Since the Monterrey Consensus, Member States of the United Nations have welcomed initiatives to reduce the debt overhang in countries that are under debt distress. Considerable progress was made with respect to LICs, whose main creditors were in the public sector. Private creditors also contributed to the debt wrote-down for LICs, even though litigation strategies were pursued in some cases by hold-out creditors. The Addis Agenda recognizes the need to assist developing countries in attaining long-term debt sustainability and commits to a range of actions.
The HIPC Initiative and MDRI are nearly complete. Debt reduction packages under the HIPC Initiative have been approved for 36 countries, 30 of them in Africa, providing $76 billion in debt-service relief over time (see here). Three countries—Eritrea, Somalia, and Sudan—have yet to start the process of qualifying for debt relief under the Initiative.
The devastating impact of the 2017 Atlantic hurricane season put the spotlight on the vulnerability of developing countries to natural disasters and their wide-ranging consequences. Hurricane Irma destroyed infrastructure and homes across Barbuda. Reconstruction costs estimated by the World Bank and Caribbean Development Bank estimated would equal 15 per cent of Antigua and Barbuda’s annual GDP. Hurricane Maria swept over Dominica, causing loss of life and unprecedented destruction estimated at 226 per cent of GDP. As climate change is expected to make such events more frequent and more intense, there is need for the international community to address these risks, and for official sector creditors, in collaboration with countries at risk, to work on pre-emptive and reactive policies to provide appropriate support in times of crisis.
The IMF’s Exceptional Access Lending framework was revamped in January, 2016. The reforms allow IMF lending decisions to be better calibrated to members’ debt vulnerabilities, while avoiding unnecessary costs for the member, its creditors, and the overall system. It has two key elements: (i) allowing for appropriate flexibility, including the use of a “debt re-profiling” option, in situations when debt is assessed as sustainable but not with high probability; and (ii) the elimination of the systemic exemption, introduced in 2010, which has proven ineffective in addressing debt problems and preventing contagion.
In December 2015, the IMF revised its policy on arrears to official bilateral creditors to strengthen incentives for collective action among official bilateral creditors and promote more efficient resolution of sovereign debt crises. The revised arrears policy encourages official bilateral creditors to reach agreement through the Paris Club, consistent with the parameters of the IMF-supported program. If a representative agreement cannot be reached within the Paris Club, and creditor consent is not received, the IMF can still consider lending into arrears owed to official bilateral creditors under carefully circumscribed circumstances ( there is need for prompt support and the member is pursuing appropriate policies; the debtor is making good faith efforts to reach an agreement consistent with program parameters; and the decision to lend into arrears will not have an undue effect on the IMF’s ability to mobilize official financing packages in the future).
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The implementation of the revised policy has started, and experience so far suggests the policy is promoting dialogue between member countries and their official bilateral creditors. The recent IMF program review[s] for Ukraine—completed in a context where there were outstanding arrears to an official bilateral creditor, no representative Paris Club agreement, and no creditor consent—was [were] the first (and so far only) case where an assessment of the criteria was provided to the IMF Board in order to allow completion of the review.
A more fragmented official creditor base could pose coordination challenges in future debt restructurings. Effective official creditor coordination will remain essential, given what are referred to as first-mover (the first creditor to restructure, who in turn gets the most favourable deal), and free-rider (a less cooperative creditor who benefits from concessions given by other creditors) problems. The Paris Club has extensive experience in negotiating debt relief on behalf of a large group of official creditors in ways that overcome these problems. Further expansion of the Club would provide one way to address this challenge in the new environment and thereby strengthen the international financial system.
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Alternatively, official creditors would need to develop other coordination mechanisms. International practice has been not to restructure debts owed to the multilateral institutions and to the IMF, except in exceptional circumstances, such as those addressed by the Multilateral Debt Relief Initiative of 2005. However, there is thus far no experience in restructuring debts owed to new development finance institutions, and it is unclear whether these creditors will demand senior treatment on par with established multilateral creditors (such as the World Bank) that other official bilateral creditors may not accept. A further complication is the case of public sector entities that have purchased and hold the sovereign bonds of other countries. In these circumstances, there could be a lack of clarity about whether the bondholder is a private or an official creditor. Even where this distinction is clear, the existence of official and private creditors in the same voting pool (e.g., in a bond with collective action clauses) could complicate restructurings.
There is no one-size-fits-all solution to these issues under the current international architecture for sovereign debt resolution, and in the absence of a more systematic multilateral solution to this question. Borrowers have sought the help of legal and financial advisors to develop appropriate incentives and penalties to encourage creditors to accept a proposed restructuring and to minimize problems with holdouts.
The IMF has been reviewing its policy on lending into arrears to strengthen incentives for debtor-creditor engagement and timely resolution of debt problems. An ongoing review of that policy with respect to private claims is expected to resume. The policy with respect to official arrears was reformed in 2015, and set up to work in tandem with Paris Club processes. However, it does not provide the same incentives towards resolution when the bulk of creditors are not members of the Paris Club. Options to use the Paris Club as an ad hoc coordinating mechanism for official creditors, or for a large creditor to take this role, have not gained traction versus the use of advisors to coordinate.
The growing importance of official creditors outside the Paris Club and the proliferation of debt-creating financing instruments and modalities, such as collateralized lending, that have raised challenges in debt restructurings. The complexities of resolving unsustainable debt situations have brought new salience to the issue of creditor coordination and long-standing challenges in the existing architecture. It may be timely to review whether a path towards a consensus on these issues might be forged, including on specific elements such as creditor coordination, debtor-creditor dialogue, or temporary standstills, in line with the Addis Agenda, which recognized scope to improve the arrangements for coordination between public and private sectors and between debtors and creditors.