Since the Monterrey Consensus, Member States of the United Nations have welcomed initiatives to reduce the debt overhangs when countries are under debt distress. Considerable progress was made with respect to low-Income Countries (LICs), especially as regards least developed countries (LDCs), whose main creditors are in the public sector.
The Addis Agenda specifically:
- Recognize the need to assist developing countries in attaining long-term debt sustainability through coordinated policies aimed at fostering debt financing, debt relief, debt restructuring and sound debt management
- Commit to support the remaining HIPC-eligible countries that are working to complete the HIPC process; Commit to explore, on a case-by-case basis, initiatives to support non-HIPC countries with sound economic policies to enable them to address the issue of debt sustainability
- Aims to restore public debt sustainability, while preserving access to financing resources under favourable conditions
- Encourages consideration of further debt relief steps [for severe natural disasters and social or economic shocks that undermine a country’s debt sustainability], where appropriate, and/or other measures for countries affected in this regard, as feasible
With regard to public creditors, the established mechanism for resolving defaults, the Paris Club, represents a diminishing share of the stock of lending. Notwithstanding its efficient processes, the Club has been involved in few restructurings since 2015.
Recent non-Paris Club restructurings—which have been protracted and incomplete—appear to bear out growing concerns about reaching timely and effective debt crisis workouts without an agreed international debt-restructuring process. In the case of Chad, an inadequate first restructuring agreement raised the net present value of the loan through the imposition of fees (i.e., no effective debt reduction). It required the country to restructure twice—in 2015 and 2017—in circumstances involving a commercial collateralized lender. For the Republic of the Congo, a restructuring that began in early 2018 remains incomplete (a year-long negotiation with a non-Paris Club creditor recently reached conclusion, but the authorities continue to be in discussions with external commercial commodity traders to restructure collateralized debt). The Gambia’s restructuring took two years to reach agreement in principle, complicated by the large role of non-Paris Club creditors and plurilateral institution lenders (and notwithstanding the helpful efforts of the largest creditor to move the process forward). Finally, Mozambique only recently reached an agreement with its bondholders, three years after first announcing the proposal, but other loans remain under negotiation/litigation. For comparison, the average duration of restructuring with commercial creditors (banks and bondholders) over 1998-2015 was about a year and half.
With the efficacy of existing processes to resolve debt crises in question, urgent attention by the international community is warranted. Improvements to market-based approaches can be considered, including greater use of innovations introduced by practitioners (e.g., trust structures), and potential extension of CACs to subnational debt. At the same time, proposals have been made to introduce basic practical steps for sovereign debt restructurings. They include enforcement of a temporary standstill on creditor litigation while debt-servicing payments are suspended by the debtor government on its own initiative, requiring approval by an independent panel; and creditors providing “debtor-in-possession” financing, granting seniority status to debt after the imposition of the standstill, which would give the debtor additional resources for financing imports and other vital current-account transactions.