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Transparency in debt restructuring processes and intercreditor-equity concerns

Wednesday 13 – Friday 15 September 2023 | WP3258

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While the Common Framework now provides a potential process for restructuring the debt of 73 eligible countries, there is nonetheless no single coherent legal and institutional framework for the governance of sovereign debt crises, debt restructuring processes require separate negotiations concerning different types of financial obligations and involving different sets of creditors. In the view of many participants, this gives rise to issues of sequencing in the debt treatment provided by different groups of creditors, lack of transparency and inter-creditor equity concerns.

Typically, the IMF plays a critical role in sovereign debt crisis resolution processes by providing emergency financial assistance to countries in distress. Debt restructurings generally take place against the backdrop of an IMF programme. Notably, the prior negotiation of an IMF financing arrangement is a pre-requisite for debt treatment under the CF.

However, the final approval of financing arrangements by the IMF’s Board requires the obtaining of financing assurances from official sector creditors concerning the willingness to provide debt relief consistent with the IMF’s debt sustainability assessment (DSA). While traditionally borrowing countries have been responsible for securing financing assurances, as discussed in further detail in section 5 one solution to improve efficiency of the CF restructurings to emerge from the breakout group discussions would be to shift the burden to the IMF itself. An alternate view felt, however, that the IMF is already very active in seeking financing assurances and that blockages have little to do with who is asking for them.

Given the relative flexibility of the IMF’s policy of lending into private sector arrears, financing assurances from commercial creditors are not formally required. However, private sector debt treatments are still bound by the comparability of treatment principle.

Thus, the function of the IMF DSA is key, as it determines the restructuring envelope. However, commercial creditors represented at the conference criticised the process for the formulation of the DSA as lacking transparency and adequate involvement of other stakeholders, i.e., bilateral and official creditors. The commercial creditors generally perceived DSAs as unilateral, based on inconsistent and arbitrary parameters and excessively conservative. The rationale for the distinction between the DSA framework for low-income countries and that for market access countries was also called into question.

In sum, many of the private sector participants asserted that the constraints on the restructuring negotiations imposed by the IMF DSAs foster concerns of inconsistent and unequal treatment, especially among commercial creditors. As discussed further in section 5, a conference breakout group concluded that the inclusion of commercial creditors earlier in the restructuring negotiations could go a long way towards addressing concerns around transparency and allow for a speedier process, not to mention contribute to the development of a fuller set of potential alternative solutions. One potential example in this context could include employing innovative financial instruments that enable adjusting the cash flow depending on variations in the economic indicators post-restructuring relative to the baseline scenario in the DSA. Such instruments could bridge the gap in expectations about the future between commercial creditors and the IMF DSA. However, this bridging function cannot be stretched indefinitely and adds complexity to debt negotiations.


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