the exception,
not the rule. (Sean Hagan, IMF, 11 October 2013)
Concessional IMF
lending
To
understand which concessional lending facilities the IMF proposes,
let's tweak the above questions somewhat:
- Who can benefit in which situation?
- What are the lending terms?
Debt
sustainability
One criterion is key for
any of the above IMF facilities – debt sustainability. As a matter
of fact, the fund requires that the debtor country has prospects to
regain access to private capital markets within the time-frame when
IMF resources are outstanding. Recently, however, the debt
sustainability criterion has (in the context of the European
sovereign debt crisis in May 2010) been softened. Today, the IMF is
also willing to lend if there is a high risk of international
systemic spillovers, following a debtor country’s possible default.
“But
while the Fund always takes contagion concerns into account when it
designs and implements its lending policies, it should not allow
these concerns to override or supersede its primary duty to help
members resolve their underlying balance of payments problems.”
(IMF Website – Lending by the IMF)
IIF Restructuring
Guidelines
The Institute of
International Finance (IIF) has put in place several guidelines for
any sovereign debt restructuring process. They are called “Principles
for Stable Capital Flows and Fair Debt Restructuring in Emerging
Markets”. Their application is voluntary for the parties.
The IIF has set up four
principles:
- Transparency and timely flow of information: Debtors must give creditors the information necessary for the latter to appreciate the economic and financial information of the sovereign debtor. If the debtor country reaches agreements with individual creditors, it should inform other creditors about it. Creditors, in turn, grant confidentiality of non-public information.
- Close debtor-creditor dialogue and cooperation to avoid restructuring: This includes namely the debtor taking structural economic and financial reforms and the borrower helping with the implementation of such reforms.
- Good faith actions: When a restructuring becomes inevitable, debtors and creditors should engage in a restructuring process that is voluntary and based on good faith. Contractual rights must remain fully enforceable. A creditor committee should serve as intermediary between the debtor and the different classes of creditors. On the debtor side, the country should resume debt service as a sign of good faith, if possible.
- Fair treatment: Affected creditors should be treated fairly and without discrimination, especially as regards the voting process.
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