The IMF's Work on Sovereign Debt Restructuring REZA BAQIR Division Chief, Debt Policy Division Strategy, Policy, and Review Department March 2, 2015, Beirut Motivation The Fund's lending decision plays a central role in a country s decision whether to restructure Prevention and orderly resolution of debt crises is core to the Fund's mandate A Board review was overdue IMF Executive Board last reviewed experience with sovereign debt restructuring in 2005 Important developments in sovereign debt restructuring since last review Greece undertook largest restructuring in history Restructurings in Belize, Jamaica, St. Kitts and Nevis Litigation against Argentina Approach: Market-based / contractual 2 1
Overview of IMF work in the area Roadmap Paper: June (2013) Sovereign Debt Restructuring RecentRecent Developments and Implications for the Fund s Legal and Policy Framework The Fund s Lending Framework and Sovereign Debt Preliminary i Considerations June (2014) Strengthening the Contractual Framework October (2014) Fund s policy on Lending into Arrears Framework for Official Sector Involvement (2016) (2016) 3 IMF s lending policies Under the IMF s Articles of Agreement two requirements for lending: Address underlying BOP problem Protect Fund resources The Fund cannot lend unless debt is assessed to be sustainable If the amount of fiscal adjustment needed to restore sustainability is not economically or socially feasible, debt restructuring needed Needed in minority of cases, but get a lot of publicity In most cases: Fund s catalytic role 4 2
Evolution of lending policies 5 Sovereign debt crises of 1980s Fund supported adjustment programs Private sector involvement Capital account crises 1995-2002 Large private capital flow reversals Large Fund-supported programs: repeated use of f exceptional circumstances clause Growing concerns with large role of discretion Creation of the 2002 exceptional access framework Exceptional access framework 2002 Larger loans, greater safeguards. Key criterion: Debt needs to be sustainable with high probability Three zones of debt sustainability: ebt cators Rising d burden indi Unsustainable Sustainable (but not high h probability) Sustainable, high probability financing for exceptional access financing for exceptional access Exceptional access (catalytic role, no debt restructuring) 6 3
Exceptional access framework (2002) Unsustainable financing Sustainable (but not high probability) financing Sustainable, high probability Exceptional access (catalytic role, no debt resructruing) 7 Introduction of the systemic exemption (current framework, since 2010) Unsustainable financing for exceptional access Sustainable (but not high probability) Debt reduction / concessional financing OR Invoke systemic exemption Sustainable, high probability Exceptional access (catalytic role, no debt restructuring) 8 4
Problems with systemic exemption Does not address underlying problem Leaves official sector at risk Inadequate framework Too broad Too narrow 9 Proposed changes to lending framework Current framework Proposed framework Unsustainable Debt reduction / concessional financing Debt reduction / concessional financing Sustainable (but not high probability) Debt reduction / concessional financingi OR Invoke systemic exemption Maintain non-fund exposure (e.g. reprofile) to improve sustainability prospects and provide insurance Sustainable, high probability Exceptional access (catalytic role, no PSI) Exceptional access (catalytic role, no PSI) 10 5
Proposal When a member has lost market access and debt considered sustainable but not with high probability, Fund lending conditional on a reprofiling Reprofiling: a limited maturity extension that preserves principal and has limited NPV impact Introduce option to g p y, reprofile Remove systemic exemption With a more flexible general framework, no need for systemic exemption In rare tail events, avoid reprofiling if official creditors willing to provide financing on terms sufficient to mitigate risks 11 Benefits: Relative to upfront debt reduction 12 6
Benefits: Relative to bailout A reprofiling improves sustainability Reduced subordination of debt stock Provides for less constrained adjustment path Catalyzes domestic support for the program Provides insurance Reduces exposure of the Fund 13 Overview of IMF work in the area Roadmap Paper: June (2013) Sovereign Debt Restructuring RecentRecent Developments and Implications for the Fund s Legal and Policy Framework The Fund s Lending Framework and Sovereign Debt Preliminary i Considerations June (2014) Strengthening the Contractual Framework October (2014) Fund s policy on Lending into Arrears Framework for Official Sector Involvement (2016) (2016) 14 7
Contractual framework paper (2014) 15 Background UST ICMA Revised proposed pari passu clause Aggregation in collective action clauses Several recent bond issues feature these clauses: Chile, Ethiopia, Kazakhstan, Mexico, Dominican Republic, Tunisia, Vietnam Next steps Board meeting on lending paper (May 2015) Reform proposals for official sector involvement and policy for lending into arrears (2016) 16 8
Thank You Questions/Comments? rbaqir@imf.org 9