Earlier this year, International Monetary Fund (IMF) staff issued a guidance note entitled “Information Sharing in the Context of Sovereign Debt Restructuring.” It did not attract the amount of attention it deserves. To the extent that the Guidance Note results in key economic information regarding the sovereign debtor being shared with creditors at an earlier stage in the restructuring process, it can reduce delays—for the benefit of all stakeholders. In an environment where debt distress remains elevated for a significant number of low income and emerging-market countries, this is a timely initiative.
The Guidance Note focuses on the IMF’s Debt Sustainability Analysis (DSA), which plays a critical role in the restructuring process in two respects.
First, the DSA effectively determines whether and when a sovereign debt restructuring process will begin. When a country loses market access, and therefore cannot refinance its debt, it will typically approach the IMF to obtain the financial support needed to avoid a restructuring. The country in distress will be concerned about the loss of hard-earned creditworthiness and the considerable economic dislocation that a restructuring can create, especially when the debt is held in the domestic banking sector. However—and this is where the DSA comes in—if the IMF concludes that the country’s debt burden is so high that it cannot repay creditors the full amount due under any feasible economic adjustment scenario (i.e., the debt is unsustainable), it will have no choice but to require a debt restructuring as a condition for its assistance.
Second, the DSA will determine the overall amount of debt relief that is needed. Having determined that a debt restructuring is necessary, the DSA is relied upon to calculate how much debt relief is needed to make the debt sustainable. This calculation is factored into the program that the IMF supports during the adjustment process.
Importantly, when the DSA reveals that a country’s debt is unsustainable, the interests of the IMF, the country, and (most) private creditors are, at least in principle, aligned on the need for a rapid restructuring process that restores sustainability—for two reasons.
First, when debt is unsustainable, it is not in the interests of private creditors (other than those whose claims are about to fall due) for the initiation of the debt restructuring process to be delayed though an IMF bailout. If the IMF continues to provide financing to repay maturing obligations, it will effectively be replacing these creditors. Because of the IMF’s de facto preferred creditor status, the remaining creditors will each have to contribute more to secure the needed level of debt relief when the restructuring process—which is now inevitable—arrives.
Second, once the restructuring process is initiated, most private creditors generally have an interest in completing the restructuring rapidly in a manner that clearly restores sustainability. Even when a restructuring involves a reduction in the principal amount, it will be preferable—in terms of the recovery value reflected in the secondary market price—for there to be rapid closure. A protracted process will only result in a further depreciation of the secondary market value of the original instrument, particularly when the delay contributes to greater economic dislocation in the country in question. Moreover, minimizing the haircut in a manner that significantly compromises sustainability will only adversely affect secondary market values after the restructuring.
Notwithstanding this alignment of interests, creditors cannot engage in negotiations until they have access to the key information contained in the DSA, since this information reveals, among other things, the overall quantum of debt relief that is needed. However, under existing policy, the full DSA is not published until after the IMF executive board has approved the program supporting the restructuring process—which can be months after the need to restructure has been announced by the country authorities.
The Guidance Note seeks to address this problem by making a distinction between (a) the full DSA document—which, as noted above, must await executive board approval as a matter of Fund policy—and (b) the key economic parameters underpinning the DSA, which IMF staff is now prepared to share with creditors at earlier stages of the process. Specifically:
Once an agreement has been reached between IMF staff and the authorities on a program (“staff level agreement”) the IMF is prepared to share both the debt targets that must be achieved to secure sustainability and the underlying macroeconomic assumptions that underpin both the DSA and the agreed-upon program. While this information has often been made available to official bilateral creditors at the time of the staff level agreement, the Guidance Note signals a willingness to share the same information simultaneously with private creditors subject to confidentiality safeguards.
In addition—and this is perhaps the most consequential aspect of the Guidance Note—the staff should be willing to share relevant information underpinning the DSA (again subject to confidentiality safeguards) at an even earlier stage of the process: namely, after the authorities’ announcement of the need to restructure but before a staff-level agreement on a program has been reached. Importantly, the Guidance Note indicates that the information in question will be of a preliminary nature and that, at this early stage, IMF staff “is mainly seeking to receive information from and hear the views of creditors.”
What does this mean? Clearly, the IMF is not inviting creditors to negotiate the DSA. The Guidance Note explicitly rules this out—for good reason. As I have indicated elsewhere, subjecting a DSA to negotiation would compromise its legitimacy as a public good, potentially rendering an already uncertain process a chaotic one. At the same time, however, the Guidance Note signals a recognition that the staff’s own independent judgment regarding the DSA parameters can benefit from input from creditors before this judgment is finalized.
There will be implementation issues. For example, as noted in the Guidance Note, creditors will need to sign nondisclosure agreements in order to receive confidential information. Since this would restrict their ability to trade, they may opt for this information to be received by—and the feedback to the IMF to be provided by—their legal and financial advisors, who will have signed these agreements. Moreover, the Guidance Note will not address other issues that contribute to delays, including the behavior of holdout creditors—whether public or private.
Nevertheless, for all of the above reasons, the Guidance Note represents an important step forward.
Sean Hagan, nonresident senior fellow at the Peterson Institute for International Economics, is former general counsel for the International Monetary Fund and advisor for Rothschild & Co.