Zambia reached an agreement with a steering committee of investors to restructure its three outstanding eurobonds, more than three years after defaulting. Two initial agreements were rejected in November, once by the IMF and twice by the Official Creditor Committee (OCC), causing fears of a complete deadlock and a meltdown of the Common Framework — we discussed this comparability conundrum back then with Brad Setser at the FT’s Alphaville.

It appears however that this bond restructuring agreement will stick — the press release indicates that “The Government has received confirmation that the agreed terms are compatible with the OCC's assessment of comparability of treatment and are compatible with IMF's program parameters under the Second Review framework.”

Time will tell what precisely enabled the updated deal to obtain the OCC’s stamp of approval, especially China’s, since the grievances last year appeared linked to a complex mix of issues — disagreement on the PV reduction for the bonds, misunderstandings around indicative restructuring terms circulated earlier, and the treatment of Chinese commercial banks.

For now we can already dive into the announcement, drawing some lessons for the restructuring architecture and other ongoing cases.

Bond terms: what changed since November?

A side-by-side comparison of the agreement cleansed in November and the final deal gives some insights into the adjustments made over the past few months to pass the CoT test — namely a higher principal haircut compensated in part by a steeper amortization.

November term sheet

Final term sheet

For starters, the structure of the agreement has not changed, with a fixed income leg (Bond A) and a contingent instrument (Bond B) which starts as a zero-coupon bond maturing in 2053 and can turn into a coupon-paying bond maturing in 2035 if Zambia outperforms IMF forecasts. The dual trigger also stays the same, based either on the IMF’s debt-carrying capacity or on export/revenue projections — though the reference point is now the IMF program’s second review.

The main change compared to the November version relates to the reduction of the face value of Bond A by $150m. Back in November the CoT issue was mostly in the baseline — not the upside scenario — so one could have expected a reweighting of the two bonds keeping the total face value constant, but the face value of bond B stays at $1.35bn.

The larger principal haircut arguably contributes to an increase of the PV reduction, which was apparently the main sticking point in the CoT assessment last year. An important question is the date at which the OCC will fix the CoT calculations — the bonds accumulated $70m in past due interest since November, which can artificially increase the PV haircut if the OCC calculates it at the time of the exchange instead of a common time for all creditors.

In addition to the larger haircut, there have been slight adjustments to the coupons, with the coupon of Bond A decreasing slightly in later years and the coupons of Bond B increasing in the upside scenario only — this arguably contributes also to a reduction of the present value in the baseline.

From the bondholders’ point of view, this larger haircut is compensated in part by a steeper amortization of bond A. Principal payments in 2024-2025 (the remainder of the IMF program) increase slightly from $476m to $498m, but the main change is in the years just after the program: principal payments in 2026-2027 increase from $208m to $578m — by end-2028, 70% of Bond A will have been repaid, leaving just $500m outstanding to avoid the removal of the bond from the main EM indices before maturity.

These payments in 2026-2027 hence appear instrumental in getting the deal over the line, so it is worth asking where the added debt servicing capacity came from — the rejected November deal already saturated available cash flows within the IMF targets. A first option is that the November deal was based on the macro-fiscal framework of the first review, and adjustments during the second review could have increased Zambia’s ability to service debt. However a quick look at the projections in the tables of these two reviews shows that the export and revenue projections, as well as nonresident holdings of domestic debt, have not moved significantly.

Another option relates to Chinese state-owned banks such as CDB and ICBC. Back in November, it was reported that China feared the bond deal would not leave enough cashflows for these banks — a surprising position since upfront cash usually comes in exchange for face value reductions which Chinese state-owned banks are notoriously reluctant to accept. Hence we can speculate that some of these 2026-2027 cashflows were initially earmarked for Chinese “commercial” banks, and the Zambian authorities progressed towards a restructuring deal with them that implies no principal haircut and a longer maturity extension. This in turn enables Zambia to allocate these cash flows to bondholders, while the Chinese banks might start to be repaid in 2029-2031 when bond amortization coincidently drops to just $9m per year.

Bottom line: ballpark calculations show that the recovery value for the bonds at a relevant market rate did not move much compared to the November deal — a significant drop in exit yields will probably do some of the heavy lifting here — making the few-month delay and the initial rejection of the deal by the OCC all the more frustrating in hindsight.

It’s all in the fine prints

The more interesting part of the press release relates to the inclusion in the new bonds of various non-financial provisions, which were not mentioned in November. Such non-financial provisions were also discussed in Suriname but it was a specific enough situation to limit the precedent-setting effect — e.g. with oil discoveries and a tight investor base. The ones drafted in Zambia could well end up being used in the other bond restructurings expected to close this year, from Sri Lanka to Ukraine. Therefore it is worth discussing what the precise wording could look like, judging from the indications in the press release.

Most-favored creditor clauses

The new bonds will feature a provision “that will require the Government to ensure certain other creditors do not receive a better recovery in the restructuring on net present value terms”, as per the press release. MFC provisions had been mentioned in policy debates in recent years, hailed by some as a way to “break the sovereign debt impasse”.

Ukraine also provides relevant precedents for these clauses: they had been used in the 2015 restructuring, making it an event of default for Ukraine to settle on better terms with holdouts including on that infamous Russia-held claim. Similarly in the 2022 restructuring of Ukraine’s GDP warrants, a most-favored creditor provision was inserted to limit Ukraine’s ability to make payments during the deferral period to dissenting Eurobonds.

A first important question in Zambia will be the scope covered by the terms “certain other creditors” in the wording of the MFC provision. This arguably does not include official creditors: since they use three formulas to assess CoT, any commercial creditor seeking more upfront cash would have to concede a higher present-value reduction than official creditors. The provision will instead probably target non-bond commercial creditors such as Credit Suisse or Standard Chartered, but more interestingly the state banks that China chose to classify as commercial — CDB, ICBC, BoC, etc. — in which case China’s reaction will be interesting to monitor.

The provision could also ruffle feathers if it targets Afreximbank, which is classified by Zambia as a commercial creditor but has long argued it should benefit from preferred creditor status or at least preferable treatment. This in turn could have an impact on the institution’s rating and funding cost. For instance, Moody’s noted in February 2024 about ongoing restructurings that “Afreximbank could be called on to provide a degree of debt relief, which would weigh on asset performance, although Moody's believes that Afreximbank will likely be treated preferably compared to private-sector creditors.”

Another question is that of the precise calculations — while the wording seems to indicate that the unique indicator will be present value, the choice of discount rate could still tip the scale for certain creditors.

Finally, the question of enforcement: even if non-compliance with the provision is classified as an event of default for the new bonds, it is unclear whether the precise debt treatments of all other commercial creditors will be made public. Chinese banks have been known to include confidentiality clauses in loan agreements (even if not always enforced), while Afrexim could have a strong incentive not to publicize its debt treatment for reasons mentioned above — so far even the comprehensive terms of the official creditors deal and its CoT parameters have not been published.

In some way, the use of MFC provisions by commercial creditors will lay ground for a two-tiered comparability system, with official creditors enforcing their requirements on commercial creditors and commercial creditors on a similar footing among themselves. It seems unlikely that debtors would ever accept to include official creditors in the scope of MFC provisions for political reasons, to avoid creating a reverse comparability that the Paris Club has long rejected and China would arguably not approve.

Transparency provisions

The press release states that the new bonds documents will feature “certain ongoing information delivery requirements by Zambia.” A version of these requirements was featured in Suriname’s 2023 restructuring: the new bonds included a provision requiring the authorities to conduct quarterly investor calls.

These provisions have been discussed in policy debates under various forms. Suriname’s investor calls could be seen as the more innocuous option, while the most ambitious proposals go as far as debt incurrence clauses — making it an event of default for a sovereign to incure liabilities beyond a certain level. Some middle ground could consist in the periodic disclosure by Zambia of all government liabilities, which would coincidently support broader debt transparency efforts.

The biggest point of interest will probably be the enforcement mechanism, namely whether the failure to comply with the disclosure requirements will be considered as an event of default. The precise scope of the requirements, including with regards to contingent liabilities or SOE debt, will also be interesting.

Loss reinstatement provisions

The idea of such a provision is that at least part of the debt relief initially granted by investors would be reinstated — i.e. added back to their claim — in case the country defaults again in a certain time frame. There are several reasons for investors to demand such a provision: they might fear that the debtor country goes on a borrowing binge right after the IMF program, causing a subsequent default. Investors in such cases could even be juniorized by the incurrence of collateralized new debt. Hence the loss reinstatement functions as a stick incentivizing sound debt management by the debtor in the wake of the crisis.

There are precedents for such provisions — namely an Ecuador 2030 bond, issued as part of the 2000 restructuring with a “principal reinstatement provision”. The bond documents indicated that if Ecuador were to default in the ten years following the issuance, the principal of the new bonds would be increased by a certain percentage of the outstanding. The default would have to persist for at least 12 months for the reinstatement to take place, creating an incentive for bondholders to delay the resolution of a subsequent restructuring, as discussed in 2007 by Felix Salmon — this shows the importance of careful wording for Zambia.

Belize introduced a similar provision in its 2013 restructuring, but with a faster time frame than Ecuador since the country had only 30 days to cure a potential default. As discussed by the IMF in a paper, this provision had an impact on Belize’s subsequent restructuring in 2016 — the Fund notes that the consent sollicitation to amend the bond terms was completed just within the 30-day period of the principal reinstatement provision.

A first point with Zambia’s version is that, as per the press release, it will only apply to a default during the IMF program, limiting the scope compared to the precedents. The wording of Zambia’s press release also does not mention “principal reinstatement” but “loss reinstatement”, hinting that the reinstated amounts could be calculated differently than looking simply at the principal haircut. A more agressive version would entail the calculation of the present-value reduction at a certain discount rate and fix this as the nominal amount to be reinstated after a default. A more straightforward version would simply reinstate the old contractual cash flows.

This provision might in theory raise issues related to CoT, since it is not included in the official creditor debt deal (based on public information) — bondholders would be better off in case Zambia defaults again in the next couple years. However, the OCC’s approval of the latest agreement with bondholders might indicate that the scope is narrow enough not to threaten the CoT assessment.

Another reason to look carefully at the way Zambia’s loss reinstatement provision will be drafted is that it will matter for other ongoing restructurings. For instance, it can also be thought of as a way for bondholders to hedge against future uncertainty, which could be economic uncertainty, or related to the sequential aspect of the restructuring. A country can ask bondholders to restructure before official creditors, at the risk of these official creditors later assessing the bond deal is not comparable and another restructuring is needed. The loss reinstatement provision in such cases can help reduce the incentive for investors to simply wait for the uncertainty to dissipate before agreeing to write down their claims.

This situation applies for instance to Ukraine and Ethiopia, which are both expected to restructure their Eurobonds in 2024 amid significant uncertainty related to the economy and the position of official creditors — it is no surprise that a loss reinstatement provision was already mentioned in Ethiopia’s december negotiations when bondholders had to hedge against the double uncertainty of the IMF DSA and the CoT assessment.

What’s next?

While Zambia’s press release indicates that the OCC has signed off on the proposal, it has not yet formally communicated on the matter, as opposed to the IMF. Since Zambia is the first Common Framework case involving significant debt relief, it is the first time official creditors go through this process of CoT assessement. It is unclear for instance whether the final wording of the non-financial clauses could potentially trigger the claw-back embedded in the OCC’s MoU and lead to another rejection of the deal — this, luckily, remains pretty much a distant tail risk.

The drafting of the non-financial clauses can be expected to take anywhere from a few weeks to a few months before the launch of the vote and the bond exchange — it took Suriname almost six months between its agreement in principle with bondholders in May 2023 and the bond exchange, so one can only hope for a quicker resolution in Zambia.

Finally, Zambia will then have to conclude restructuring agreements with all remaining commercial creditors while respecting IMF program constraints, the OCC’s comparability requirement, and the new bonds’ MFC provision. The multiplicity of non-financial clauses, from the ones discussed here to the claw-back clause inserted in the OCC’s MoU, makes it all the more important for the different creditor groups to provide transparency about their own deals.

I am grateful to Greg Makoff for valuable comments.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

Views expressed here are my own, not my employer’s.

Zambia’s agreement in principle with bondholders was met with reservations by the IMF and the Official Creditor Committee, and is apparently being revised.

There are two main reasons for the official sector to balk at the deal: compliance with IMF targets, related to the DSA and financing gaps, as well as Comparability of Treatment which is assessed by official creditors.

While time will tell which of these two aspects — if not the two — was the main hurdle in the assessment, this development sends the strong message that the official sector is serious about enforcing the rules, even if it means calling out a deal and reopening negotiations with commercial creditors.

This latest plot twist will further delay Zambia’s restructuring process — hopefully by not more than a few weeks — and could also have spillover effects for other restructurings, especially in Common Framework cases.

(TL;DR — I also did a short thread laying out my main thoughts back on the day of the announcement)

IMF targets: blurred line between program reviews

The first test that the agreement in principle (AIP) with bondholders has to pass is the compliance with IMF program parameters which are twofold: meeting DSA targets, and ensuring that the IMF program is fully financed — meaning there is no residual financing gap for each year of the program.

According to Zambia’s October 2022 investor presentation, the binding targets for Zambia are related to external-debt-to-exports and external-debt-service-to-revenue, while bridging the financing gap at that time also required creditors to deliver $8.4 billion of flow relief over the program period.

The IMF’s wording in the FT after expressing their reservations about the AIP seems to indicate that the deal did not fit within the targets mentioned above:

“Further discussions and modifications are needed to bring this initial proposal more fully into line with the requirements of the programme.”

One thing to take into account is that the IMF’s assessment is most likely based on the updated DSA published with the first review in July 2023, which featured significant changes compared to the one published when the program was approved back in September 2022.

Several parameters of the original DSA were sharply criticized by creditors: Zambia’s weak debt carrying capacity (DCC), the application of 40% buffers on already low targets, and non-resident holdings (NRH) of local debt eating up an important share of available cash flows.

While the IMF could not change the DCC or the buffers, it did modify the data related to the NRH and other aspects of the macro-fiscal framework when approving the first review: NRH were revised down from $3.2 billion to $2.6 billion in face value, reducing the stock constraint for other creditors. The IMF also modified the forecasts for the evolution of NRH, judging from BoP data: net portfolio inflows were reduced by c. $2 billion over 2022-2025, as I discussed in an earlier blog. In addition, projections for exports — a key anchor for DSA targets — were improved, for instance by c. $600 million in 2024 and $900 million in 2025 between the 2022 and the 2023 staff reports (data from the BoP tables).

These changes arguably relaxed the DSA and financing gap constraints: for example between the program approval and the first review, the flow relief to be delivered by external creditors over 2022-2025 was reduced from $8.4 billion to $7.7 billion — that is $700 million more for servicing restructured debts in that period.

Looking at the terms of the AIP, a likely point of contention with regards to IMF targets might be the early amortization of the base bond (“bond A”). As we noted with Brad Setser, the amortization structure of this bond looks rather steep: 25% of the $2 billion bond A was expected to mature in 2024 and 2025.

For reference, the October 2022 investor presentation noted that Zambia would have $400 million of available cash flows for all restructured debts (Paris Club, China, bondholders, etc.) in 2024 and 2025 combined (slide 13). The AIP on the other hand implied that bondholders would get north of $700 million for these two years with principal and coupon payments — even if the IMF freed up some cashflows, the gap appears difficult to bridge.

Another issue could be around the design of the state-contingent instrument featured in the AIP (“bond B”). The IMF and official creditors have repeatedly insisted in recent months that any state-contingent instrument designed as part of restructuring negotiations should be in line with IMF program parameters, in all states of the world. It is not totally clear whether it is the case with the triggers for the upside scenario in the AIP — let’s dive in.

The upside scenario is triggered upon the occurrence of any of two events: Zambia's DCC is upgraded from weak to medium by the IMF, or "the 3-year rolling average of the USD exports and the USD equivalent of fiscal revenues (before taking into consideration grants) exceeds the IMF’s projections as laid out in the First Review of the IMF’s Extended Credit Facility Arrangement released in July 2023".

Therefore, a scenario could occur in which Zambia barely outperforms IMF forecasts for exports and revenues in the observation period but the DCC is not upgraded. In that case the upside scenario would materialize — one of the two triggers is sufficient — and the debt repayment schedule would steepen sharply, potentially pushing Zambia over the debt sustainability thresholds for countries with a weak DCC.

As a side note, the reasoning for bondholders to combine the two triggers had some merits in theory: the DCC is a prime candidate for a state-contingent trigger due to the massive threshold effects it induces for IMF debt targets, meaning creditors can leave a lot of money on the table if Zambia’s DCC is agonizingly close to being upgraded. However, the DCC is also a complex indicator taking into account variables like world growth which could fail to capture variations of Zambia’s actual ability to service debt. It also relies on qualitative factors which could increase legal risks when including it in a bond contract. Therefore bondholders chose to combine the DCC with a somewhat more objective trigger related to exports and revenues. Time will tell if this drew the ire of the IMF.

Bottom line, there is a lot of moving pieces: it is hard to say with publicly available data how far off the mark the AIP currently stands, whether it has to do with the amortization schedule or the state-contingent features, and therefore how long renegotiations could last.

Comparability: no more free riding?

Another important test for the AIP is Comparability of Treatment (CoT) as assessed by the Official Creditor Committee (OCC). The G20 Common Framework (CF) communiqué from November 2020 indicated that “A debtor country that signs an MoU with participating creditors will be required to seek from all its other official bilateral creditors and private creditors a treatment at least as favorable as the one agreed in the MoU.”

The communiqué also specified that CoT would be assessed along the three indicators used by the Paris Club (PC): “changes in nominal debt service, debt stock in net present value terms and duration of the treated claims”. Indeed, the PC has historically used a holistic approach when assessing CoT, calculating the contribution of all creditors with the three methodologies and making a final judgement call. There is no set threshold above which a treatment is deemed not comparable — a debt treatment could provide a lower NPV haircut than the PC and compensate with more short-term flow relief and longer duration extension.

As noted by Diego Rivetti, the PC has never withdrawn a debt treatment due to a breach of the CoT provision. Historically, the PC also did not include claw back clauses in its agreements: the main threat for debtors offering sweeter terms to non-PC creditors came from the non-compliance with IMF targets — if the debt treatment is not compliant then the IMF will suspend disbursements.

The CF was bound to reschuffle the cards.

In October, the progress report of the Global Sovereign Debt Roundtable (GSDR) provided further clarity on the assessment of CoT in CF restructurings. It confirmed that the three PC formulas would be used, and clarified that the NPV reduction would be calculated using the present value of old/new debt as numerator/denominator respectively, all discounted at the standard 5% rate used in the LIC DSA.

Most importantly, the GSDR progress report stressed that the OCC would enforce CoT through different mechanisms, evolving from the PC’s historical practices. These mechanisms include claw back clauses — the OCC debt treatment would fall through if a sweeter one is given to other creditors — or the request for the debtor country to commit not to repay any creditor which has not agreed to comparable debt treatment.

While often overlooked in the analyses of the GSDR progress report which came out after the IMF meetings, this paragraph is key. The design of the enforcement mechanisms in the Zambia CF MoU also probably explains the delay between the June deal with the OCC laying out the financial terms, and the signing of the MoU which happened only in October during the IMF meetings.

The lack of enforceability of CoT — or at least the perception thereof — had been an issue for China since the creation of the DSSI and then the CF. It explained part of China’s reluctance to negotiate restructurings in a multilateral setting and accept the same terms as PC creditors, if it believed that bondholders would be better off. For instance Deborah Brautigam and Yufan Huang acutely described the perception of unfairness by China towards bondholders in their paper on the participation of China in the DSSI.

The official sector balking at the first ever bondholder deal concluded for a CF case therefore sends a strong message: the PC is now serious about enforcing CoT. This could as a result increase the trust of China in the overall CF process — let’s see if any positive spillovers materialize on other cases.

Similar to the IMF debt targets, it is hard to say how much of an issue CoT was in the official sector’s assessment of the AIP without the precise cashflows pre- and post-restructurings for all creditors. In order to improve the accountability of the process, it would be a major progress for the PC/OCC to make its CoT assessment public, along the three formulas. This would coincidently reduce a potential perception that the official sector balks at deals it doesn’t like for purely political reasons. Finally, the publication of calculations would gradually provide increased clarity ex ante on the wiggle room that debtors have when negotiating with bondholders.

An important related question is the role of the IMF with regards to CoT. The longstanding policy of the IMF is to not have views on the allocation of losses across creditor classes — hence on CoT — and to focus entirely on the overall debt reduction. However, the IMF has an indirect interest in CoT because the lack of comparability can delay restructuring negotiations and create inter-creditor tensions which in turn hamper the return to debt sustainability.

In addition the IMF has significant technical capabilities within its staff when it comes to debt math. The IMF recently started publishing partial CoT calculations, specifically the respective NPV reductions of the PC and bondholders in Suriname at different discount rates. Building on this example, it would make a lot of sense to leverage the IMF’s expertise and increase the strength and transparency of the CoT assessment, making it a standard disclosure in staff reports during restructuring.

What happens now in Zambia and elsewhere?

The priority in the short term will be for Zambia to adjust the deal and make it compliant with the two tests described above. The wording of the IMF in the media seems to indicate it should be doable in a reasonable timeframe, though it might seek to avoid scaring off the market. In addition, it is unlikely that the IMF would block subsequent disbursements because a deal with bondholders has not been finalized — the announcement of the AIP still shows that negotiations are progressing and the arrears policies are more permissive with commercial creditors than with official ones.

Beyond Zambia, the clarity provided in the GSDR report with regards to CoT applies to all CF cases. This means that recent developments matter a great deal to Ghana and Ethiopia. In Ethiopia specifically, the treatment of the country’s sole Eurobond has been a recurring topic of discussion, and some bondholders have made a preemptive restructuring proposal. The looming threat of the official sector balking at a deal after concluding their own debt treatment a few months later might disincentivize a preemptive liability management exercise which arguably has otherwise strong merits. This illustrates issues around the sequential aspect of the CF and the persisting lack of clarity ex ante for the assessment of CoT — a topic for another blog.

For countries outside of the CF, namely Sri Lanka and Suriname, the impacts of Zambia’s process are less obvious in terms of CoT, although they will still have to ensure strict compliance of any debt deal with IMF parameters. First, the GSDR report underlined how a common understanding of CoT in the official sector is yet to emerge for non-CF cases. For instance, if China pushed for the inclusion of claw back clauses in the Zambia MoU, it is uncertain whether the PC would use the same mechanisms when negotiating without China as is the case in non-CF countries.

Second, non-Common Framework cases are less sequential and it would surely be much more politically costly for official creditors to call out a bond exchange after it has been executed. This might in turn create incentives for all creditors to front run others and announce a deal quickly — something which one can glimpse from China Exim’s restructuring agreement in principle of which nobody seems to have seen the terms.

An important point: the rejection of the Zambia bondholder deal does not spell the end of state-contingent instruments in restructurings — it simply means that their design warrants increased attention to the compliance with IMF targets and CoT. For instance the “Macro-Linked Bonds” proposed in Sri Lanka are linked to the USD GDP which is also the anchor for all debt targets (debt-to-GDP, GFN-to-GDP, and external-debt-service-to-GDP), making it easier to ensure their compliance with these targets. Whether they return the country to a sustainable footing is another question, and the government balked at the bondholders’ proposal for now.

Bottom line, one can only hope that Zambia will soon be out of the woods, and that the transparency and accountability of the CoT assessment will improve going forward. While it seems unlikely that all creditors will agree on a unique quantitative CoT formula — none could fully capture complex debtor-creditor relationships — there are low hanging fruits which could greatly contribute to streamlining restructuring processes.

I am grateful to Bernat Camps, Mathilde Gassies and Stephen Paduano for valuable comments.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

Views expressed here are my own, not my employer’s.

The architecture for sovereign debt restructurings tends to be shaped by landmark cases. In that view, the deal reached in June by Zambia with its Official Creditor Committee is an important milestone. One aspect that ought to get more attention however is the story of Zambia’s domestic debt since the country’s external default in November 2020.

Domestic debt has long been a missing piece in the international financial architecture, and Zambia has been a case in point. IMF support was withheld for almost two years absent financing assurances from official creditors, leading Zambia to rely heavily on its domestic debt market. This coincided with massive foreign inflows over the summer of 2021, supported by various factors (SDR allocation, election).

The inclusion of these nonresident holdings in the IMF’s external DSA then created pressures from other creditors to try and sweep them into the restructuring perimeter. Fears of a potential domestic debt restructuring in turn led to cracks appearing in the local market, until official creditors stated publicly that they would leave domestic debt untouched as part of their restructuring deal.

For all the policy debates about whether domestic debt should be included in sovereign restructurings, including a dedicated GSDR workshop on Friday, this blog takes a reverse perspective and tries to show how the current architecture for sovereign restructurings creates unproductive dynamics in domestic debt markets — be it overreliance by governments, volatile flows, or misplaced incentives to include domestic debt in the perimeter.

Domestic debt as a last resort when international support falls short

Zambia defaulted in November 2020 on its external debt, and requested a debt treatment under the G20 Common Framework in February 2021. It then took a year and a half for official creditors to provide financing assurances to the IMF, in August 2022 — the IMF program was only approved in September 2022, almost two years after Zambia’s default. Something often overlooked: not only was IMF support withheld during that period but also that of other development partners, many of whom require an IMF upper-credit tranche program in place to make significant disbursements.

Embroiled in geopolitical battles that were none of its making, the Zambian government had to find other avenues to plug financing gaps, at the height of the COVID-19 pandemic which required additional expenditures across the board.

A first source of financing came from the global allocation of Special Drawing Rights by the IMF, of which Zambia received the equivalent of $1.3 billion. Zambia was, in relative terms, one of the main beneficiaries of this allocation. S&P noted the following in June 2021:

We still judge that for five sovereigns it will be enough to sufficiently bring reserves to a level at which all adequacy benchmarks will be newly satisfied. This group includes Zambia (the gross reserves of which will more than double), Jordan, El Salvador, Benin, and Togo.

The SDR allocation supported Zambia’s social spending in the wake of the pandemic and the crisis that was exacerbated by the default, according to the IMF’s 2023 staff report:

The government used about 50 percent of the proceeds to finance the 2022 Budget, mostly for social sector spending including the social cash transfer programme and pension arrears clearance.

However, beyond the one-off SDR allocation, the main source of funding for Zambia was the domestic debt market. As the IMF notes in the same report:

The domestic debt stock (Government securities) increased as external financing remained constrained. The stock of Government securities was K210.0 billion at end-2022, an increase of 9.0 percent from K192.9 billion as at end-December 2021.

This is obviously a more generic trend across frontier economies cut off from international capital markets after the pandemic — the IMF wrote in a chapter of the April 2022 GFSR that “the additional government financing needs have been met mostly by domestic banks amid declining foreign participation in local currency bond markets”.

What makes Zambia specific however is that the reliance on the domestic market was supported by sudden and massive inflows from foreign investors, compelled in the summer of 2021 by the improved macroeconomic outlook, the appreciation of the kwacha, the election of a new president viewed as a reformist and fiscally responsible, as well as the improvement of the external position by the SDR allocation.

As a result, over the course of barely two-three months, nonresident holdings (NRH) of domestic debt skyrocketed in face value, from c. $800 million to more than $3 billion. The inflows are particularly visible on this chart from the IMF September 2022 staff report:

As the IMF sums up in the 2023 staff report:

The 2022 deficit was equally financed by the domestic market (1/3), ongoing project-financing together with additional IMF and WB resources (1/3), and use of half the 2021 SDR allocation (1/3).

Bottom line, the IMF’s inability to disburse rapidly is pushing debtor countries towards suboptimal borrowing decisions, draining their one-off SDR allocation (hence incurring a permanent liability to the IMF at a variable interest rate, higher for instance than the 0% of IMF PRGT loans), repurposing badly needed project loans for emergency spending, and once these sources dry up, over relying on often thin domestic debt markets.

In addition, Zambia’s ability to tap foreign investors on a significant scale in the local market was predicated on events that were out of its control — macroeconomic outlook improvement, elections, historic SDR allocation — which means that other countries undergoing a restructuring could instead end up saddling their domestic banking system with government debt.

Furthermore, it is not totally clear that volatile portfolio inflows in the domestic debt market are the adequate source of financing for countries in the wake of a sovereign default, as opposed to cheaper long-term concessional financing which can better anchor the recovery. And indeed, these NRH would come back to bite.

Blurred lines between domestic and external debt

When the IMF program was approved in September 2022 and restructuring negotiations started, Zambia’s authorities made it clear from the start that they would exclude local-currency debt from the restructuring altogether, out of concerns for financial stability in the domestic banking sector. As the IMF duly noted in the 2022 staff report:

Given the material spillover risks, the authorities intend to exclude domestically-issued debt from the restructuring perimeter. Domestically-issued debt accounts for 48 percent of GDP and represents the most significant source of budget financing in the near to medium term. While non-residents hold about 26 percent of this stock, the Zambian financial sector holds the bulk. In particular, these securities account for almost one third of banking sector assets (or about 12 percent of GDP). Therefore, any restructuring of this debt could trigger significant financial instability, potentially requiring public resources to support the sector. It would also raise broader economic risks by weakening market and business confidence, triggering capital outflows, and reducing the private sector’s access to finance.

However, the IMF’s DSA for Zambia is conducted according to the model for low-income countries (LIC-DSF), based on a residency criterion — as opposed to currency. This meant all the local-currency debt held by non-resident had to be included in the external debt stock, creating a sharp discrepancy between the scope of the DSA and that of the restructuring. NRH were estimated by the IMF at $3.2 billion in face value, as big as the outstanding stock of Eurobonds.

Heres the external debt breakdown from the IMF 2022 staff report:

This decision was bound to create inter-creditor tensions: the definition of the restructuring envelope from the IMF’s DSA is a zero-sum game, meaning any increase in non-restructurable debt in the external debt stock automatically translates in additional debt relief requirements from other creditors — namely official bilateral creditors and Eurobond holders.

Other external creditors rapidly argued that the importance of NRH inflows was highly inflated since most of these bonds were actually issued at a discount, or then traded at a discount on the secondary market due to interest rate swings, and hence the actual inflows of foreign currency were much lower than the $3.2 billion in face taken by the IMF.

One could argue that the face value remains the most relevant indicator since this is the amount that the government will have to repay in the end. However this assumes that foreign holders hold the bond to maturity, something which the volatile inflows and outflows tend to dismiss. Especially, Zambia’s end-June 2023 debt bulletin shows that NRH are concentrated in maturities beyond one year, especially bonds due in 2026 and 2031, meaning there is a high likelihood that foreign holders would liquidate their position before maturity, at the secondary market price rather than face value.

The share of NRH in the debt stock does not tell the whole story however. Local-currency debt instruments are different from, say, Eurobonds in terms of maturity structure and nominal interest rate — for instance in its DSA assumptions the government projects that interest rates on domestic T-bills and bonds will remain in the 10-20% range for the program period.

As a result, NRH weigh even more strongly on debt service (flow) metrics than on stock metrics in the IMF’s DSA. Brad Setser has discussed this at length on his blog — bottom line in this first version of the IMF DSA NRH represented just over 15% of the external debt stock, but captured a significant share of the debt servicing capacity of Zambia in the first years of the program.

Combining data from Zambia’s DSA assumptions for NRH debt service (interest and principal) and exchange rate forecasts, and an investor presentation for available cashflows in the original DSA, one can approximate that NRH ate up just over 50% of cash flows available for debt service to all external creditors over 2022-2026. Another 32% was expected to be taken up by other debt excluded from the restructuring — multilaterals, payables, SDR allocation — meaning little remained for official creditors and Eurobond holders.

Renewed uncertainty about a potential restructuring

The IMF’s debt sustainability targets for Zambia required meaningful debt relief due to different factors: the IMF assesses Zambia to have a low debt-carrying capacity, and applies a further risk buffer of 40% on already low targets. Combined with NRH eating up most of the short-term debt servicing capacity, it soon became clear that something had to give in order for Zambia to reach a restructuring deal with official creditors and bondholders.

The IMF’s debt-carrying capacity and buffers, despite some form of judgement involved, are derived directly from the IMF’s DSA model and endorsed by the IMF Executive Board. This was virtually impossible for the IMF to change these parameters between the approval of the program and the first review. It left NRH as the only likely variable of adjustment, incentivizing “restructurable” creditors to ask Zambia to sweep NRH into the restructuring or kick them out of the DSA.

Soon enough, it was indeed reported that China was delaying a restructuring agreements by demanding a restructuring of NRH, according to US Treasury officials. Similar demands were heard from the Eurobond holders although it was less vocal.

The uncertainty and discussions around a potential restructuring of NRH in turn lead to foreign outflows, draining foreign reserves and putting the currency under pressure. Outflows got the NRH down from $3.2 billion to $2.6 billion over the second half of 2022 according to the 2023 IMF staff report:

Outflows were especially sharp for T-bills, which rolled off at a faster pace than longer-dated bonds and were arguably not rolled over by nonresidents — foreign holdings of T-bills appear to now be close to zero:

The IMF acknowledges the impact of restructuring uncertainties on the exit of foreign investors from the domestic debt market:

Reflecting a combination of tighter global financial conditions and uncertainty around the debt restructuring process, non-resident investors withdrew from the domestic debt market in 2022—they did not reinvest proceeds of maturing holdings, engaged in some secondary market sales, and did not provide new inflows of funds to the market.

This underpins how IMF policies — namely the DSA residency criteria — combined with geopolitics and negotiations among external creditors had a concrete and severe impact on one of Zambia’s main sources of financing since the default, putting the economy under further strains.

Uncertainty leads to disfunctions in the domestic market

Restructuring NRH alone would have been a complex endeavor from a logistical and legal perspective, with any bond potentially held in part by domestic in part by foreign investors. The presence of domestic banks with a foreign parent company would also have caused further headache. One can go back to that 2004 paper by Anna Gelpern and Brad Setser on the “doomed quest for equal treatment” between external and domestic debt: efforts to differentiate holders by residency have never been smooth sailing.

Putting capital controls in place to limit the drain on foreign reserves of potential outflows would not have solved the conundrum either. The IMF looks at debt service figures for NRH, which do not vary whether or not at a later stage foreign investors can exchange their kwacha for USD after being repaid by the government. As a result, capital controls by themselves would probably not have removed the impact of NRH debt service on the DSA.

Therefore soon enough the issue was not only about portfolio outflows from foreign investors: since differentiating NRH from the rest of the domestic debt stock would have been difficult, pressures to restructure NRH arguably caused fears that the whole domestic debt stock would be swept into the restructuring perimeter. Coincidently during that same fall 2022 period, Ghana started its restructuring negotiations by executing a domestic debt restructuring. Similarly in early 2023 Sri Lanka announced it would execute a domestic debt optimization in order to comply with IMF debt targets, despite initially proposing to restructure only its external debt.

This in turn led domestic banks in Zambia to consider their holdings of government debt more carefully, reducing their subscription to domestic debt auctions, even more so for banks with parent companies outside of Zambia which might have been involved in Ghana’s domestic debt restructuring.

Cracks hence started to appear in the domestic debt market as a whole and the government faced increasing difficulty in raising badly needed financing. The IMF has a striking chart showing how the period of uncertainty towards the end of 2022 translates into a decrease in the bid-to-cover ratios — a sharp difference with the 800% subscription rate at the peak of inflows in the summer of 2021:

The IMF 2023 staff report sums up the materialization of funding pressures:

Average auction-cover dropped to 64 percent in 2022 and further to 45 percent January-April, from 95 percent in 2021. Demand for Treasury bills has also declined, with average auction-cover at 91 percent in 2022 and 79 percent in January-April 2023, down from 100 percent in 2021. In parallel, yields increased by around 200 basis points on average across the curve in 2022, with short-term yields rising further by about another 40 basis points on average in January-April.

Bottom line, powerplays between the IMF and creditors, especially the lack of clarity on the scope of the restructuring, contributed to disfunctions in Zambia’s domestic debt market. This is somehow even worse when considering that the Zambian government’s reliance on domestic debt as a funding source was reinforced in the first place by these same powerplays which prevented the IMF and partners from providing timely support.

Primary market restrictions as a surprising fix

Interestingly, there seems to have been a return of foreign inflows in recent months, maybe against the backdrop of hopes for a definitive resolution of the external restructuring that would spare domestic debt. NRH stood at $2.2 billion in face value at end-March 2023 according to the Q1 debt bulletin and climbed 24% over a quarter up to $2.7 billion at end-June in the Q2 debt bulletin — that is c. $100 million higher than the IMF’s estimate in its July 2023 staff report.

Subsequently in June 2023, the Bank of Zambia announced it would limit foreign participation in domestic debt auctions to a maximum of 5% of annual planned issuance, at face value. It seems that the restriction covers T-bills and T-bonds alike.

At first glance, it could seem like the new foreign participation limit was aimed at curbing these recent inflows and avoiding a return of the pendulum that could destabilize the economy or derail the IMF DSA. It will be interesting to gauge the impact of this measure on NRH in the next instalment of the debt bulletin in October.

However, the carve-out for secondary markets transactions will arguably limit or negate the impact of restrictions, since foreign inflows can still happen through this avenue. Domestic banks could bid for primary market auctions and sell part of their allocations directly to foreign banks and investors. If this were to happen on a significant scale, this would not only reduce the impact of the primary market restrictions but also reduce the visibility and monitoring capabilities of Zambia’s debt managers, with potential spillovers on liquidity and financing costs.

Acknowledging the restrictions would have little impact on actual market dynamics, there is a risk that they would instead window-dress IMF DSA indicators and facilitate a restructuring deal with external creditors. Coincidently, the 5% cap was announced on June 21, one day before the restructuring deal with the Official Creditor Committee.

Comparing the 2022 and 2023 IMF staff reports, there is indeed a big difference that has not been discussed much. The IMF previously expected net portfolio investments — the majority of which arguably in government securities in Zambia — to be positive every year for a total of $1.6 billion over the program period. In 2023 the IMF, noting the restriction on primary market participation, now expects negative net flows every year over 2022-2025 for a total of minus $690 million over the same period — overall a net different of more than $2 billion in portfolio flows over barely 4 years.

Similarly, the IMF originally expected debt service on NRH to be $631 million in 2023 and $439 million in 2024. In the updated data, the IMF now expects it to stand at only $445 million in 2023 and $320 million in 2024. Due to the zero-sum game aspect of restructuring negotiations, this translates into hundreds of millions in additional cashflows available for debt service to other external creditors over the program period.

Overall, it appears that real-world outflows have contributed to reduce the impact of NRH on the external debt stock, and the 5% cap on foreign participation has enabled the IMF to reduce the projected debt service on NRH in coming years, facilitating a deal with official creditors and bondholders. This is not a satisfactory solution, as the outflows put the economy under pressure and the 5% cap, as showed above, could be more about window-dressing IMF targets than any concrete benefits for Zambia.

Clarity at last, but arguably too late

When a deal was reached in June 2023 with official creditors, it was soon reported that they had agreed to leave NRH — and hence domestic debt overall — out of the restructuring. Damage, alas, had already been done as explained above.

The IMF also brought further clarity in its staff report and FAQ:

Official creditors have accepted the position of the Zambian authorities that to preserve domestic financial stability, non-resident holdings of local currency bonds and Treasury bills will not be subject to a restructuring.

Zambia’s situation was solved, albeit with blood sweat and tears, but no lasting solution for the next countries in line was found. The IMF 2023 staff report, as soon as the second paragraph, goes to great length in explaining how nothing of Zambia’s final deal would create precedents to streamline future restructurings:

These discussions covered several important issues, including […] the exclusion on non-resident holders (NRH) of domestically-issued debt from the proposed debt treatment. […] The OCC reached an agreement on all of these issues for Zambia, taking into account its specific circumstances, but official creditors recognized that these issues deserve further discussion in other cases, as well as a more systematic approach through exchanges in relevant fora.

Bottom line: a deal was done but nothing was settled.

In a further twist, the IMF in its staff report encourages the government to enact business friendly policies to attract portfolio inflows again. This seems to ignore that portfolio investment trends in recent years, as this blog tried to show, were driven in important part by exogenous factors, geopolitical powerplays and their interaction with complex IMF policies.

Lessons for the international financial architecture

Zambia’s domestic debt market has gone through a rollercoaster over the past couple years: after Zambia was let down by the international community, domestic debt was the financial lifeline that helped the country keep public services running. Then it became an unlikely sticking point in restructuring negotiations.

After shedding light on the timeline of recent years and trying to link the different factors behind the dynamics of Zambia’s domestic debt market, one can draw some more generic takeaways to inform relevant policy debates set to take place in coming months.

• Time is ripe for a reform of the IMF’s arrears and financing assurances policies, ensuring the Fund can play its role in the presence of high-leverage creditors. This is obviously easier said than done, but the failure of the IMF to provide timely financial support to countries in need is leading borrowers to make suboptimal decisions, relying on repurposed multilateral loans at the expense of long-term investments, on volatile portfolio inflows, and on overburdened domestic banks.

• Combining local- and foreign-currency debt in the external DSA leads to bad incentives, encouraging unnecessary domestic restructurings or constraining the development of domestic capital markets which is otherwise supported by the IMF and development partners.

• Domestic-currency and foreign-currency debts are different beasts. Nonresident holdings of local-currency debt do pose risks to the external position but usually through a potential drain on foreign reserves if investors exit their position, rather than the forecasted maturity redemptions: the speed of in- and outflows, as well as exchange rates swings, in frontier domestic debt markets make it almost irrelevant to have forecasts for the drain on reserves in more than 2-3 years.

• Instead of including NRH in the external DSA, a possibility could be to have a separate stress test gauging the risks of short-term outflows compared to the country’s foreign reserves. Alternatively Brad Setser also proposed two ways to window dress IMF targets, by assuming that NRH are either rolled-off or rolled-over indefinitely, to avoid the “double pain” of recurring interest payments and principal redemptions. This debate could become an important part of the upcoming update of the IMF-WB’s LIC-DSF, expected to start this year.

• Communication is key, not just from country authorities but also from the IMF and external creditors. If the government is alone in insisting that a domestic restructuring is off the table, domestic market participants can assume that the IMF and creditors are still pushing the opposite and will prevail in the end. When stress starts building in the domestic debt market, an ad hoc communication from relevant creditor committees could go a long way in alleviating market disruptions.

I am grateful to Godfrey Mwanza, Brad Setser and Teal Emery for valuable comments.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

Views expressed here are my own, not my employer’s.

The IMF just reached a staff-level agreement with Suriname on the third review of the country’s program, which restarted in June after a year-long hiatus. This led me to have a look back at the IMF staff report from June for the second review, and it features some interesting tidbits that are relevant to broader debates pertaining to the international architecture for sovereign restructurings.

This blog discusses three issues:

• Restructuring negotiations with China, now the sole remaining holdout creditor.

• Complications caused by an escrow account, part of a loan agreement with China Exim.

• The deal with bondholders and what it means for comparability of treatment.

Restructuring: all eyes again on China

The IMF originally approved Suriname’s 2021 program without financing assurances from China and India, and no progress was reported on that front at the first review. The program then went off-track for a year. Now a major development in the staff report for the second review is that a restructuring agreement with India was reached ealier in 2023:

An agreement on the official credit line from EXIM India was made in March 2023 and an agreement on the loan backed by EXIM India was reached in May 2023. With these, financing assurances provided from India are fully consistent with program parameters.

This leaves China as the sole remaining holdout creditor, after the country reached restructuring agreements with the Paris Club and bondholders. The lack of progress in the negotiations with China, together with the response of the IMF, are surprising to say the least.

When the Suriname program was approved in 2021, the IMF had never received textbook financing assurances from China. As I discussed in an earlier blog, the IMF instead made use of its arrears policies to override the need for affirmative financing assurances. Put simply, Suriname stopped paying China and the IMF hence made the assumption that China would come to the negotiation table and agree on a deal in line with the one granted by the Paris Club.

Since then however, there have been major developments in other cases: China provided financing assurances in two Common Framework cases (Chad and Zambia) and then on a standalone basis in Sri Lanka.

In Sri Lanka more specifically, a first version of the Chinese financing assurances letter was considered as insufficient by the IMF, as reported by Reuters in January 2023. Three months later, the IMF announced that China had provided sufficient assurances, enabling it to approve the program. While the new letter has not been made public, it arguably featured a stronger wording and especially a commitment from China to provide a restructuring consistent with IMF program parameters. This new letter, coincidently, came five days after a phone call between the IMF Managing Director and the then Chinese Premier, in which they discussed China’s role in addressing debt problems in low-income countries.

Therefore, one could have expected the IMF to apply evenhandedness in Suriname, and require China to provide similar assurances before restarting the program. This apparently did not happen, judging on the latest staff report — it would be good for the Fund to provide increased transparency in that regard and explain what underpins its judgement that China is more likely to restructure its claims in Suriname than Sri Lanka.

A defiant quote by a Chinese official in a New York Times piece further begs the question of why the IMF assumed China would restructure its claims in line with the Paris Club, absent any formal assurances:

“The I.M.F. gives some parameters relating to the debt relief, but for us I think it is not binding,” said a Chinese diplomat in Paramaribo, Suriname’s capital, who spoke on the condition of anonymity so he could speak openly. “China will negotiate only with the Surinamese government.”

The NYT highlighted Suriname as a prime example of how the US-China rivalry is preventing the IMF from providing timely support to countries in need: after reaching an agreement with the authorities in April 2021, the IMF did have to wait for almost 9 months until the country fell into arrears to China, in order to approve the program and start disbursements.

Zambia went through a similar ordeal, as it took one year for official creditors to provide financing assurances to the IMF, leaving the country without external support, and China then held up the first review for another few months by refusing to turn its financing assurances into a concrete restructuring deal.

What makes Suriname special however is that the IMF, albeit after a few-month delay, did approve the program and subsequent reviews without financing assurances from China.

That’s not the end of it: the NYT piece argues that the reason the program went off track is because the US did held up IMF disbursements to pressure China into a restructuring — this was pushed back by US officials:

The delay reflected the concerns of a powerful actor: The U.S. Treasury — which handles the American relationship with the I.M.F. — pressured the fund to withhold the money to compel China to commit to debt relief, according to two sources involved with the process.

After publication, a Treasury representative, Megan Apper, issued a statement disputing that account. “This charge is false,” the statement said.

Coincidently one day after the NYT piece came out the IMF published its staff report for the second review which, in its first paragraph, dismissed the idea that a stalemate in restructuring negotiations made the program go off track in 2022, noting it was instead “due to the delayed completion of a prior action on parliamentary approval of the VAT law and, subsequently, to spending overruns which injected local currency liquidity into the system, fueling currency depreciation and inflation.”

Bottom line, Suriname appears to be the only restructuring case where the IMF accepts to lend into official arrears to China without financing assurances. Though Suriname does not get the same coverage as Zambia and Sri Lanka for being a sea change in the restructuring architecture, this aspect at least ought to be discussed more.

Escrow account shenanigans

Another interesting aspect of the Suriname IMF program and restructuring negotiations is related to an escrow account maintained as part of a loan agreement between China Exim and Telesur, Suriname’s national telecom company.

The escrow account has already caused headache to the IMF staff: the authorities had confirmed to the IMF when it approved the program that no escrow had been funded. During the first review three months later, the IMF learned not only that an escrow account had in fact been funded offshore, but also that China Exim had withdrawn $1.4 million from the account.

It appears that the issue continued in 2023, as noted by the IMF:

In January 2023, Telesur, the state-owned telecommunication company, made an erroneous payment of USD 7 million to EXIM China.

To avoid further blunders, the authorities required reimbursement for the payments, and enacted a series of safeguards:

The government has requested full reimbursement of the payment and controls have been put in place to prevent further such payments, including by requiring MoFP officials to be present at any meetings between Telesur and EXIM China, by issuance of Finance Minister’s letter to all the parties involved (including Exim China) such that no payment on the Telesur’s loan to EXIM China will be made until a restructuring agreement within the parameters of the IMF EFF program have been reached, and by issuance of a Presidential Decree stating that the debt restructuring process will be respected and payments by Telesur are prohibited until the debt restructuring agreement between Suriname and China has been reached.

This commitment from the government not to repay China unless it agrees on a restructuring is reminiscent of Sri Lanka: just before the approval of the IMF program, the Sri Lankan President sent an open letter to creditors, committing not to restart payments to any creditor unless it agrees on a restructuring consistent with the IMF program as well as comparability of treatment.

The resolve of the IMF and authorities to ensure no further payments are made from that escrow account is explained by the fact that they are problematic in several regards. The IMF program was approved through the use of the arrears policies vis-à-vis China, which tautologically does not work if Suriname services its debt to China. However the size of payments is arguably not significant enough to make the program go off-track by themselves.

They are more of a political blunder that could come back to bite in later discussions, especially when the Paris Club will assess whether the comparability of treatment has been respected by the expected Chinese restructuring deal. Therefore:

The authorities made a commitment to reflect the payments to EXIM China in the eventual debt restructuring so as to ensure comparability of treatment with other official creditors.

Bottom line, this situation is another illustration of how increasingly complex debt instruments — SOE debt with government guarantee, offshore escrow accounts —collide with capacity and coordination issues across government agencies to make restructuring negotiations more protracted.

Bondholders: the comparability of treatment puzzle

Comparability of treatment (CoT) appears to be even more of a burning topic when it comes to the deal reached by Suriname with bondholders. In May, Suriname announced that it had reached a restructuring agreement with a committee of holders of its two outstanding Eurobonds. I did a deep-dive into the terms of this deal in a previous blog post, arguing that negotiation dynamics leaned strongly towards creditors who got a sweet deal.

The 2023 and 2026 Eurobonds rallied since the deal was announced and were hovering around 85 and 83 cents on the dollar respectively on Bloomberg as of end-August. Though these bonds are not liquid so any price indication is to be taken with a pinch of salt, that is hardly the usual level we’re used to see for other restructuring cases — Ghana, Sri Lanka or Zambia are all trading in the 45-55 range these days.

Where it gets interesting is that the IMF has weighed in with an estimate of the NPV reduction granted respectively by the Paris Club and bondholders, confirming the intuition that bondholders did get a sweet deal:

Under the baseline (without VRI), this restructuring scenario results in NPV reduction of around 25 percent for official bilateral and 14.4 percent for external commercial creditors at a 5 percent discount rate, and 51.7 percent for official bilateral and 39.5 percent for external commercial creditors at a 10 percent discount rate.

Again these calculations are made under the assumption that the VRI does not pay out — if it does, creditors could get an additional $689 million, more than the original face value of the old bonds, further skewing the NPV calculations above in their favor.

These numbers are set to put pressure on the Paris Club. For the first time in its history, the Club has granted a two-step debt treatment, and the rescheduling of maturities falling due after the IMF program period is contingent on the respect by Suriname of the CoT principle with other creditors.

The Paris Club uses what it calls a holistic approach to assess CoT, alongside three measurements: NPV reduction, as well as nominal debt service reduction over a so-called consolidation period, and the duration of the restructured debt.

Now that the IMF has showed that the treatment was not comparable at all for the first indicator, it will be interesting to look at the other two to see whether they can tip back the scale. However, it is difficult to assess the respective contributions in nominal debt service reduction because the Paris Club did not publish the nominal debt service due to its members during the IMF program. Similarly on the duration of the restructured debt, since we do not have the precise cashflows of the Paris Club claims pre- or post- restructuring.

The Paris Club has never withdrawn a debt treatment due to a breach of the CoT provision, as noted by Diego Rivetti. Suriname is set to become an important test-case, and a welcome opportunity for transparency by all stakeholders involved amid policy debates on how to assess CoT in restructurings. The IMF notably organised a workshop on CoT in June 2023 under the aegis of the Global Sovereign Debt Roundtable.

Beyond the nitty gritty of the calculations, Suriname also begs the question of the scope of the CoT assessment, especially whether to include state-contingent debt instruments in it. Any development in Suriname in that regard will be of interest to Zambia, where official creditors reached a deal with a state-contingent feature related to an IMF indicator.

As I noted in my last blog, I continue to think that the apparent difference of treatment between bondholders and the Paris Club might impact China’s willingness to restructure its claims. Chinese authorities have repeatedly flagged the lack of fair burden sharing by bondholder as a major hurdle to their own involvement in sovereign restructurings, and Suriname might become a prime example of this dynamic.

This could be another incentive for the Paris Club to come out publicly with its assessment of comparability of treatment in that particular case: if it assesses that the bondholder deal is not comparable, the Paris Club’s two-step deal will fall through and China would have some merits in refusing to provide much more relief than bondholders. If the Paris Club can prove that the bondholder deal was in fact comparable based on other indicators, this would incentivize China to come to the table and provide a comparable debt treatment.

Suriname in a league of its own?

This blog discussed the China’s behavior in Suriname’s restructuring and the policy response of the IMF, complexities related to a Chinese escrow account, and CoT challenges raised by the restructuring deal with bondholders. Along these three dimensions Suriname raises many questions which might appear idiosyncratic at first glance but provide important insights about the architecture for sovereign restructurings, begging for more transparency across the board.

Coming weeks are set to be interesting. The IMF indicates that the new bonds — fixed income leg and VRI — will be issued next week, providing initial insights on the price of VRIs amid uncertainties about oil exploration. Then if and when the third review is approved by the IMF board, the wording — or the lack thereof — around the restructuring of Chinese claims and the arrears policies will be another indication of ongoing powerplays.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

Views expressed here are my own, no my employer’s.

In May 2023, Suriname reached a restructuring agreement with holders of its two outstanding Eurobonds, contingent on obtaining a Staff Level Agreement with the IMF for the next program review. The country was placed in a tough spot, with the defaulted bonds capitalizing at a high rate while the default could have hampered FDI badly needed to kickstart oil exploration and lift up economic growth.

The IMF should soon unveil an updated macro-fiscal framework, but the restructuring deal appears to fall short of the hypotheses underlying the 2021 program. Since then, the government had to cope with a sharp deterioration of the macro environment, while trying to implement required reforms. There is a risk that a remaining gap in an updated IMF program would need to be bridged through additional fiscal consolidation instead of debt restructuring, right as the government faces significant economic headwinds.

The next step will be for Suriname to get the IMF program back on track, putting China into the limelight as textbook financing assurances – never formally obtained in the first place – will probably be required for disbursements to resume.

Deep-dive into the terms of the deal

The main terms of the agreement in-principle have been laid out in a press release – the blog is based solely on this information which might be complemented when the deal closes. Interestingly, the deal is contingent on Suriname reaching a Staff-Level Agreement with the IMF by June 15.

In short, the two outstanding Eurobonds will be bundled into one fixed income instrument with a face value of $650m – that is a 25% principal haircut on original face value and accumulated past due interest (PDI) – a 10-year maturity, and a coupon of 7.95%. During the first two years, only 4.95% will be paid in cash with the remaining 3% capitalized.

A first observation is that PDI has been capitalized at the hefty prevailing contractual rate for the past 3 years, that is 12.875% and 9.25% for the two existing bonds. In fact, the 2023 bond originally bears a 9.875% coupon but features a provision (“Additional Interest” in the prospectus) which states that the interest rate will increase by 300 basis points after any missed payment by the issuer.

In the end, the PDI significantly increased the size of the claims: after the haircut the total face value is only reduced from $675m to $650m, that is a c. 4% reduction.

Using the Sturzenegger and Tresbesch formula for haircuts (1-PV_new/PV_old) I find that the NPV reduction is c. 16% with a 5% discount rate (the one used by the IMF). Looking at market-relevant discount rates, we get a c. 29% NPV reduction at 10% exit yield, and c. 40% reduction at 15%. These are ballpark estimates though Daniel Munevar finds similar figures. I made the simple (and conservative) assumption that missed coupons are settled in year 1 for the old bonds which gives a slightly higher haircut.

The fixed income instrument described above will be complemented with a value recovery instrument (VRI) paying out only if the country manages to exploit its yet-untested oil reserves and receives royalties. After an initial $100m of oil royalties goes to the government, creditors will be able to claim 30% of the yearly oil royalties from block 58 until 2050. The initial amount of the VRI is set at the value of the initial haircut multiplied by a factor of 1.2, meaning if it pays out bondholders would not only recover their losses but also make decent money in the process. The maximum amount payable under this instrument is set at $689m, coming on top of the fixed income instrument, as the initial amount of the VRI increases over time at a 9% capitalizing interest rate.

The VRI features a call option enabling the government to prepay the instrument without penalty or premium. As soon as royalties start coming in, the government will face a difficult trade off: if it expects the 30% of royalties from block 58 will exceed the outstanding amount of the VRI before 2050, it could be tempted to retire the VRI right away to limit the payments to creditors. However, this would severely drain public finances and there is still a risk that royalties would not materialize in the end.

These VRIs will surely be difficult to price: not only investors need to factor in oil price forecasts, they also need to price the actual volume of oil in Suriname’s block 58, estimate the ability of the government to exploit these reserves, the volume of royalties they would derive from it, and the probability that the government calls the instrument. However, with the concentrated investor base (5 investors control c. 75% of the outstanding bonds according to the authorities), a secondary market for these instruments is unlikely to exist and they will probably sit on the books of the participants in the exchange until expiration.

Finally, the press release indicates that “the full amount of Suriname's royalty payments from Block 58 shall be deposited” in an offshore payment account, over which the investors have some sort of control. More precisely, upon the occurence of certain events (not specified for now) investors will be able to exercise a put option and sell the VRI back to Suriname using the funds docked in the offshore account.

The information available for now begs serious questions about sovereignty when it comes to the benefits of the country’s natural resources, especially since the amounts held in the offshore account will be higher than just the share of royalties investors are owed. When the final deal is inked the precise contours of the so-called put events will be a matter for scrutiny.

More broadly, the use of quasi-collateral like offshore accounts is rather unusual for Eurobonds (no precedent immediately springs to my mind), but quite common for Chinese loans as showed by Anna Gelpern and colleagues. Coincidently, the IMF discovered that China Exim had drawed funds from an escrow account in Suriname between the approval of the program and the first review. The use by bondholders of similar structures could prove useful to China when it comes to pushing back on “debt trap” accusations by western governments, answering that commercial creditors located in the main financial jurisdiction share the same practices.

These mechanisms can come back to bite: they make it difficult for issuers to restructure bonds or even run arrears, complicating the negotiations of IMF programs since the Fund can ask further assurances from such creditors. For now, it will be interesting to see what the IMF has to say about the offshore payment account in its staff report when the program makes it to the Board.

A deal at odds with the IMF program?

The Suriname IMF program is currently off-track and the IMF recently indicated work is ongoing with the authorities and a mission is expected soon. The new program will likely feature an updated macro-fiscal framework and debt sustainability analysis which is not yet public.

In the meantime, we can compare the characteristics of the last deal to the restructuring parameters that formed the bedrock of the IMF program approved in 2021 – quotes in this section are from the 2021 staff report. Disclaimer: any relief calculation for bondholders is somewhat of a lower bound since it does not take the VRI into account – if the security pays out it is likely that bondholders will not grant any relief.

First, about nominal haircuts:

Under this scenario, the face value of external commercial debt, including arrears—bonds and non-ECA backed loans—is reduced by 40 percent at end-2022, and the amortization of remaining debt outstanding would be paused for 3 years.

The IMF hence expected a bigger face value reduction than the 25% featured in the deal. The delay in reaching the deal and significant capitalized PDI, make the actual reduction of the face value of the claim even smaller.

About coupon reduction, the IMF expected an average coupon of 3.4% for non-ECA-backed commercial debt:

In addition to the nominal haircut and extension of maturity, the restructuring scenario also assumes interest payments starting in 2023 with reduced average coupon rates of 3.4 percent for non ECA-backed commercial debt and Eurobonds, and around 1.1 percent for official and ECA-backed commercial debt.

Non-ECA-backed commercial claims other than Eurobonds represented 1% of GDP at end-2021 compared to 31% of GDP for bonds. Since the new bond will bear a 7.95% coupon, it is unlikely that non-bonded debt instruments can have a low enough coupon to get the average down to the IMF requirements.

Then comes the NPV relief:

This restructuring scenario results in NPV reduction of around 36 percent for official bilateral and 45 percent for external commercial creditors at a 5 percent discount rate, and 62 percent for official bilateral and 58 percent for external commercial creditors at a 10 percent discount rate.

As discussed in the first section, the latest deal with bondholders seems to result in a NPV reduction of c. 16% at a 5% discount rate and 29% at 10%, significantly below the IMF’s assumptions. This could also be a breach of the Paris Club’s comparability of treatment principle, as the NPV relief appears significantly lower than the one granted by official creditors – the final call on this will come from the two other measures the Club uses to assess CoT in a holistic manner (nominal flow relief and duration extension).

Overall, the restructuring appears to fall short of the IMF expectations. Problem is, since the approval of the program at end-2021 the macro and fiscal backdrop have arguably deteriorated with lasting scars from the pandemic, spillovers from Russia’s invasion of Ukraine, and inflationary pressures. The deterioration was the reason for which the program went off-track in the first place, as the authorities considered that reforms required by the IMF had become unpalatable.

A deeper restructuring would therefore have been expected to stay in line with the updated IMF program parameters. As things stand, either the program will have loose assumptions – we have the Sri Lanka precedent in that regard – or the fiscal adjustment will be much stricter – something that the government can ill afford in the current economic context.

A glimpse of negotiation dynamics in recent months

Another way to understand how the negotiations unfolded in the last stretch is to compare the final terms to the ones that were on the table in July 2022 from both the authorities and bondholders, with significant gaps at that time. I outline the key differences between the two parties below, and indicate on which side the final deal ended up. Disclaimer, bondholders “stated that the alternative restructuring scenario they presented should not be regarded as a proposal”, but it still brings valuable information on the direction of travel.

For the fixed income instrument:

• Government proposed a 33% face value haircut, bondholders 20% – the 25% value is closer to the bondholders

• Government wanted PDI to accrue at 8% instead of contractual interest rate after 2021, bondholders wanted contractual interest rate until the restructuring date – in the end PDI accrues at contractual interest rate up to the closing date

• Government wanted a 6% average interest rate, bondholders 8.75% – the 7.95% value is closer to the bondholders

• Government wanted a step-up coupon, bondholders wanted a straight coupon – in the end bondholders do get a straight coupon, with part of it capitalized in the first two years

For the VRI:

• Government wanted a one-off floor of $500m in royalties before payments to creditor kick off, bondholders wanted a $50m floor – the $100m value in the final deal is closer to the bondholders

• Government wanted the interest rate on the VRI to be set as the average coupon of the fixed income instrument, bondholders wanted a step-down from 12% to 7% – the 9% in the deal is somewhat in line with what bondholders wanted, and higher than the coupon on the new bond

• Government wanted the VRI to expire in 2035, bondholders did not provide a date – in the end the expiration date in 2050 is significantly later than the government’s proposal

• Government wanted a hard cap on the VRI payments, bondholders did not want a hard cap – in the end there will be a hard cap at 2.5 times the value of the nominal haircut initially accepted by bondholders

• Government wanted to allocate 10% of royalties to bondholders, bondholders wanted 30% – the final deal features a 30% allocation ratio

• Bondholders wanted a security interest included in the structure of the offshore escrow account, which the government did not propose – the final deal does feature the security interest

Overall, it appears that the needle moved in the direction of bondholders for most indicators except the inclusion of a hard cap in the VRI.

A new normal for bond restructuring dynamics?

It is interesting to try and understand the incentives and leverage of all stakeholders that might have led to the final deal, before drawing takeaways.

First, time was not on the side of the government for several reasons. PDI capitalizing at the prevailing contractual rate was rapidly increasing the size of the claims, by more than $60m per year. As bondholders apparently refused to have a cut-off date after which the accrual rate would be lower (see the previous section), it was urgent for Suriname to get a deal at least in order to stop the bleeding and lower the interest rate.

Additionally, it would have been harder for the government to attract the FDI needed to finance the upcoming exploration of oil while in default to bondholders. Empirical literature tends to show that sovereign defaults have a significant negative impact on FDI attraction. For what it’s worth, the national oil company announced the signature of profit sharing contracts for two offshore blocks with international oil companies a few days after the restructuring deal.

In parallel, we can assume that bondholders had significant leverage: these are small bonds, outside of the main indices, and the investor base was particularly concentrated with 5 investors holding 75% of the outstanding. This is a point that, in my view, warrants more attention in current policy debates: smaller issuers have to cope with a constrained investor base, less liquid secondary markets, facilitating the obtention of blocking stakes giving a few holders the upper hand in negotiations and reducing the impact of majority voting provisions. It is especially the case for small island developing states, which often undergo restructurings when climate shocks occur.

Therefore any takeaway from the Suriname deal for other restructurings is to be taken with a pinch of salt: the behavior and leverage of bondholders is probably different that in, say, Zambia or Sri Lanka – that’s even before throwing the oil exploration story into the mix.

Still, the Suriname deal aligns with a trend of increasing proactiveness from bondholders in restructurings as I alluded to in my takeaways from the IMF meetings. It started earlier this year when investors made a spontaneous restructuring offer to Ethiopia for a restructuring of its outstanding Eurobond, before the bilateral restructuring under the Common Framework and even before the IMF came out with its updated DSA.

Therefore, I still expect more movement from bondholders in coming months, trying to circumvent IMF constraints and the logjam among bilateral official creditors. Indeed, even when the bonds accrue PDI at a high interest rate in theory, investors still earn nothing on the position for several years, making these instruments a tough sell when US t-bills are paying 5%.

This dynamic can put governments in a difficult position: while they are surely willing to accomodate the demand of bondholders for faster deals, they also need to comply with contradictory injunctions. As part of Paris Club or G20 Common Framework agreements, countries have to respect the comparability of treatment principle, meaning earlier bond restructurings deals can constrain a debtor in its subsequent negotiations with bilateral creditors. Then again, if bondholders strike deals before the conclusion of IMF programs, countries might be forced to implement additional fiscal adjustment in order to comply with program assumptions later on.

What’s next? China back in the limelight

In May 2022, the IMF reached a Staff-Level Agreement on the second review of the program, which never made it to the Board as the program went off-track. The next step for the country will be to get the program back on track, as the Fund hinted at an upcoming mission during the spring meetings in April 2023.

We could expect a Staff-Level Agreement on a new review in coming weeks, especially since the IMF signalled its flexibility to adapt the program, but China could become a roadblock once-again towards the approval of the review by the Board and the resumption of disbursements. This, as an aside, might also be why bondholders made the deal contingent on a Staff Level Agreement and not an IMF Board approval.

As I discussed at length in previous blogs, the IMF used its arrears policies in 2021 to override the need for financing assurances from China and approve the program. However, with the evolution of policy discussions in recent months it is unlikely that the same trick could be used again without triggering reactions from major shareholders.

During the spring meetings, the acting director of the IMF’s Western Hemisphere Department touched exactly upon this issue:

And in the program previously, we had basically moved forward on the program on the basis that they were essentially not paying the debt to China and would be eventually restructured. So, I think we are looking for some progress in terms of that restructuring of the Chinese debt. The Surinamese already reached agreement with its Paris Club creditors and it's close to reaching an agreement with India, which is the other big creditor. And so, I think having some more progress on the debt restructuring talks with China would really help, both help both with the program and help the country.

Like in Zambia, the IMF does not say precisely what kind of progress would be necessary to get the program back on track. I would expect that the IMF is asking China for a letter similar to the one provided to Sri Lanka, which most importantly included a commitment to provide a debt treatment in line with IMF program parameters.

An interesting question is to what extent the bond deal could impact China’s behavior. In a podcast, Jeromin Zettelmeyer said that China was reluctant to restructure in Suriname in part because it wanted to make sure bondholders would also restructure. When the dust settles, if it appears the deal struck by bondholders is more attractive than the Paris Club deal, China could demand to align with these latest terms.

Then if the IMF program resumes, it will be interesting to see whether China turns these financing assurances into a concrete restructuring deal, something that has proven difficult so far in Zambia and Sri Lanka. One risk in that regard is that the Paris Club has – for the first time in its history to the best of my knowledge – made its restructuring agreement contingent on the respect by Suriname of the comparability of treatment principle. If China does not restructure its claims, Paris Club claims due after 2025 would not be restructured and the debt amortization would further steepen.

Conclusion

Suriname finds itself in a tough spot again, and the road ahead is bumpy at best. There are a lot of moving pieces which will be interesting to watch:

• The update of the IMF macro-fiscal framework will give a first indication on the feasability of the fiscal adjustment to restore sustainability given current restructuring parameters.

• Getting China on board is set to be the main challenge for the government in coming months, including the obtention of financing assurances and a subsequent restructuring deal.

• The light debt treatment for Eurobonds might result in a very high exit yield, hampering market access and leading to the need for subsequent restructurings.

• The Paris Club will see its assessment of comparability of treatment tested by the terms accepted by bondholders and China, which might be an occasion to increase the transparency of its assessment, right as there are policy discussions about a common formula across creditors to assess CoT.

I am grateful to Teal Emery for valuable comments.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

Views expressed here are my own, no my employer’s.

Sovereign debt was on top of the agenda during the IMF/WB Spring Meetings, between April 10 and 16. There was movement at the Global Sovereign Debt Roundtable and at the country level for ongoing restructurings. Most of the progress remains preliminary and coming weeks will show if we are moving past the logjam that has plagued sovereign restructurings in recent years.

This blog dives into four main takeaways from the IMF/WB meetings:

• Ongoing discussions about whether we are witnessing a systemic debt crisis in LICs and the subsequent policy response;

• Notable movements at the Global Sovereign Debt Roundtable;

• How domestic debt is climbing up the policy agenda and the risks of hastened policy changes;

• How global policy developments translate into movement for ongoing sovereign restructurings.

The blog post is unusually long so feel free to jump to any of the four parts.

A HIPC moment? The jury is still out

Just before the start of the Spring Meetings the IMF published a working paper with a star-studded line-up of authors, comparing the current debt situation in LICs to the pre-HIPC era. They say the following:

The main conclusion is that, high risks notwithstanding, debt vulnerabilities in low-income countries today remain substantially less alarming on average than they were in the mid-1990s. […] This said, debt vulnerabilities in LICs could reach levels comparable to those of the mid-1990s over the medium- to long-term if current trends persist and in the absence of policies and reforms to address such vulnerabilities.

This point is best summed-up with the following graphs, showing that debt levels on average, despite a sharp increase, remain lower today than pre-HIPC and sovereign arrears are yet to pick up significantly. (All graphs in this section are sourced from the IMF paper.)

This IMF paper comes at an important moment, with debates around the best way to address debt vulnerabilities in LICs, and calls for a systemic approach akin to HIPC or the Brady plan, such as the “Debt Relief for a Green and Inclusive Recovery” proposal by Ulrich Volz and colleagues.

The IMF as an institution has often erred in recent months towards the idea of a systemic debt crisis in LICs, in order to stress the urgency of the required policy response. During the Spring Meetings – that is after the publication of the IMF paper – the head of the IMF Africa Department called for a “Gleneagles-like moment”, in reference to the 2005 G8 summit which gave birth to the MDRI initative to complement HIPC. Back in October the World Bank Chief Economist called for “another round of structured debt relief, because that’s what HIPC was”, similarly illustrating the institutional debates going on within the Bretton Woods institution.

While the IMF paper would tend to push back on the relevance of a blanket approach to debt relief, devil is in the detail and there is much more in the piece than the headline conclusion.

First, the absence of arrears could be the tip of the iceberg, hiding a development crisis brewing across LICs as governments service their debt at the expense of other crucial expenditures. Masood Ahmed nailed it at a recent conference:

I don’t think we are going to have many defaults - the cost of default is very high. (…) What we are going to see is that unsustainable debt service is going to lead to development crises rather than debt crises. There will be default for future generations, cutting back on investments for the future.

The IMF paper studies this specific point by looking at the gap between debt service and social spending in LICs. While the gap remains better than during the HIPC period, the direction of travel is especially worrying at a time when LICs face a series of shocks from the COVID-19 pandemic to the spillovers of Russia’s invasion of Ukraine.

There could be several reasons for the growing cost of restructurings. First, the increased fragmentation of the creditor landscape in LICs has made the process more burdensome, delaying not only the resolution of the debt overhangs but also the provision of support by the IMF and its partners as showed recently by Jorgelina do Rosario. The graph below neatly illustrates the fragmentation by showing the increased share of non-Paris Club bilateral creditors – for which there is no streamlined process when it comes to sovereign restructurings – and bondholders in the LICs debt stock. The increased share of multilateral debt – usually excluded from restructurings – has also further rigidified debt stocks.

Second, at a granular level, the IMF notes (paragrah 29 of the paper) that the use of increasingly complex debt instruments by LICs could further deter or prevent governments from engaging in timely and preemptive restructurings – this includes the use of guarantees, securitization, collateral, and PPPs. The IMF notes:

“Debt instruments with special enhancements that go beyond the standard “plain vanilla” terms could be more difficult to manage and assess risks and, when they are collateralized and guaranteed, they could easily be transferred to the sovereign’s balance sheet in the face of sudden economic shocks, thereby elevating debt vulnerabilities and complicating debt treatments.”

All these factors, combined with stalemates observed in countries such as Zambia, are significantly reducing the incentives of governments to restructure or default, potentially leading to hard defaults and worse outcomes later on.

However, if push comes to shove and we do reach that HIPC moment, the IMF already warns of donor fatigue as a major hurdle towards the implementation of the policy response. This is underscored by the graph below showing that net flows to LICs as a percentage of GDP have plateaued in the wake of HIPC. The outlook is gloomy at best, with Chinese lending declining, market access hampered across the board, aid budgets under threat in advanced economies, and protracted debates about ways to increase the firepower of IFIs. As showed by Brad Setser, net flows to developing economies will “fall off a cliff” absent a dramatic change of course.

It will be interesting to watch in coming months which view prevails within the IMF and the World Bank when it comes to the relevance of a structured wave of debt relief, and whether it is merely a descriptive disagreement or it shapes the response of these institutions to debt crises in LICs.

Progress at the Global Sovereign Debt Roundtable

From the start of the Spring Meetings, the sovereign debt crowd was abuzz with talks of a potential compromise between China and other stakeholders to break the sovereign debt restructuring logjam. The WSJ first came out, indicating China could drop its demand for MDBs to take haircuts in exchange for fresh MDB funding during restructurings. Then came Reuters saying that in exchange for dropping its demand China would get earlier access to the IMF’s DSA during restructurings.

The co-chairs of the Global Sovereign Debt Roundtable (GSDR) finally published a statement on Wednesday April 12 which provides interesting insights on the current state of play. The discussions seem to be structured around a three-pronged approach involving:

• Increased transparency and information sharing for the IMF/WB DSA;

• An agreement on the way to assess comparability of treatment across creditors;

• Increased efforts by MDBs through “net positive flows”.

One then has to read between the lines of the communiqué to understand the concrete progress and potential policy changes.

First, with regards to information sharing, the mention that the IMF will issue staff guidance seems to indicate that there will be no sea change – any significant policy modification would require to go through the Executive Board. “Staff guidance” hence means that the IMF will probably encourage mission chiefs to do the most they can within existing rules. This falls short of China’s demand to provide inputs in the IMF DSA, and that of commercial creditors to have access to the full DSA between the staff-level agreement and the Board approval. However, the IMF arguably wants to protect the value of the involvement of its Executive Board: the role of IMF DSAs comes from the fact that they are approved by the IMF Board giving them their legitimacy. It is unsure as a result whether all stakeholders will come to an agreement soon.

Second, the outcomes of the workshop on comparability of treatment (CoT) will be interesting to watch, especially the attitude of the Paris Club. The Club currently assesses CoT in a holistic manner involving three different measures, and has never withdrawn a restructuring agreement due to a breach of CoT as noted by Diego Rivetti. Choosing one definitive measure of CoT could corner the Paris Club, blowing up any restructuring agreement if China or bondholders then strike a deal on slightly better terms according to the set formula, even if the difference is negligible.

Finally, the most important point of the GSDR communiqué is the role of MDBs in restructurings. It is difficult at this stage to understand whether any concrete progress has been made. The head of the SPR department at the IMF went on the record talking about a “major breakthrough” and indicating haircuts for MDBs were now off the table. However, the tone of Chinese officials was more muted to say the least – their public remarks do not indicate a major change of stance for now.

As a further illustration of cautiousness, in the wake of the IMF meetings Janet Yellen gave remarks at SAIS on the US-China economic relationship and told the audience that China “has served as a roadblock to necessary action”, without mentioning the GSDR or any progress in policy discussions.

The definition itself of net positive flows from MDBs is not totally clear, and we can expect tough discussions on whether it should be made up mostly of grants or loans, in which proportion, etc. It will be also interesting to see whether the discussion of MDBs support in restructurings becomes one piece of the broader debate around the increase of the MDBs’ firepower, including through a reform of their capital adequacy frameworks.

The reason for the uncertainty on this topic is probably that the heavy lifting is yet to come – even if haircuts are off the table – as the definition of the “additional effort” by MDBs entails major hurdles. First, MDBs other than the World Bank were not at the table in GSDR discussions, yet they would be binded by the resulting arrangement. Second, the ability of MDBs to provide outright grants – which China might consider as the closest equivalent to a participation in restructurings – is limited. Third, MDBs are constrained by their internal policies including country envelopes, which might prevent them from extending additional support to some countries undergoing restructurings.

The GSDR appears to be a meaningful forum for a broad dialogue, and has touched upon many contentious issues that had been somewhat avoided in recent years. However, we have to aknowledge that the gap remains significant on many fundamental debates and concrete progress is yet to materialize.

Finally, the GSDR communiqué already indicates other topics to be discussed in the upcoming gatherings: “cut-off dates, formal debt service suspension at the beginning of the process, treatment of arrears, and perimeter of debt to be restructured, including with regards to domestic debt”.

The perimeter issue will be one to watch, including when it comes to the treatment of central bank swaps in restructurings. The inclusion of these instruments in the perimeter remains rather untested in recent years but might come back to the limelight – a recent paper by Sebastian Horn and colleagues provides early evidence of China bailing out loans extended by its policy banks through the use of swaps with the PBoC. Other creditors might hence push for these swaps to be restructured to satisfy fair burden sharing.

The domestic debt puzzle

Among the topics to be discussed further by the GSDR, domestic debt stands out as especially important. It has been climbing up the policy agenda in recent months and featured predominantly in policy discusions at the IMF meetings, especially as governments shut out of international capital markets rely increasingly on domestic markets to finance their budget. This has already led the IMF to dedicate a chapter of the Global Financial Stability Report to the sovereign-bank nexus in emerging markets.

Domestic debt has also been an important topic in ongoing restructurings. Looking at the sequence of events in recent months:

• Zambia first chose in 2022 to exclude domestic-currency debt from the perimeter of its restructuring given '“material spillover risks” (para. 28 of the IMF staff report).

• Ghana then implemented a domestic debt restructuring in Q1 2023 before starting negotiations with its external creditors.

• Subsequently, bondholders demanded in a letter to the IMF Managing Director that Sri Lanka “reorganize” its domestic debt as part of the ongoing restructurings. A few weeks later the authorities announced in a creditor presentation that they would implement a “domestic debt optimization”.

While we can see an early trend towards the inclusion of domestic debt in restructurings, this process is no quiet river. Ghana is working on the implementation of a financial stability fund to alleviate any impact of the domestic restructuring on its banking sector, and press reports indicate that Sri Lanka is facing hurdles with its voluntary domestic debt restructuring.

In Zambia, domestic debt came back to bite as the foreign holdings of domestic debt excluded from the restructuring were nonetheless included in the IMF external DSA, conducted on a residency criteria, and hence eat up the country’s debt servicing capacity in the short term within the DSA – something Brad Setser has written about in depth.

Although the international financial architecture is blatantly ill-equipped to deal with growing domestic debt markets and foreign participation in them, any blanket approach to burden sharing between external and domestic debt remains at best elusive, at worst detrimental to all stakeholders.

Anna Gelpern and Brad Setser made a compelling argument in this view in a 2004 paper entitled “Domestic and External Debt: The Doomed Quest for Equal Treatment”. They wrote that a systematic approach to domestic debt treatment is probably not desirable since it would not unfold in the context of a matching social safety net. In essence, such a systematic approach would surely fail to capture the broader relationship between a sovereign debtor and its domestic creditors, since it involves for example the provision of social security, education, the supervision of the financial sector, etc.

Anna and Brad’s argument was framed in the context of debates around the creation of a Sovereign Debt Restructuring Mechanism (SDRM). Interestingly enough, a paper published around that time by the IMF touched specifically upon the potential inclusion of domestic debt in the SDRM, and indicated (para. 42) that “consultations with foreign investors to date suggest that they would actually prefer to have domestic debt excluded from the SDRM”.

The IMF’s doctrine so far on domestic debt restructurings has been prudent and sensible, as illustrated by the 2021 primer and subsequent blog rightly entitled “handle with care”. One would hope the doctrine remains somewhat the same, assessing costs and benefits on a case-by-case basis and rebuking calls for a systematic burden sharing incolving domestic debt.

Finally, the issue is much wider than restructurings: in recent years the IMF and the WB have provided significant technical assistance to help countries develop their domestic debt markets and attract foreign investors, notably to reduce the exposure to foreign currency risks. Any policy change regarding the inclusion of domestic debt in restructurings will need to take this aspect into account. Indeed, a more regular inclusion of domestic debt in restructurings could significantly impact market dynamics or foreign investors’ behaviors when debt vulnerabilities increase.

Moving pieces at the country level

Progress at the country-level is probably the best way to judge any movement and progress in global policy discussions. The IMF meetings provided some rather positive developments across the board. For instance, Ethiopia is moving towards an IMF program which would lay ground for a subsequent debt treatment that the country requested through the G20 Common Framework.

Bondholders are apparently becoming more proactive and seem eager to strike faster restructuring deals despite potential stalemates in negotiations with bilateral official creditors:

• Bloomberg reported that Suriname is nearing a restructuring agreement with commercial creditors, which will be interesting to watch with regards to the inclusion of commodity-linked instruments.

• Reuters reported that Zambia sent a concrete restructuring proposal to bondholders.

• Reuters reported that Sri Lanka’s bondholders sent a first restructuring proposal to the authorities.

Though these are steps in the right direction, we are yet to witness the signing of a definitive restructuring agreement with bondholders in any of the major cases. Additionally, these developments contrast sharply with the absence of major progress or even movement when it comes to bilateral creditors and especially China.

A first indication of China’s behavior can be found in Sri Lanka, where all the other major bilateral creditors announced the creation of a common forum for restructuring discussions, without China so far. Despite providing financing assurances to the IMF a few weeks earlier, China either does not yet want to negotiate, or prefers to do so in a bilateral manner, which would again trigger questions around comparability of treatment.

Zambia, finally, is the prominent test-case for the ability of China to start discussing concrete restructuring terms, and the IMF program’s first review and disbursement remain up in the air absent any progress on the restructuring front. As I wrote earlier, the IMF faces a difficult trade-off between appearing to let down Zambia which implemented all required policies, and reducing the incentive for China to play ball in the restructuring if it disburses without progress.

The IMF indicated that the signing of a Memorandum of Understanding (MoU) would be sufficient to unlock the review. The Zambian authorities hinted during the IMF meetings that they hope significant progress towards the MoU, even if it is not signed, would enable the IMF to make the disbursement anyway.

In addition, depending on its content, the signing of the Memorandum of Understanding (MoU) could amount to kicking the can down the road. As with Paris Club agreements, such an MoU is “legally non-binding” – what matters is the subsequent bilateral agreement signed between the debtor country and each creditor. This means that China could in theory sign the MoU and then drag its feet when it comes to turning it into a concrete restructuring deal for all Chinese claims. This would threaten a replay of the current stand-off during all remaining program reviews.

There is cause for concern, as a similar pattern was observed with financing assurances: the IMF accepted somewhat vague financing assurances from China which turned out to be anything but “specific and credible”, as China subsequently pushed back on the assumptions of the IMF program and DSA instead of negotiating restructuring terms in line with these parameters.

The problem is reinforced by the lack of transparency and guidelines of the G20 Common Framework. Nobody knows what a Common Framework MoU looks like – the one for Chad, the only one signed so far, was not published. It would hence be positive for the IMF and G20 members to provide additional transparency about what parameters should be detailed in a MoU.

These are difficult discussions but it does not seem for now that they can be avoided, as the alternatives – including the use of the IMF arrears policies – remain at best temporary fixes. Despite the hurdles, China’s presence at the GSDR and the depth of discussions in recent weeks do provide room for cautious hope. Once again, any progress will only be assessed properly if the transparency of the process is increased across the board.

I am grateful to Bernat Adrogue, Mathilde gassies and Stephen Paduano for valuable comments.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

The G20 Common Framework somehow assumed that China could behave like Paris Club creditors within the international financial system. The Zambia restructuring is proving that this assumption is overstated for the time being, as the IMF ramps up pressure ahead of the Spring Meetings next week.

The Fund faces a difficult trade-off: approving the review and making disbursements will diminish the incentives for China to start playing ball in the restructuring. Withholding disbursements, on the other hand, lets Zambia bear the full cost of geopolitical blame games despite having implemented all required policies as part of the IMF program.

Uncertainty around the Zambia IMF program

The IMF just reached Staff-Level Agreement on the first review of Zambia’s program, approved in September 2022. As part of every program review when a restructuring is ongoing, the IMF conducts a financing assurances review to ensure that it still has “specific and credible” assurances that the required debt treatment is underway.

Absent any progress in Zambia, it seems difficult for the IMF staff to convince the Board that these assurances are present when there are press reports every other week indicating that China is pushing back on virtually any common practice that forms the thin bedrock of the architecture for sovereign debt restructurings.

For now indeed, the wording of the press release in Zambia seems to imply that the $188m disbursement will be held up unless the country makes significant progress on the restructuring front, such as turning financing assurances from bilateral creditors into a concrete restructuring deal:

Zambia will have access to about US$188 million in financing once the review is approved by IMF Management and formally completed by the IMF Executive Board. To remove any hurdles to the timely completion of the review, Zambia needs official creditors to move forward and reach agreement on a debt treatment in line with the financing assurances they provided in July 2022.

This analysis is further supported by a quote from the Mission Chief for Zambia:

The staff-level agreement is subject to IMF Management approval and Executive Board consideration once the necessary financing assurances have been received. An agreement with official creditors on a debt treatment in line with program parameters would provide the needed financing assurances.

The fundamental ambiguity of the IMF’s wording is that it does not say what else, apart from a restructuring deal, would constitute sufficient financing assurances. This could indicate that, despite trying to apply pressure on China, the IMF wants to give it a temporary face-saving exit as noted by Brad Setser.

It is worth noting that the stalemate we are witnessing now was embedded from the start in the design of the Zambia program, as the commitment to achieve a restructuring before the first program review was included in the memorandum on econonomic and financial policies (MEFP, para. 73):

We are committed to finalizing the MOU with official creditors by the time of the first program review, and reaching agreements on comparable terms with other creditors soon after, by the time of the second review at the latest.

In hindsight, the inclusion of such a commitment in the program strikes me as odd. It had the perverse consequence of giving China a veto over the IMF program and subsequent disbursements – exactly what the IMF’s Lending Into Official Arrears (LIOA) policy is meant to avoid. Making the authorities commit to a specific timeframe weakened from the start the ability of the IMF to use its arrears policies and apply pressure on China.

A delayed reckoning for the Common Framework

Taking a step back, the Zambia stalemate can be considered as a reckoning for the Common Framework as a whole. As I mentioned in a previous blog, the only way to get China on board with this initiative was to give up from the start on the IMF DSA as the bedrock for the negotiations, complementing it with “the participating official creditors’ collective assessment” – whatever this meant in practice.

The statement that was considered as sufficient financing assurances for Zambia by the IMF looks rather vague in hindsight. Especially, creditors said they supported Zambia’s IMF program but did not commit to provide a debt treatment in line with the parameters of this program. It paved the way for China to drag its feet and question any assumption that the IMF made.

In essence, the Common Framework assumed that China would behave like Paris Club creditors, who for decades have turned their financing assurances into restructuring agreements in a timely manner. Experience now tells us that it is anything but true, notably because of differences in the decision making process idiosyncratic to China: no entity is able to commit to a debt treatment on behalf of all stakeholders involved – be it the PBoC, MoF, or policy banks.

This fragmented landscape goes against the very principle of the financing assurances policy whereby the creditor country needs to provide a unified commitment binding for all national entities involved. In that view, Zambia provides a counter-example for recent policy proposals to move the provision of financing assurances after the IMF Board approval, or to assume they have been received by default. The issue is not the timing of financing assurances, rather the fact that China is structurally unable for now to provide assurances in line with what the IMF needs.

Acknowledging this, the IMF is now changing tack, setting up a Global Sovereign Debt Roundtable to try and agree on a set of basic common rules – something which would have come in handy when drafting the “Common” Framework – and ramping up pressure on China at the country level as illustrated by Kristalina Georgieva’s statements in recent weeks.

With this in mind, it will be interesting to watch whether the IMF continues to encourage eligible countries seeking debt treatments to apply for the Common Framework in coming months, absent any improvement of the mechanism.

What’s next?

The potential stalemate comes at the worst time for Zambia, with inflation on the rise and the currency taking a hit. The inability of the IMF to approve the review and move the program forward would reinforce these dynamics while the country has to cope with a challenging global economic environment. Incentives are high, and rightly so, for the IMF to use any lever available and approve the review to keep the program afloat.

As it became clear that China was not playing ball in restructuring negotiations, the IMF hence insisted that Zambia had done all it could and support should not be held back by recalcitrant creditors. It is probably no coincidence, then, that on the same day both the IMF Managing Director and the US Treasury Under Secretary for International Affairs hinted publicly that the IMF might have to lend into arrears to China.

The recent change of tack is best illustrated by this quote from Kristalina Georgieva with Bloomberg:

China has been very slow to recognize that multilateral debt restructuring requires China to play by the rules that are already established. Now is the time for China to demonstrate that they are capable of playing by these rules. 

With the IMF Spring Meetings coming up next week, it will be interesting to see how this narrative translates into policy actions, both at the country level in Zambia or the global level with the roundtable.

Finally, it is worth remembering in any case that China’s behavior remains rather unpredictable. It can lead to positive surprises as illustrated a few weeks ago by the provision of textbook financing assurances in Sri Lanka – although we might come to learn that these assurances were worth as much as these provided in Zambia.

This unpredictable behavior in any case begs deeper questions with regards to the international financial system, beyond sovereign debt restructurings. They are illustrated for instance by ongoing debates around the 16th IMF quota review due in 2023: in his remarks outlining the priorities of the US for the IMF meetings, Jay Shambaugh rightly asked if it would be appropriate to give more weight in international institutions to countries which do not behave responsibly in the international financial system, including on debt issues.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

In September 2022, Sri Lanka reached a Staff Level Agreement with the IMF. Six months later, the program is moving to the Executive Board on March 20 after China provided financing assurances that were deemed as sufficient by the IMF – the first time it does so outside of the Common Framework. While this progress is most welcome, there’s still a long way to go as noted by Mark Sobel: financing assurances need to be turned into a concrete restructuring deal, the most difficult step where Zambia has been stuck for more than 7 months now.

In this blog post, building on data from Jorgelina do Rosario, I take a look back at previous country cases to try and show that today’s stalemate experienced by Sri Lanka or Zambia was long in the making.

To better understand the hurdles that Sri Lanka faces towards a restructuring after the IMF Board approval, I look at the reasons for China’s reluctance to participate in restructurings, both foreign and domestic. Some of them are expected to be dealt with at the newly launched Global Sovereign Debt Roundtable and other forums, potentially further delaying the final resolution to Sri Lanka’s debt overhang.

An unprecedented logjam…

Data gathered by Jorgelina do Rosario at Reuters sheds a crude light on the current inability of the IMF to play its role as lender of last resort and provide timely support to countries in need, due to the difficulty of seeking financing assurances from non-traditional creditors. The latest series of sovereign restructurings have led to unprecedented time gaps between the Staff Level Agreements (SLA) and the approval of IMF programs by the Executive Board, Sri Lanka being one such example.

During this time spent in the grey zone, governments are on the hook, having to implement politically difficult reforms without the relief of new money flowing in. They also have to resort to alternative avenues to keep public services running – that’s for instance part of the explanation of why we saw foreign holdings of domestic debt instruments shoot up in Zambia from $1 billion to $3 billion after the default.

… which should have materialized earlier?

Speaking at a webinar in 2022, a deputy director of the SPR department at the IMF said the following about Chad’s Common Framework process: “It was the first case ever in the entire history of the Fund where China provided financing assurances to the Fund for us to be able to lend”.

This begs the question of how the IMF was able to approve programs beforehand whenever China was a significant creditor. Indeed, while China’s overseas lending ramped up in the wake of HIPC and then after the launch of the Belt and Road Initiative in 2013, some loans started going south earlier than the COVID-19 pandemic.

Congo-Brazzaville

The Republic of Congo’s 2019 IMF program is one of the first test cases with China having too much skin in the game to be overlooked within IMF policies. Reuters data indicates that the time gap between the SLA and the Board for Congo’s program was 63 days, from May to July 2019.

However, looking at the 2019 staff report, the first footnote says that “This report provides a full update to the July 2018 Staff report that could not be considered by the IMF Board due to lack of sufficient financing assurances.” This means that the July 2019 Board approval was actually the conclusion of a SLA reached not in May 2019 but in April 2018. Even though governance issues surely played a part in the delays, this would be among the highest time gaps with 448 days.

It appears that, unable to get specific and credible financing assurances, the IMF waited instead for Congo to strike an actual restructuring deal with China before approving the program, i.e. a more stringent requirement than financing assurances which merely constitute a commitment. As per Reuters, the deal only touched part of the Chinese debt stock, with a significant chunk to be repaid by 2021, that is before the end of the IMF program. It was achieved, as we have been accustomed to with China since then, through a maturity extension and no haircut.

Ecuador

Following that initial roadblock, the IMF stretched its policies on a case-by-case basis to try and prevent China from gaining a veto over IMF programs while limiting the risk that new money would just pay off Chinese debt service.

For instance, Ecuador’s 2020 IMF program was approved on the back of expected new disbursements from China to offset part of the debt service during the program period, and only a partial rescheduling of the claims. The comprehensive restructuring of Chinese claims would only be achieved two years later in September 2022, with the details available here in Annex IV.

It is interesting to note though that despite these difficulties the IMF indicated in the 2020 staff report that it had received specific and credible financing assurances from bilateral official creditors. The later acknowledgement by the staff that Chad was the first ever case of textbook financing assurances from China can support the idea that Ecuador was not dealt with by the book.

Suriname

Suriname in 2021 can be considered as the first program where the cracks really started to show, as discussed in an earlier blog post. The IMF waited for almost one year until the country fell into arrears to China. Then, the IMF used its arrears policies to override the need for affirmative financing assurances from China, despite its internal policies still requiring these assurances for important or recalcitrant bilateral creditors even in arrears.

Further delays after IMF program approvals

Even after programs are approved, financing assurances shenanigans sometimes prevent reviews and subsequent disbursements from happening in a timely manner: it took more than a year for the first review to take place after the program was approved in Chad, as restructuring discussions stalled.

The issue is that financing assurances are a commitment to provide adequate debt relief on a broad level, but they do not lay out how the relief will be achieved. This can be done in several ways, and each creditor will have specific preferences among them, e.g. maturity extension, grace periods, interest rate reductions, and nominal haircuts.

With the IMF Board approval achieved, countries need to negotiate with creditors and strike a final deal that is agreeable to all lenders while respecting the parameters of the program and the DSA. There might be another stalemate if, say, some DSA threshold requires a maturity extension longer than what a creditor is willing to accept.

The problem of delays after the Board approval was, in my view, reinforced with the Common Framework due to an original sin in the communiqué which said that the IMF DSA would be complemented with “the participating official creditors’ collective assessment” – opening the door to pushbacks from recalcitrant lenders on the framework of the negotiations.

This is exactly what happened in Zambia: China provided its (weak) financing assurances alongside other bilateral creditors in July 2022, yet subsequently started to push back against IMF assumptions in restructuring negotiations, as reported at length in the press.

Understanding the roots of China’s feet dragging

Even though Sri Lanka is not eligible for the Common Framework, it will probably face similar issues raised by China when the negotiations start in order to hammer down the terms of the restructuring. These difficulties appear to be quite generic and not country-specific – as a result, recent policy discussions provide valuable insights on what they could be.

For some time, delays were partly attributed to China’s lack of experience in coordinating across different entities such as the PBOC, the MoF and Policy banks. This argument becomes weaker as time goes by, and more fundamental roadblocks remain. It can be useful to divide them between geopolitical disagreements on the one hand and domestic constraints on the other hand, both requiring different kinds of solutions.

The first category of demands relates to China’s longstanding disagreement with the rules forming the bedrock of the international financial architecture for sovereign restructurings. These include pushbacks against the IMF’s methodology to assess debt sustainability, such as the definition of thresholds or the use of the residency criteria and its impact on the accounting of foreign holdings of domestic debt. It also includes China’s widely discussed demand for the World Bank and other multilateral institutions to take losses in restructurings, threatening their preferred creditor status.

The most difficult problem with China though seems to be the domestic political economy. Policy banks do not want to take losses for various reasons, which might include genuine internal KPIs of department managers or not-yet-allocated political cost distribution and blame games across different institutions, as well as among their respective political supervisors – for instance it was reported that some bankers viewing themselves as commercial actors did not want to take losses on shaky policy loans that they had been forced to make by the political leadership.

Non-exclusive to those hypotheses, the leadership in Beijing might be reluctant to take any action that could be perceived as a form of debt-forgiveness to other developing economies, something the tightly monitored public discussion in China has historically been very sensitive too.

These domestic issues are especially hard to tackle because they are mostly insulated from any lever that Sri Lanka or the international community might have. As a result, absent a plan to allocate the political and financial losses domestically, it is uncertain that China would come to an agreement in sovereign restructurings even if other stakeholders gave in on its outside demands.

The Global Sovereign Debt Roundtable as a partial answer

Faced with this conundrum, the IMF announced the launch of a new forum called the Global Sovereign Debt Roundtable (GSDR), to try and agree on common rules that would help unlock country cases. It brings together all major stakeholders, including private creditors and debtor countries. Additionally it was reported that China would send representatives from several institutions (MoF, PBOC, Exim), potentially limiting coordination issues among Chinese entities.

There is a clear risk that the roundtable will not achieve its objective of moving forward country cases, instead freezing them for another few months. As long as the roundtable is ongoing, the IMF could be disincentivized to apply maximal pressure on China in order to keep the Chinese parties at the table. Similarly, China will be wary of transforming vague commitments, like these made in Sri Lanka, into concrete deals since any compromise at the country level would in turn weaken its position at the roundtable.

An additional problem is that, looking at the roadblocks listed above, it is unclear how many can actually be answered within this new forum. For instance, the demand to make MDBs take losses in restructurings might well be related to a broader willingness of China to gain more power in these institutions that they consider as merely a US proxy. In this case, they will be discussed at the G20, or the Board of these institutions, with a longer time horizon.

A way to alleviate this risk could have been to define clear objectives and deadlines for the GSDR from the start, to avoid successive rounds of protracted negotiations during which some participants continue to move the goalposts. Only time will tell if the roundtable was the last step before an inevitable reckoning.

Then, if a consensus emerges that China will not be ready to play ball in the foreseeable future, this would bring the IMF in uncharted territories. While the arrears policies can help countries muddle through for a while, it is not realistic to envision a world where debtor countries would simply remain in arrears to China indefinitely. There would, in fact, still be significant risks: countries could repay Chinese lenders after the end of IMF programs when the Fund and other creditors still have skin in the game but the oversight is reduced.

I am grateful to Bernat Adrogue, François Chimits and Mathilde Gassies for valuable comments.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

There have been major developments in recent weeks for Sri Lanka’s debt restructuring process and IMF program negotiations: India and the Paris Club provided financing assurances for the program to move to the IMF Board, while China Exim offered a two-year debt service moratorium falling short of IMF requirements and risking a protracted stalemate until one of the stakeholders blinks.

The situation puts China at odds with most other creditors. Assuming it does not comply with the IMF’s requirement for specific and credible financing assurances, there is a narrow path towards the approval of the program and associated disbursements. It would require the IMF to lend into arrears to China, and probably a loose interpretation of various policies including financing assurances or what constitutes a “representative” Paris Club agreement.

Sri Lanka is yet another illustration of how idiosyncratic sovereign restructurings get wound up in broader geopolitical tensions pertaining to the international financial architecture. The problem being that if none of the players yields, it will just mean more economic and social hardship for the debtor country stuck in the middle.

India building momentum on restructurings during its G20 presidency

India’s decision in Sri Lanka ought to be framed in a broader geopolitical context: India recently assumed the presidency of the G20 for the year 2023, a forum that gained a major role for sovereign debt issues in the wake of the COVID-19 pandemic by leading the implementation of the DSSI and the Common Framework for Debt Treatments.

The G20 is likely to be a key forum when it comes to sovereign debt in 2023 through the Sovereign Debt Roundtable, with its first gathering set to take place in Bengaluru at the end of February on the sidelines of the G20 Finance Ministers and Central Bank Governors meeting, chaired by India. This new forum was unveiled by the IMF Managing Director following a round of meetings in China, and will gather international financial institutions, bilateral and commercial creditors as well as debtor countries to try and improve the architecture for sovereign debt restructurings.

In parallel with global policy developments, it appears that India intends to build momentum on restructuring cases. While this mostly flew under the radar, India also agreed in January to restructure the debt of Suriname, according to declarations by the authorities reported in the local press. India’s claim in Suriname is arguably of modest size at USD 38m compared to 400-500m for China. However this is a notable development since both India and China had repeatedly refused to provide financing assurances to Suriname, forcing the IMF to make an unusual interpretation of its policies as discussed in an earlier blog. India’s decision to restructure hence isolates China as the sole holdout bilateral creditor.

Then came India’s letter to the IMF about Sri Lanka, which leaked on social media. This letter is interesting in several regards.

India was the first bilateral creditor to provide financing assurances, even before the Paris Club. This proactive attitude marks a change from previous cases, including Suriname, and is also interesting since India’s behavior in sovereign restructurings where it is a major creditor remains rather untested.

Not only does India commit to provide debt treatment to Sri Lanka, it commits to do so in line with the parameters of the IMF program targets which are precisely listed, e.g. a reduction of the public debt-to-GDP ratio to below 95% by 2032. This alignment is key for the IMF to consider the assurances as “specific and credible” per the textbook definition.

Additionally, India indicates its willingess to collaborate with the Paris Club on debt negotiations. India has been an observer at the Paris Club since 2019 but has never collaborated formally on a debt treatment outside of the G20 Common Framework. While it will be interesting to see how the coordination unfolds concretely, this move isolates China further by giving a sense of union among the rest of major bilateral creditors.

China wary of committing to a deep debt treatment

A few days after India’s letter was published, China Exim sent a letter to the Sri Lankan authorities. It offers a two-year debt service moratorium – for the payments due in 2022 and 2023 – and proposes to engage in further negotiations regarding a medium- and long-term debt treatment.

This letter looks rather underwhelming compared to the Indian equivalent, notably because the two-step approach gives no certainty to the IMF about the outcome of the negotiations. Additionally, while China Exim supports the IMF program, it does not commit that its debt treatment will be in line with the IMF’s assessment of debt sustainability or the fiscal targets of the IMF program.

As a result, it is highly unlikely that the IMF would consider these assurances as specific and credible. One can look at the Zambia precedent for guidance: the financing assurances statement signed by China did not specify clearly that the debt treatment provided would be in line with IMF program parameters. China subsequently pushed back against the IMF assumptions, causing a deadlock in restructuring negotiations unfolding after the approval of the program which now risks going off-track absent any progress.

It is worth noting that the letter to the Sri Lankan Ministry of Finance was sent not by Chinese authorities but by the management of China Exim, despite other policy banks like China Development Bank having major exposure to Sri Lanka. It could be explained by the fact that China Development Bank is classified as a commercial creditor, a category of creditors for which the IMF does not require affirmative financing assurances as flagged by Brad Setser.

However things are not that clear-cut, considering for instance that in Zambia China Exim is the leading negotiator for Chinese interests, representing other Chinese creditors – the precise list of which has not been disclosed.

The Paris Club chooses to move forward

On February 7, the Paris Club published a communiqué to provide financing assurances to Sri Lanka. The wording is especially interesting because it involves a wide range of non-Paris Club members – India, Hungary, Saudi Arabia, Kuwait – each with its own level of commitment, meaning that the group of countries changes from one paragraph to another.

For instance, while Kuwait participated in the Paris Club meeting, it is not mentioned in the following sentence, indicating limited political buy-in at this stage: “Paris Club members as well as Hungary, Saudi Arabia and India continue to look forward to working together along with all bilateral creditors and to engage with other key stakeholders in order to proceed with a comparable debt restructuring as soon as possible.”

Then, only the Paris Club and Hungary commit to a debt treatment in line with IMF program parameters. India had already done so through its letter to the IMF, while Saudi Arabia “expressed its support for the process and acknowledged the importance to offer financing assurances in the near future”.

The delay between the meeting on January 25 and the publication of the statement can indicate that the Paris Club left time for these countries to get domestic political buy-in, in order to maximize the impact and representativity of the agreement.

The “lending into arrears” puzzle

Now that all major stakeholders have played their cards, the scene is set for a final showdown. As of today it seems fair to assume that China will not provide textbook financing assurances, including because its reluctance is rooted in a deep disagreement on the foundations of the current mechanism for sovereign debt restructurings and the role of the IMF as umpire. China has notably advocated recently – in Sri Lanka or in Zambia and even in G20 communiqués – for a participation of multilateral institutions in restructurings, something other stakeholders think is at odds with their role as lenders of last resort.

This stalemate has led to discussions in policy circles about whether the IMF should lend into arrears to China. A first question is to see whether it is technically possible – the Lending Into Official Arrears policy details several ways for the IMF to move a program forward in the absence of an agreement paving the way for a clearance of arrears:

• A representative Paris Club agreement enables the IMF to deem away arrears owed to other bilateral creditors, e.g. China in this case.

• Bilateral creditors provide consent to financing despite the arrears, something China did in Suriname but which might be more difficult in the current context of heightened geopolitical tensions.

• The debtor country is making a good faith effort to reach an agreement with the reluctant creditor, and “the decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases.” This last option was designed to deal with the Ukraine & Russia situation after the Crimea invasion and it would be considered pretty much a hostile move for the IMF to use it with China.

Hence the most likely way forward without Chinese financing assurances or consent would be to deem away China’s arrears thanks to a representative Paris Club agreement. However, assessing the representativity of such an agreement is not straightforward, even more so since the IMF Executive Board has from time to time declined to set a numerical threshold determining representativeness.

First, China represents a major share of the bilateral debt stock: depending on the estimates – e.g. whether Sinosure-backed commercial claims are included in the bilateral stock – China can weigh 40 to 55% of bilateral claims. Whether any agreement without China can be considered as representative would clearly be a judgement call from the IMF.

Second the Paris Club stricto sensu would probably not be sufficient to reach that threshold and deem away Chinese arrears without the addition of other notable bilateral creditors including India, Saudi Arabia and Kuwait. Then it is unclear whether the IMF could consider such an ad hoc coalition as a representative forum. The latest update of the IMF arrears policies indicates notably that “Affording another representative standing forum similar status to the Paris Club under the LIOA policy would require an Executive Board decision”.

However, the IMF also notes that non-Paris Club claims within the Common Framework process can count towards determining representativeness, showing that some flexibility can be applied. India’s apparent willingness to collaborate with the Paris Club, together with the attitude of the Club trying to get as many bilateral creditors on board, seems to indicate that they are preparing for this option.

Additionally, solving the issue of Chinese arrears would not directly solve the related issue of financing assurances. Doing so would require the IMF to apply a caveat in its arrears policies discussed in an earlier blog, which negates the need for affirmative financing assurances when a country falls in arrears to a recalcitrant creditor. This would also not be straightforward since the IMF is supposed to still require these affirmative assurances when there is “significant uncertainties that the creditor(s) will restructure their claims” (arguably the case with China’s behavior in recent restructurings) and “such restructuring is critical to achieving debt sustainability” (arguably the case for China too due to the size of the claims).

Who will be the first to blink?

Despite these technical hurdles, it should be possible for the IMF to lend into arrears to China if the management and major shareholders want to politically – the real question being what happens next.

Deeming away Chinese arrears through a representative Paris Club agreement could be a major test for the enforceability of the Club’s comparability of treatment principle in a changing creditor landscape. The choice of the Paris Club when faced with a similar situation in Suriname was to provide a two-step deal and to reschedule debt service falling after the program period only if China had participated in the restructuring by that time. This approach is risky and akin to nuclear deterrence: it would be very difficult politically for the Paris Club to withdraw a debt treatment a few years from now and ask Suriname or Sri Lanka to resume higher debt service at the expense of, say, social expenditure.

Finally, the IMF arrears policy will put pressure on China and incentivize it to participate in the restructuring only if the IMF has some certainty that Chinese banks will actually not take money off the table in the short-term. Otherwise new money from the IMF and its partners would merely help repay Chinese creditors at the expense of restoring macroeconomic stability. Suriname again provides an interesting precedent: China Exim drew funds from an escrow account that the authorities failed to disclose to the IMF between the program approval and the first review.

More broadly, as noted by Mark Sobel, the current international financial architecture is ill-equiped to deal with a major recalcitrant creditor benefiting from outsized (geo)political leverage. While it remains illusional to insulate sovereign restructurings from geopolitical considerations, there is a risk that they would turn into a game of chicken between China on the one hand and the IMF and Paris Club on the other hand. The problem being that if none of the players yields, it will just mean more economic and social hardship for the debtor country stuck in the middle.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

The financing assurances policy is proving to be the main roadblock towards IMF program approval in recent sovereign restructuring cases, such as Zambia and Sri Lanka. The Fund is walking a fine line between risking to give reluctant creditors a veto over IMF disbursements, and letting them be repaid with said disbursements instead of contributing their fair share in the restructuring.

Lee Buchheit proposed in an Alphaville piece to reform the financing assurances policy by pushing back their provision after Board approval – as opposed to the current custom of seeking them between the Staff-Level Agreement and the Board – while withholding IMF disbursements until financing assurances have been provided.

In this blog post I try to show that such a proposal could amount to little more than moving the goal posts, because disbursements matter more than Board approval per se. More focus should be given to increasing the transparency of the financing assurances process, or designing a multi-step approach towards program approval relying on emergency financing, which could reduce the leverage of reluctant creditors.

Some background on financing assurances

When a country’s debt is not sustainable, the IMF will require financing assurances from creditors before approving a program, usually in the form of a commitment to provide debt treatment in line with the IMF DSA parameters.

The aim of the Fund is to strike a difficult balance: if the requirement is too stringent, this gives reluctant creditors an effective veto over IMF programs, and hence undue leverage over the debtor to strike a deal on more favorable terms. If the requirement is too loose, this heightens the risk of IMF disbursements being used to repay creditors at the expense of restoring macroeconomic stability. The latter option also risks derailing restructuring negotiations: other creditors might consider that holdouts are not contributing sufficiently, and therefore withdraw the commitment to restructure their claims.

As noted by Lee Buchheit, it was much easier when the creditor lanscape was dominated by Paris Club creditors and a reasonable number of commercial banks. The new paradigm is more complicated, with emerging bilateral lenders like China, complex commercial claims involving collateral, or plurilateral institutions claiming preferred creditor status. This new normal is characterized by less coordination across and within creditor classes, but also various forms of leverage that creditors can use to extract a better restructuring deal from the debtor, jeopardizing both IMF program and restructuring negotiations.

To illustrate with a concrete example, when approving a program for Suriname in 2021 the IMF said in a footnote that no escrow account had been funded . Then the Fund learned between the Board approval and the first review that (i) the authorities had funded an escrow account as part of a China EXIM loan arrangement, and (ii) China EXIM had drawn on said account, jeopardizing the IMF financing assurances and arrears policies, as well as comparability of treatment and restructuring negotiations.

Lee Buchheit’s proposal: probably no silver lining

In order to put an end to this conundrum, Lee Buchheit proposes the following:

There is an obvious solution. Instead of asking lenders to give financing assurances as a condition to taking a program to the IMF’s Executive Board, let the Board approve the program but withhold any significant cash disbursements until existing lenders have agreed to provide the needed debt relief.

Indeed, for now the provision of financing assurances is expected between the Staff-Level Agreement (SLA) and the Board approval. During this same period, the government is also expected to implement so-called prior actions – steps that the IMF will require before any disbursement such as the removal of price controls or the presentation of a new budget.

An important point raised by Lee Buchheit is that the current application of the policies can put governments in an awkward position, forcing them to implement politically difficult reforms only to see the IMF program held up for months by reluctant creditors – in Zambia it took 8 months for creditors to provide these assurances after the SLA, and in Suriname they never did so the IMF waited for months until the country fell into arrears.

Say a country is required as a prior action to unify parallel exchange rates or devaluate its currency. The political support for such a measure will usually be found in the belief that it will trigger a fresh flow of financing from the IMF and its partners, enabling the government to alleviate the short-term socioeconomic impacts. If the government implements the reform but financing is still withheld, this is a perfect recipe for social unrest.

However, enabling Board approval right after prior actions have been implemented, as proposed by Lee Buchheit, would do little in this view so long as significant disbursements are still withheld until financing assurances are received. The Board approval is so important precisely because it is tied to the first significant disbursement: separating the two would barely add a layer of complexity in the program approval process.

This reformed process would risk giving the illusion of victory when the program makes it to the Board, whereas the heavy lifting – obtaining financing assurances – would remain to be achieved. Citizens would hence be in a position to question what it means for a program to be “approved” if the country still cannot access significant disbursements despite implementing all prior actions at a significant social cost.

Finally, there is also a risk that the proposed reform would dilute the catalytic effect of IMF Board approval, usually thought to restore confidence and foster support from a wide range of partners. Indeed, the financing assurances also contribute to reassuring multilateral lenders that they are not merely subsidizing some Chinese policy bank or holdout hedge fund.

Increasing the transparency of financing assurances

Once acknowledged little can be done in terms of the sequencing of financing assurances within program negotiations, we should instead focus our attention on reforming other aspects of the process. For instance, the transparency of what the IMF considers as specific and credible financing assurances could be greatly enhanced, streamlining the process and enabling precious time gains.

Below are a few ideas of what the IMF could do.

First, the IMF could clarify ex ante the concrete form of financing assurances, so that debtors know exactly what to ask from their creditors before they engage. The current situation, with a lot of room for judgement calls by the IMF staff, puts countries in a difficult position when they obtain something from their creditors only to be told by the IMF that it was actually not sufficient. The IMF could state clearly: is a friendly nod from the Executive Director at the Board enough? Should it be a signed letter? A signed term sheet?

A similar problem lies in the level of commitment the IMF requires: should the creditor commit broadly to a debt restructuring in line with program parameters – which apparently was not sufficient in the Zambia case – or should it agree to specific terms for its own claims? Should it commit to accept on its claims the target average NPV reduction of the overall debt stock? Should it commit to any NPV loss at all in the first place?

Of course part of the answer to these questions depends on the type of creditor and the characteristics of the claim, e.g. whether the creditor has control over some collateral, or whether it is unduly claiming to benefit from preferred creditor status and can hence be expected to be especially reluctant. However, these characteristics could probably be narrowed down in categories and fed into a decision tree enhancing the transparency of the whole process ex ante for all stakeholders.

Then as a public good, the IMF could improve the granularity of financing assurances reviews ex post, as proposed notably by Brent Neiman at the US Treasury: “Details about financing assurances – their form, scale, provenance, etc. – should be more transparently reported and tracked in staff reports.”

Such reporting would in turn feed into the previous steps, enabling the IMF and its shareholders to build a track record for each creditor and take it into account when telling debtor countries the kind of assurances they should seek from each of their creditors to access significant IMF disbursements.

For instance, building on the difficulties observed in the Zambia case, countries seeking financing assurances from Chinese creditors in coming months should be better informed by the IMF whether these assurances should be sought from the State Council, the Ministry of Finance, the top management of policy banks, loan officers, or a combination of these stakeholders which play different roles in China’s overseas lending.

PMB: the IMF’s secret weapon?

Faced with the financing assurances conundrum, the IMF has tried several approaches in recent years, which were not particularly successful and even drew the ire of its main shareholder:

• In Suriname, the IMF tried to use the arrears policies to override the need for financing assurances, and the program went off-track before the Fund had to deal with the issue of the unforeseen escrow account blunder described above.

• In Ecuador, the IMF accepted Chinese financing assurances which resulted in a subsequent restructuring two years later.

• In Zambia, the IMF apparently lowered the bar and approved a program with assurance that ended up being not specific nor credible since we are learning from media reports that Chinese creditors are pushing back on IMF assumptions and restructuring negotiations are yet to start.

As said time and time again, Sri Lanka looks set to be the next major test case for the financing assurances policy, and the government is yet to receive these assurances from relevant bilateral lenders.

However, away from the limelights, the IMF could actually have another card up its sleeves, in the form of a two-step approach involving emergency financing instruments. These instruments, meant to be disbursed rapidly, have less stringent requirements than full-fledged IMF programs. For instance debt needs to be prospectively sustainable but the program does not need to be fully financed, meaning a financing gap can remain. Additionally, the IMF has empirically applied less stringent requirements in terms of debt restructuring assurances for emergency financing.

Concretely, in cases involving unsustainable debt and creditors reluctant to provide financing assurances, the IMF could approve a smaller-scale emergency financing package, relying on weak or non-existent financing assurances. This financing would provide the government with a time-bound lifeline, reducing the leverage of reluctant creditors during the next few months and laying ground for the conduct of good-faith restructuring negotiations. This would ideally result in the provision of specific and credible assurances, or even of a final restructuring deal, enabling the approval of a full-fledged IMF program with bigger disbursements.

This idea could actually be considered as a way to make Lee Buchheit’s proposal workable within the current IMF policies, since within the two-step approach the Board does approve a program without comprehensive financing assurances, and the most significant disbursements under the UCT program do come at a second stage after financing assurances have been received.

The missing piece in this process would be IMF oversight during the emergency financing period, since emergency instruments do not involve conditionalities. However, when unveiling its Food Shock Window in October 2022, the IMF also created a new form of Staff Monitored Programs with Board Involvement (PMB for short). While they were not widely discussed, PMBs are exactly meant to bring some form of oversight within the IMF’s emergency financing toolkit, and would be a perfect fit for the two-step approach described above.

Of course there is little chance this trick could be used in Sri Lanka now that the country has an SLA for a UCT program. The two-step approach also entails risks, increasing the resources that the IMF lends in the absence of adequate safeguards. PMB also risk diluting the catalytic aspect of IMF financing as I argued in an earlier blog post.

However, any innovation in the international financial architecture is worth looking at, especially in difficult times. There is room for cautious hope, and for instance Malawi looks set to be patient zero for this two-step approach, as the IMF noted that the emergency financing approved in November 2022 would hopefully pave the way for the subsequent approval of a UCT program.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

In my last blog post, I looked at the Suriname 2021 IMF program to try and make the point that it was enabled by blurred lines between financing assurances and arrears policies. An eagle-eyed reader pointed me to a paragraph in the latest update of the Fund’s arrears policies which describes the theoretical interactions between the two and sheds an interesting light on the Suriname case.

In this blog post I explain what the IMF says explicitely about using the arrears policies to override the need for financing assurances, discuss whether these elements apply to Suriname in retrospect, and then try to draw historical parallels with previous evolutions of the policies to understand the way forward.

Overall, I argue that in cases where a debt treatment is needed, the ability of the IMF to override the requirement for debt restructuring assurances by applying the LIOA policy (i) risks underestimating the ability of creditors to obtain more favorable repayment terms and derail the IMF program, and (ii) can become an incentive for countries to fall into arrears, with adverse economic consequences.

On the other hand, the adherence to strict financing assurances guidelines in the presence of reluctant creditors might significantly undermine the ability of the IMF to support vulnerable countries. There is no easy way to reform of the LIOA and make it fit for current challenges, beyond temporary patches like relying on the strength of the Paris Club’s comparability of treatment principle.

Always read the footnotes and annexes!

The generic point I tried to make by browsing IMF reports on Suriname was actually hiding in “plain sight” – that is in paragraph 13, Annex I, deep into the latest update of the Fund’s arrears policies. It describes how the arrears policies and financing assurances interact, especially in the case of debt restructuring assurances:

Application of the arrears policies, which are underpinned by criteria designed to restore debt sustainability, may provide sufficient safeguards to negate the need for further assurances on debt sustainability. In particular, the application of the LIA or LIOA criteria, including the provision of consent by the creditor Executive Director, will generally act as a safeguard to assure the Fund that a restructuring deal will be forthcoming that will restore debt sustainability. […] Thus, staff could also assess that no assurances regarding the restoration of debt sustainability beyond the application of the arrears policies are required, depending on the member’s circumstances.

(The emphasis above is my own.)

The IMF writes clearly that the application of the Lending Into Official Arrears (LIOA) policy, more precisely the consent to IMF financing despite the arrears, can be used to override the need for a strict application of the financing assurances policy.

The idea that consent to financing despite the arrears can indicate that a restructuring deal is forthcoming seems counterintuitive at first, since the two policies are meant to serve distinct objectives. If a creditor wants to assure the IMF that it will restructure its claims, it can tautologically do so by providing financing assurances.

The intuition would therefore dictate the opposite: if a creditor refuses to provide financing assurances and barely consents to Fund financing, this should call for more scrutiny from the Fund on whether the claims will be restructured, not for an override of basic requirements – and at the very least in the case of creditors known historically for feet dragging when it comes to debt treatments.

How long has this interaction been in place?

Recently some people were surprised to hear Guillaume Chabert, Deputy Director in the IMF Strategy, Policy and Review Department, say at a conference that the Chad and Zambia processes were the first for which China formally provided financing assurances. The elements above could mean that in previous restructurings involving significant Chinese claims the IMF relied on the arrears policies to approve the programs.

A first question is hence to understand when this interaction between IMF policies first appeared, for instance by looking at previous IMF communications on the topic. The IMF 2015 paper on the creation of the LIOA policy does not indicate clearly – as far as I can tell – that consent is sufficient to override financing assurances, but it says that so long as official arrears are outstanding any disbursement will be subject to a review of financing assurances after program approval.

When it comes to the direct interaction between arrears and financing assurances, the 2015 paper points to another document from 2013, that is before the LIOA was even created. The 2013 article in question discusses developments in sovereign debt restructurings and provides useful insights. The IMF already hinted at that time to its reliance on the Paris Club’s comparability of treatment principle to deem away arrears to non-Paris Club creditors and make debt restructuring terms assumptions – which should in theory resquire financing assurances:

Arrears to non-Paris Club bilateral creditors are similarly deemed eliminated for Fund program purposes as the Fund has relied on the Paris Club’s comparability of treatment principle and assumed that these creditors will restructure the member’s debts on similar terms.

However, the IMF already acknowledged the shortfalls of this approach within a changing creditor landscape:

In the past, these conventions worked well because Paris Club debt constituted a large share of official bilateral claims. However, since the 1990s, the Paris Club's share of developing countries' debt and financing flows has been steadily declining and new non-Paris Club bilateral creditors are emerging.

This is especially interesting since in Suriname in 2021 the IMF indicated it relied on the comparability of treatment principle to have sufficient confidence that Chinese and Indian claims would be restructured, despite the fact that the Paris Club had negligible claims compared to the sum of these owed to China and India.

It appears that the IMF’s ability to override the need for specific and credible assurances when consent to financing has been provided was first explained transparently in the 2022 update of the policies. If this is correct, it might have been a major transparency improvement that was overlooked when discussing the update, compared to other changes like the classification of multilaterals within the arrears policies.

Further thoughts from Suriname

The elements above shed a new light on the Suriname situation, and raise the question of whether this mechanism provided ground for the IMF to approve the Suriname program in the first place – assuming of course this interaction between IMF policies already existed before 2022.

The short answer would be “probably not”, since another paragraph in the 2022 update of the arrears policies says the following:

However, in cases where there are significant uncertainties that the creditor(s) will restructure their claims (e.g., the debt is collateralized and/or there is a high legal risk that creditor action could severely undermine program implementation) and such restructuring is critical to achieving debt sustainability and medium-term viability, the Fund may still need to seek further assurances from the creditor(s) […] before approval of an arrangement or completion of a review to sufficiently establish safeguards for Fund resources.

As noted in the recent blog post on Suriname, the IMF learned during the first program review that China Exim had drawn balances from a so-called resource account between the program approval and the first review, using this collateral to clear part of the arrears and hereby threatening the comparability-of-treatment principle.

More than the use of collateral – which remains relatively small compared to the outstanding amount owed to China – one can argue that there are indeed “significant uncertainties that the creditor will restructure their claims”. A first one could be undisbursed balances for project loans, which can be used as a leverage by China to coerce Suriname into granting a more favorable treatment on disbursed claims.

To understand the leverage that China has if it wants to be paid back on more favorable terms than required by IMF program parameters and comparability of treatment, we need a broader scope than looking solely at its financial claims on Suriname. For instance, China appears to be a notable trade partner of the country, which imports c. 10% of its goods from China according to the UN Comtrade database. Hence the discussions on arrears between the Surinamese and Chinese governments are likely to fit within broader economic and geopolitical considerations and power plays.

An interesting parallel can be drawn with the debate about how sovereign restructuring procedures fail to capture the overall relationship between a debtor and its creditors, for instance in the different case of domestic creditors. This point was made by Anna Gelpern and Brad Setser in their seminal paper on the doomed quest for equal treatment between domestic and external claims:

Domestic firm or bank insolvency unfolds in the context of a social safety net-including, for example, unemployment and deposit insurance-to address the impact of economic failure on stakeholders whose interests in the failed enterprise are not adequately described by the instruments they hold.

They argue in essence that a sovereign bankruptcy regime akin to the 2004 proposal for a Sovereign Debt Restructuring Mechanism is not necessarily desirable, since it would probably not reflect the broader exposure of domestic creditors to their government – e.g. through the provision of security and healthcare.

This argument in reverse could well apply to the apparent failure of policies like the LIOA to account for wider forms of leverage that a bilateral official creditor can have in restructuring negotiations. It would as a result justify the need to maintain a high standard in terms of requirements before approving an IMF program when debt is not sustainable.

Creating an incentive to default

Taking a step back, the Suriname case illustrates a broader issue caused by the interaction between the LIOA policy and financing assurances. All other things equal, the mechanism lowers the bar for countries to access IMF financing once arrears have been incurred – a point I hinted at in the conclusion of the Suriname blog. This represents to some extent an incentive to run arrears, and the simplest way to do so is to default which entails unintended adverse consequences.

Say a country remains current on debt obligations, but faces liquidity issues and would need a rescheduling of upcoming official bilateral debt payments to ensure debt remains sustainable as per the IMF assessment. If non-Paris Club bilateral creditors representing a significant share of the debt stock are reluctant to commit to a debt treatment in line with IMF program parameters, the IMF cannot lend.

As happened in Suriname, negotiations will drag on for weeks or months, stumbling upon the requirement for “specific and credible” debt restructuring assurances. Then, if one day the country falls into arrears suddenly the IMF only has to require the creditors’ consent to IMF financing and the program can be approved without a commitment to debt treatment.

It can be understood from the point of view of the IMF that when a country stops paying, creditors will be more inclined to come to the negotiation table and restructure instead of not being paid at all. However, hard defaults and arrears are not a desirable way forward since they are associated with worse economic outcomes for countries in general. Again, Tamon Asonuma and Christoph Trebesch showed that preemptive restructurings “have lower haircuts, are quicker to negotiate, and see lower output losses”.

The idea is to find a way for the IMF policies to at the same time (i) prevent bilateral creditors from gaining undue leverage over IMF program approval, and (ii) incentivize stakeholders to opt for a premptive restructuring instead of falling into arrears.

A naive way to solve this would be for the IMF to seek a commitment from the debtor country that it will fall into arrears if no restructuring deal has been struck with the creditor before a set deadline. This could enable prompt IMF support without incentivizing the country to wait for a default, but this solution is not realistic. Indeed, no creditor would preemptively consent to IMF financing despite arrears as it would mean giving away significant leverage in subsequent restructuring negotiations.

Looking back to look ahead: a policy adrift?

The IMF arrears policies have gradually evolved to adapt to a changing creditor landscape, trying to gauge the leverage of new types of creditors over debtors and to strike the right balance in the level of assurance required before approving a program. To understand today’s debates, it is therefore worth looking at historical precedents and how they unfolded.

For instance, back in 2007, Lee Buchheit and Rosa Lastra wrote a piece entitled “Lending into Arrears—A Policy Adrift” to argue that the then recent implementation of the IMF’s Lending Into Arrears (LIA) policy – the one related to commercial creditors, since the LIOA did not exist at that point – risked making the Fund a referee in sovereign debt workouts, requiring it to have too much of a say on how negotiations with bondholders should be conducted.

Were their worries warranted? For a more recent take on the LIA, see this interesting piece by Gregory Makoff which concludes that the 2022 update does reduce the apparent willingness of the IMF to prescribe how the negotiation process with commercial creditors shall be conducted. Notably, the IMF removed from its policies the expectation that countries would engage with their creditors through a formal negotiating framework, something that drew the ire of Lee Buchheit and Rosa Lastra.

What is especially interesting is that their critic were along the lines of the IMF involving itself too much in how the negotiations should be conducted and their outcome. The problem today with the LIOA is quite the opposite: faced with an inability to steer bilateral restructurings in the right direction, the IMF appears to part way with the strict requirements for financing assurances, instead deferring to the Paris Club to convince reluctant creditors to provide debt treatment.

As a result the solutions that applied for the LIA – basically stop intervening in a process that already works rather well – are much easier than the potential modifications of the LIOA needed to help the IMF deal with reluctant bilateral official creditors. Furthermore, if the current policy toolkit does not work for creditors with significant leverage, and no feasible solution is in sight to reduce this leverage from the IMF’s standpoint, this might end up putting into question the role of the Fund in providing the bedrock for sovereign debt restructurings.

Arguably, the blurred lines between the LIOA policy and financing assurances might have helped the IMF provide badly needed support to vulnerable countries, especially during the COVID-19 pandemic. It appears however to have been not more than a temporary patch, something Kevin Carey likened elegantly to a “shadow DSSI”.

Recently in Zambia the IMF did obtain financing assurances from China, but we can infer from media reports that these assurances might have been too vague since some Chinese lenders are pushing back on DSA assumptions. Sri Lanka will be the next important test case in terms of financing assurances from China or India before program approval. However, the Zambia and Suriname precedents might entice major IMF shareholders to call for more specificity in the commitment by China or India to restructure their claims, in line with IMF program parameters and the comparability or treatment principle.

Hence comes the time of finding a lasting solution to the issue at stake: the inability of the IMF to rely on financing assurances and the comparability of treatment principle to ensure debt treatments are implemented and countries have the necessary capacity to repay the Fund. This stalemate is giving a de facto leverage for major bilateral creditors to make IMF programs go off track – at important economic and social costs – or block their approval in the first place.

Finally, even before thinking about possible reforms, more transparency about these policies and their interactions, including a look-back by the IMF on previous cases, would be extremely helpful. As Lee Buchheit and Rosa Lastra wrote in 2007:

Therein rests the problem. No one, the IMF least of all, seems prepared to articulate the definitive rationale and objective of the LIA policy. This makes a critical analysis of the policy, whether attempted by the IMF Executive Board, sovereign debtors, or private lenders, very difficult.

I am grateful to Sophie Borra for valuable comments.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

In 2021 the IMF approved a program under the Extended Fund Facility for Suriname. The country’s debt was unsustainable and needed to be restructured, yet the IMF let the program move forward without specific and credible financing assurances from major bilateral creditors, namely India and China.

This led Brent Neiman at the US Treasury to point out recently the “unusual application” by the IMF of its own policies in that specific case. In this blog post I try to understand how the IMF indeed managed to approve the Suriname program in 2021, what happened since then as the program went off-track, and what are some interesting takeaways for ongoing restructurings such as Zambia and Sri Lanka.

To the best of my understanding, it appears the IMF could not satisfy the textbook financing assurances policy with regards to China and India. Instead, it relied on the arrears policies to make assumptions on the restructuring of Chinese and Indian claims, hoping the comparability of treatment principle of the Paris Club and rational incentives would force both countries to participate in the restructuring – something that has not yet materialized.

Financing assurances and arrears policies: the theory

As discussed earlier in detail for a blog post about Sri Lanka, the IMF has two different sets of policies which need to be satisfied before a UCT program approval: financing assurances, and the arrears policies.

I won’t go too deep into the weeds again, but the challenges are the following with bilateral creditors if we simplify slightly:

• Financing assurances: when debt is unsustainable, the IMF needs a firm commitment from relevant bilateral creditors to provide a debt treatment in line with the program parameters.

• Arrears: either they are tentatively cleared by the restructuring commitment described above, or there is a representative Paris Club agreement, or relevant bilateral creditors need to provide consent to Fund financing despite the arrears. See box 2 here for more details about the Lending Into Official Arrears (LIOA) policy.

A key idea is that in theory these are two related but different issues, as noted by Daniel Munevar: one policy can be satisfied when the other is not, e.g. a consent to Fund financing despite arrears should in theory not equate to the provision of financing assurances.

Concretely in the case of Suriname: if a major bilateral creditor consents to financing despite its arrears, the LIOA policy is satisfied. However, if debt remains unsustainable without a restructuring of these claims, then the financing assurances policy should not be considered as satisfied.

Whatever happened in Suriname?

In April 2021, the IMF reached a Staff-Level Agreement with Suriname on a three-year EFF program. The press release said:

Board would consider approval of this agreement in the coming weeks, after the […] receipt of the necessary financing assurances.  Debt relief from Suriname’s official bilateral partners and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps.

This meant that the country was expected to engage with its bilateral creditors, present them with the economic situation and tentative IMF program parameters, then ask for a commitment from each creditor to provide debt treatment in line with these parameters.

Who are these bilateral creditors? According to the IMF, mostly China at 17% of GDP, followed by the Paris Club in a much smaller amount (2% of GDP) and then India. A takeaway from this breakdown is that there is no way for the IMF to consider an agreement with the Paris Club as representative under the LIOA policy and deem away Chinese claims.

Source: IMF, 2021

On December 22, 2021, the IMF board approved the program, allowing a first disbursement to avert a deeper economic crisis, and the press release did not mention whether the IMF had indeed received the financing assurances. It just said:

To achieve debt sustainability, the authorities are negotiating debt relief from private and official creditors in line with program parameters.

Then the staff report provided more information. On arrears, it said:

Paris Club creditors and China have provided their consent to proceeding with Fund financing. India has requested more time to consider consenting to Fund financing notwithstanding these arrears.

That is a first roadblock: India did not consent to IMF financing despite the arrears. The only textbook option, looking at the LIOA policy, would be to deem away these arrears to India through a representative Paris Club agreement, but the IMF could not do that since the Paris Club represents such a small share of the claims.

Bottom line, either the IMF bent the rule slightly and made the judgement call that India would consent afterwards, or maybe it considered that arrears to India could be deemed away by the sum of Paris Club and Chinese claims for which consent had been provided. Coincidently, in the latest update of the Arrears Policies the IMF details how non-Paris Club debt can count to determine the representativeness of an agreement under the Common Framework process (para. 53).

Then onto financing assurances, the staff report first indicates:

Financing assurances have been received from the Paris Club in anticipation of an Agreed Minute. China and India have also provided assurances, although less specific than those provided by the Paris Club creditors, that they intend to work with Suriname towards a debt restructuring that will restore sustainability.

This means that at that point the textbook financing assurances policy (requiring “credible and specific” commitments) could not be satisfied: there was no way that debt could be considered as prospectively sustainable, since China represents too big of a share in the debt stock. Assuming China did not restructure, this would have required an outsized contribution from other creditors to get all DSA indicators to go back down below their respective thresholds.

But here comes the tricky part, as the report also says the following:

On the basis of these assurances, together with the Surinamese authorities’ commitment to continuing working with all creditors to achieve a debt treatment consistent with program parameters, staff expect that Suriname’s debt to China and India will be treated on comparable terms with other bilateral creditors.

In essence, the IMF could consider that the program was fully financed and debt would return to a sustainable level by making the assumption that China and India would accept a restructuring which they had explicitly refused to commit to in a specific and credible manner. Strange.

Fast forward to March 2022, when the IMF approved the first review of the program, including a specific review of financing assurances. The staff report says:

Paris Club creditors have provided specific and credible financing assurances indicating that they will provide debt relief in line with program parameters. China and India continue to consent to the use of Fund resources despite Suriname running arrears on their official debt. Conditional on the expected implementation of debt treatments on both official and private debt, Suriname’s debt is sustainable on a forward-looking basis.

In other news nothing changed apart from the fact that India was now consenting to Fund financing despite the arrears, meaning that at least the arrears policies were entirely satisfied. The unusual application of the financing assurances policy continued, enabling an additional disbursement.

The IMF program goes off-track

In May 2022, the IMF reached a Staff-Level Agreement on the second review of the program, subject to approval by the Fund’s Executive Board. The press release said nothing on arrears or financing assurances.

It appears the second review did not make it to the board as the program went off-track, and hence the staff report was not published. It is important to stress that the program did not necessarily go off-track because of the arrears and financing assurances shenanigans. Indeed it was also reported in September 2022 that the authorities were trying to renegotiate the terms of the EFF.

In parallel, there were significant roadblocks in the negotiations with private creditors. The IMF refuses for now to incorporate the economic upside of recent oil discoveries in its macro-fiscal framework, considering that it will not certainly materialize – exploration is still underway. Private creditors on the other hand do not want to accept the required relief considering the capacity to repay of Suriname will likely increase significantly in coming years. As Lee Buchheit once said, creditor will usually argue that principal haircuts, like true love, are forever.

To bridge the expectation gap, the government made a restructuring proposal to investors combining a fixed income leg with a value-recovery mechanism (VRM). This VRM fits in the broader species of state-contingent debt instruments which have a long history of being disliked by investors for various reasons related e.g. to liquidity, pricing or index-inclusion.

The Suriname VRM would be even more complex than traditional oil warrants because its financial characteristics depend not only on the price of oil but also on the binary outcome of whether the country will actually be able to pump oil out of the ground and get revenues from it. As a result, negotiations appear to have stalled, and at least one restructuring proposal was formally rejected by bondholders.

Due to all these reasons, it is now unclear what will happen of Suriname’s program. The IMF spokesperson said in a press briefing in September 2022 that “It will require, you know, a lot of determination and hard work to get it back on track.” The IMF Managing Director signalled the next day the Fund’s openness to “adapt” the program in light of the latest economic developments.

Now back to our focal point: what really happened in the first place when it comes to the arrears policies and financing assurances?

A tale of incentives and friendly noises

Jeromin Zettelmeyer, who recently left his position as Deputy Director of the Strategy and Policy Review Department at the IMF, provided additional context on the Suriname case in a podcast about the latest update of the IMF Arrears Policies – quotes in this section are from the podcast and transcription errors are all mine. It is a rare and welcome deep dive into the inner workings of the IMF and the way it applies its arrears and financing assurances policies concretely.

Basically Jeromin Zettelmeyer indicates that the decision to lend in Suriname was based on two defining factors.

The first factor was so-called “friendly noises” that China and India gave to the IMF staff, e.g. through their respective chairs at the Executive Board:

We decided to lend to Suriname because we had sufficient confidence that although China and India had not committed to restructuring, they had given us sort of friendly noises that they would restructure once the private sector restructuring was underway or completed, and we were sufficiently confident that the restructuring would actually happen within the program period to conclude that debt is sustainable.

These friendly noises are probably what the IMF’s initial Staff Report referred to as assurances that were “less specific” than the Paris Club ones. However, this confirms to some extent the lax application of the financing assurances policy in the case of Suriname, since these noises cannot be assessed to be “credible and specific” as required in the textbook.

Interestingly Jeromin Zettelmeyer discusses the assumptions made by the IMF on what the Chinese and Indian restructurings would look like:

In the sustainability analysis we knew at that point what the Paris Club had offered and so when we concluded that probably debt is sustainable yes we made the assumption that this [NB: China and India restructuring] would be on comparable terms. Now do we have the instruments to enforce it? Not really, except that we will have to let the program go off track unless the restructuring happens.

This confirms the understanding stemming from Staff Reports that the IMF decided to shift the burden to the Paris Club in terms of ensuring the participation of China or India in the restructuring, acknowledging that the IMF lacks enforcement mechanisms for these non-traditional creditors. Unfortunately, this means that the only card left for the IMF afterwards – letting the program go off-track – probably hurts the country more than it hurts the holdout creditors.

Finally, the second factor which led the IMF to approve the program is the following, according to Jeromin Zettelmeyer:

The question really was: will China and India have sufficient incentives to actually do the restructuring. And in this case we concluded – and this might be a case by case decision, so it’s not clear that because it was the answer in Suriname it needs to be the answer in other cases – that yes this is probably the case. The reason is that if they don’t restructure within the program period it’s really not clear they will get their money back.

This is particularly interesting. As far as I understand, financing assurances policies are required especially because even when it is in their theoretical interest to restructure, some creditors might hold out and then engage in disruptive behaviors which can derail IMF programs or restructuring negotiations for years down the road.

Concluding that we can bypass financing assurances requirements by assuming creditors will behave in an economically rational way might underestimate the importance of other factors, not least geopolitical ones, which can be used by creditors to enforce their claims at a later stage in spite of the requirement for comparability of treatment.

The Paris Club remains cautious

An additional interesting aspect of the Suriname story is the attitude of the Paris Club since the phrasing of IMF Staff Reports on Suriname seems to indicate that the Fund counts on the strength of the Club’s comparability of treatment principle to make China and India participate in the restructuring. And, as noted by Jeromin Zettelmeyer, Paris Club creditors were rather unhappy with the whole process:

If non-Paris Club creditors can simply consent to lending into arrears then this sort of lowers the incentive for them to actually come up and participate in the restructuring.

As a result, when the Paris Club provided a debt treatment to Suriname in June 2022 it chose a two-step approach. A first treatment would cover the IMF program period, and the treatment of claims falling due beyond 2025 would only happen if non-participating creditors had actually participated in the restructuring in the meantime. Here’s the wording from the Paris Club press release:

Additionally, based on a future assessment that the Republic of Suriname has fulfilled all its commitments under the agreement, notably the comparability of treatment, and maintaining sound macroeconomic policies consistent with long-term debt sustainability, Paris Club creditors are committed to reschedule all maturities in capital falling due starting on 1 January, 2025.

The prudence of the Paris Club with regards to Chinese arrears seems warranted to some extent. Indeed, the IMF writes the following in footnote 8 of the first program review:

In February 2022, China EXIM withdrew US$1.4 million from a US$2.9 million repayment reserve account that was set up offshore as a credit enhancement for a US$94 million loan to Suriname. […] Payment from the repayment reserve account for the Telesur loan will be reflected in the eventual debt restructuring with China EXIM to ensure there is comparability of treatment with other official creditors.

(As a side note, this confirms the rule that the interesting bits of IMF reports are always in the footnotes.)

This shows that part of the Chinese arrears could end up being serviced during the program period, threatening the comparability of treatment and hence the Paris Club treatment after 2025. The footnote also says that the government confirmed to the IMF this resource account was the only occurence of collateralisation in the debt stock.

The use of escrow or resource accounts has been largely documented in the recent “How China Lends” paper by Anna Gelpern and colleagues, and appears to be a routine way for Chinese policy banks to increase their recovery values when loans go south. In turn, this makes the enforcement of restructuring commitments more difficult and complicates the application of policies and principles such as financing assurances and comparability of treatment.

Now the interesting point about this is that, as noted by Diego Rivetti, the Paris Club has never withdrawn a debt treatment due to a breach of the comparability of treatment principle. The reliance of the IMF on this principle for its financing assurances, combined with the cautious two-step Paris Club deal and the (partial) payment of Chinese arrears was setting the scene for a perfect storm which could have made Suriname the first country to have its Paris Club treatment cancelled for a breach of the comparability of treatment, had the program stayed on track. This will be a major development to watch if and when the country restarts the program.

The way forward

The main takeaway from Suriname is hence probably that what works for Paris Club creditors or bondholders does not necessarily work for other lenders like China, and this includes relying on a nod or friendly noises to approve a program when debt is not sustainable – a fact which apparently we are learning the hard way in Zambia too.

It appears from public information available on the Suriname IMF program that the arrears policies were seen as a way to override the requirement for a strict application of the financing assurances policies. This could become an incentive for countries to wait until push comes to shove and fall into arrears, as Jeromin Zettelmeyer nails down with a tad of euphemism, again in the same podcast:

This is a little bit of an issue in the future because it can basically weaken the incentive for official creditors to give us restructuring assurances ex ante.

This mechanism is at odds with the prevailing view in the literature and policy circles that sovereign debt restructurings should be treated preemptively rather than post-defaults. As showed by Tamon Asonuma and Christoph Trebesch, preemptive restructurings “have lower haircuts, are quicker to negotiate, and see lower output losses”.

With restructuring negotiations coming to a halt or stalling in many landmark cases such as Zambia, policymakers are realizing the importance of the arrears and financing assurances policies and the probable need to make them fit for an ever-changing creditor landscape, as illustrated again in Brent Neiman’s speech:

Details about financing assurances – their form, scale, provenance, etc. – should be more transparently reported and tracked in staff reports.

It is a welcome reckoning, but now comes the harder part of making concrete policy proposals to remove the sand in the gears of the international financial architecture. There have been several contributions to the public debate recently, e.g. by Gabriel Sterne, Jill Dauchy or Sean Hagan, and I think a middle ground can be found between a complete revamp of the policies and using them as they are.

Reforms could include taking into account the track record of countries to define the level of commitment to debt treatment required from them before approving a program, or seeking assurances at a more granular level for each lending entity (e.g. policy banks) within a single creditor country – something which to the best of my knowledge is not written in any IMF official document. I intend to expand on these policy proposals in upcoming blog posts.

It comes down to the timing

Finally, while the focus of this post was on IMF policies, it appears that a defining factor of the stalemate in Suriname’s negotiations was the perennial question of the timing of sovereign debt restructurings among different classes of creditors. Talking about China and India, Jeromin Zettelmeyer said for instance that “one of the reasons they wanted to wait is because they wanted to make sure that the private creditors would restructure.”

This echoes recent policy debates around the timeframe of the G20 Common Framework which does not involve private creditors until after a deal has been struck with bilateral official creditors. To break the stalemate in all these cases, there has notably been renewed interest for so-called Most Preferred Creditor (MPC) clauses, as discussed by Lee Buchheit and Mitu Gulati recently in the FT: to be continued.

I am grateful to Mathilde Gassies and Teal Emery for valuable comments.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

On October 5 the IMF Executive Board approved two additions to its policy toolkit:

• A “Food Shock Window” (FSW) within its emergency financing tools, the Rapid Financing Instrument (RFI, from the General Resource Account) and the Rapid Credit Facility (RCF, from the Poverty Reduction and Growth Trust, i.e. for lower income countries)

• A new type of Staff Monitored Programs with Board Involvement (PMBs)

While I’m yet to grasp the precise intricacies of these announcements, the creation of PMBs looks like a way for the IMF to cope with the persistence of emergency financing instruments as the world faces a series of shocks. The subsequent delay in the transition to full-fledged IMF Upper-Credit Tranche (UCT) programs could in turn have a series of unintended consequences.

A growing use of emergency instruments in the wake of the pandemic

As a background, it is worth remembering that the IMF made good use of its emergency financing toolkit as soon as the COVID-19 pandemic broke out, with almost 100 program approvals in 2020 and most of it (70) through RFI and RCF arrangements (see the excerpt below from the 2021 review of access limits).

Source: Review Of Temporary Modifications To The Fund’s Access Limits In Response To The Covid-19 Pandemic, IMF, December 2021

The use of these financing instruments was meant as a temporary bridge towards full-fledged IMF programs. The IMF noted in December 2021:

This shift from EF to UCT-quality programs has been intended, as it allows for a more carefully calibrated approach tailored to country-specific circumstances. UCT-quality programs are better tailored to support reforms to address underlying BoP problems or vulnerabilities and larger financing needs. Absent the urgency associated with the rapid spread of the pandemic, the case for additional unprecedented EF support from the Fund is much weaker at this stage.

Despite a small increase in UCT programs take-up among PRGT-eligible countries, at end-2021 most of these PRGT countries with approved emergency financing did not have an ongoing UCT program (14 out of 51, see Annex II here, and the number has only marginally increased ever since).

In order to accelerate the transition towards UCT programs as the economic impact of the pandemic abated, the IMF staff recommended a return towards some sort of normality in terms of access limits:

Taking the above considerations and trends together, staff proposes to allow the temporarily higher annual access limits to expire and move towards restoring the coherence of the Fund’s risk management framework.

That was back in December 2021, an eternity ago and more importantly before Russia’s invasion of Ukraine.

A new window in the emergency financing toolkit

The creation of the FSW is hence motivated by the recent disruptions to food commodities markets brought about by this conflict and inflationary pressures across the board. It is expected to be available for a 12-month period following Board approval.

It will in effect increase access limits within the IMF’s emergency financing framework, with an access limit at 50% of quota for the FSW over the 12-month period, and a parallel increase of 25% of quota for cumulative access limits in another RFI/RCF window for countries making use of the FSW (see table 1 here for the details).

This is motivated, according to the IMF, by (i) the inadequacy of UCT programs in the wake of this shock for some countries due e.g. to policy implementation challenges, and (ii) the inadequate existing access limits under the emergency financing instruments which were not calibrated to deal with a shock of this magnitude.

Eligibility will be based on either a situation of food insecurity or an export shock - the latter being especially relevant for Ukraine. Food insecurity will more precisely be assessed in two ways: (i) countries facing a BoP crisis and suffering from food insecurity as per the assessment of the FAO/WFP, or the United Nations Global Report on Food Crisis (UNGRFC), (ii) countries facing a BoP shock related to the price increase of specific cereals and fertilizers worth at least 0.3% of GDP.

Bringing policy oversight into emergency financing

While it might be overlooked compared to the nitty-gritty of the FSW, the parallel creation of PMBs as a new form of Staff Monitored Programs (SMPs) might be a notable development in the way the IMF frames its financing assistance to member countries.

SMPs are usually "informal agreements" between the authorities and the IMF staff to monitor the implementation of reforms and contribute to establishing a track record towards UCT financing. The IMF Board doesn’t approve SMPs (with limited exceptions under HIPC), and is only informed of developments by the IMF staff.

In parallel, the IMF also has "UCT-quality" non-financing programs with board oversight: the Policy Support Instrument and the Policy Coordination Instrument (PSI/PCI). They require debt sustainability, and even absent IMF financing they need to be fully financed.

Under the new proposal, PMBs would be a subset of SMPs for which the IMF board would formally discuss the reform agenda and "opine" on its robustness. A summary of their assessment would be published in approval and reviews documents. This would place PMBs somewhat halfway between SMPs and PSI/PCI, whereby the Board would give its opinion but not formally approve and monitor.

Then comes the question: why the need for this “halfway point” in terms of Board involvement for some non-financing IMF programs? The answer is that these PMBs are apparently meant to “strengthen” the oversight of co-existing emergency financing programs which usually lack any such mechanism.

The IMF coincidentally writes in the proposal for the establishment of the FSW (paragraph 13) that countries seeking financial assistance through the FSW and for which a UCT program is “not feasible”, would be “strongly encouraged” to request a PMB in parallel if they also satisfy the following conditions:

A PMB would only be available to members that seek to establish or re-establish a track record for UCT-UFR, and either (i) are benefiting from an ongoing concerted international effort by the international community to provide substantial new financing/debt relief in support of the member’s policy program, or (ii) have significant Fund credit outstanding under emergency financing instruments at the time they obtain new emergency financing.

This is where it gets tricky. First, IMF financing is usually considered as a catalyzer for additional donor support precisely because of the strength of the policy monitoring as part of UCT arrangements. It remains unclear whether the IMF got some informal feedback from the membership indicating that a PMB would be sufficient to unlock bilateral grants and loans.

It might be even more difficult for the World Bank and other MDBs to approve support on the back of a PMB, since some of their instruments like budget support are often conditional on the approval of a UCT program.

Second, the usual solution for countries with significant credit outstanding under emergency financing instruments is, as indicated by the IMF itself, to transition towards UCT program with strong oversight. In terms of optics, it might be difficult for the Fund to avoid sending the message that they are parting ways with their existing risk management framework.

Towards permanent emergency?

Through the combined approval of the FSW and PMBs the IMF is trying to find a middle ground, attaching more oversight and accountability to its emergency financing, while retaining the flexibility of the instruments and not requiring a heavy Board approval process.

Overall the IMF finds itself in a difficult situation, with many frontier/emerging markets locked out of international financial markets, little prospects from new bilateral financing notably due to increased prudence from China, and risks to financial stability on domestic debt markets as noted in Chapter 2 of the latest IMF GFSR.

All these hurdles might make it difficult for countries to apply for UCT programs which need to be “fully financed” with commitments from creditors, as part of the financing assurances policies discussed in an earlier blog post.

This background, combined with the aforementioned economic shocks, makes a strong case for emergency support from the lender of last resort. However, almost three years into the COVID-19 pandemic, this could be looking more and more like a permanent turn to emergency instruments, reducing the incentive for countries to commit to broad and deep sets of conditionalities as part of UCT programs - not even mentioning implications for the IMF’s risk management framework.

One could think about it as Zugzwang financial assistance, echoing Daniela Gabor’s Zugzwang Central Banking. No good move is really available, e.g. approving rapidly a series of full-fledged UCT programs. Increased firepower for emergency instruments combined with PMBs can be a quick fix but might do little more than kick the can down the road. Indeed the IMF writes:

Directors underscored that members would be encouraged to transition to UCT-quality programs as soon as appropriate and feasible to support structural reforms to address underlying vulnerabilities and larger financing needs. In this context, they noted that concurrent use of the FSW with an SMP or, in certain cases, with a PMB, could be considered to build or re-build a track record towards a Fund arrangement that supports a UCT-quality program.

It looks like a replay of the wording seen at the heights of the COVID-19 pandemic. Since then, global economic conditions and the spillovers from the war in Ukraine have prevented the transition towards UCT programs. Unfortunately, prospects for such a return to normal look rather gloomy as the world braces for more economic shocks - not least these caused by the impending climate and nature crises.

This could cause additional problems, for instance because underlying UCT programs are also a prerequisite for accessing financing under the newly created Resilience and Sustainability Facility.

I am grateful to Mathilde Gassies for valuable comments.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

Sri Lanka reached a Staff-Level Agreement with the IMF in September on a USD 2.9 billion arrangement under the Extended Fund Facility. The next hurdle towards Executive Board approval and disbursements is the requirement for the country to seek financing assurances from creditors, which might prove trickier than anticipated.

In this post I try to disentangle several intertwined challenges, first by giving a brief overview of the IMF financing assurances and arrears policies, before looking at the institutional setting in which the negotiations could take place in Sri Lanka. Then I discuss briefly specific aspects related to the participation of China in the negotiations, and conclude with a broader perspective on the precedent that Sri Lanka could set for the international financial architecture.

A brief reminder of IMF financing assurances and arrears policies

The IMF states that “The financing assurances policy requires Fund-supported programs to be fully financed”. Countries are required to obtain “firm commitments” to bridge the external financing gap for the next 12 months, e.g. with upcoming signed loan disbursements, and “good prospects” for the remainder of the program period. Good prospects then need to be gradually turned into firm commitments on a rolling basis through the program review process.

In addition to assurances to bridge financing gaps, countries with unsustainable debt will also be required to provide another type of assurances proving that debt sustainability will be restored. These come usually in the form of new non-debt-creating flows such as grants or debt restructuring and relief.

Once arrears have been incurred, as is the case for Sri Lanka which suspended most external debt repayments in April 2022, the IMF turns to its arrears policies which come in addition to the above assurances and are usually treated simultaneously, e.g. a debt restructuring that would clear arrears, restore debt sustainability and contribute to bridging any remaining financing gap by reducing debt service.

The IMF’s arrears policies are threefold:

• The Lending into Arrears (LIA) policy for arrears to commercial creditors

• The Lending into Official Arrears (LIOA) policy for arrears to bilateral official creditors

• The Non Toleration Policy (NTP) for arrears owed to multilaterals

The level of assurance required for the IMF to approve a program in the presence of arrears hence depends on the type of creditor, or on the relative importance of the creditor in the country’s debt stock. First, arrears to multilaterals are a peculiar occurence and they fully prevent IMF financing apart from a very narrow set of situations.

For commercial creditors, the Fund can approve a program before a restructuring agreement has been reached as long as the authorities are making a good faith effort to reach said agreement with their commercial creditors. Good faith is assessed through a set of criteria described here (Box 1).

The harder part comes with bilateral creditors and the LIOA, for which there are three options (for the details, see again here, Box 2):

• The country has a representative Paris Club Agreement

• Bilateral consent has been provided for Fund financing despite the arrears

• As a last resort, the country is making a good faith effort to reach an agreement with its creditors

It is worth noting that this last option of good faith was engineered mostly to deal with the situation of Ukraine and its bond owed to Russia in 2015, hence is very rarely an option considered in regular program negotiations.

For Sri Lanka the heavy-lifting in coming weeks – and the focus for the rest of this blog – hence lies in getting assurances from bilateral official creditors that they will commit to a debt treatment and/or new financing consistent with the parameters of the IMF program.

Sri Lanka in uncharted territories

In a presentation to creditors, Sri Lankan authorities announced that they would promote the creation of an ad hoc forum to coordinate all bilateral creditors, aiming to streamline the provision of financing assurances (see the slide below).

Source: Investor Presentation – 23 September 2022

This proposal is interesting in several regards. First, 66% of Sri Lanka’s bilateral debt stock is owed to non-Paris Club members, mostly China (52%) and India (12%). Therefore, an agreement with the Paris Club alone could not be considered as representative by the IMF and deem away arrears to remaining bilateral creditors. Sri Lanka needs to find a way to get China (and probably India) on board.

Second, Sri Lanka is not eligible to the G20 Common Framework for Debt Treatment beyond the DSSI (CF for short), to which only 73 low-income countries are eligible. There have been repeated calls to broaden the scope of the CF to highly indebted middle-income countries hard-hit by the COVID-19 pandemic and subsequent energy and food price shocks, not least from the IMF itself or the US Treasury.

Since Sri Lanka is in effect trying to engineer its own CF process, it is worth taking stock of the current situation with CF cases when it comes to financing assurances.

The IMF discusses the CF in the latest update of its arrears policies (paragraph 53 onwards). The phrasing is a bit ambiguous: while the IMF signals openness to grant the CF a similar status to that of the Paris Club under the LIOA policy, it acknowledges the shortfalls of ongoing CF processes in Chad, Ethiopia and Zambia, and indicates more experience is needed for a change of the policies. At the same time, the IMF indicates the following:

Adequately representative CF treatments can only “deem away” arrears to non-participants when a Paris Club creditor participates (in such cases, both the non-Paris Club and Paris Club financing under the CF would count to determine representativeness, as is currently the case in Paris Club Plus treatments)

Since there is de facto always a Paris Club member in CF Creditor Committees – France even co-chairs the Zambia committee without having any claim on the country – it means that the CF will be able to benefit from some form of specific status under the LIOA policy.

Another important aspect is the level of commitment required for financing assurances within the CF process. Sri Lanka might be looking at Zambia in this regard, where the Creditor Committee published a statement that was considered by the IMF as sufficient financing assurances, despite not saying anything about the specifics of the upcoming debt treatment:

Consistent with their national laws and internal procedures, creditor committee members are committed to negotiate with the Republic of Zambia terms of a restructuring of their claims to be finalized in a Memorandum of Understanding (MoU), in accordance with the “Common Framework for Debt Treatments beyond the DSSI”.

This phrasing looks rather vague, and one could be surprised that the IMF approved the program without knowing for instance the flow relief that China could provide to Zambia over the program period, or whether it is ready to accept a haircut. However, Guillaume Chabert from the IMF noted at a recent conference that it was unprecedented to have a written commitment from China, and that it was the result of hours of negotiations. It might also be that the IMF got some informal feedback from China which was not made public but brought additional confidence – Jeromin Zettelmeyer described something similar for Suriname in a podcast.

An even more striking statistic: Guillaume Chabert also said that the Chad CF process and then Zambia were the two first occurences when China provided financing assurances for the IMF to approve a program.

Sri Lanka, not being eligible for the CF, will have to build on these recent developments and answer two major questions: how to get bilateral creditors (especially China) on board with the ad hoc platform, and what level of commitment to seek from them in this forum in order to reach the Board Approval for its IMF program – e.g. whether a statement similar to that of Zambia’s bilateral creditors would be sufficient.

Uncertainty surrounding the attitude of China and India

The provision by China of financing assurances outside of the CF hence remains untested, so it would be rather ambitious to draw definitive conclusions from the Zambia case. Some argued that China did take a lot time to provide assurances – 7 months between the Staff-Level Agreement in Zambia and the provision of financing assurances – because of a lack of experience, and that it would be faster for Sri Lanka. However other factors, not least geopolitical ones, could come into play and disrupt the Sri Lankan process.

An interesting precedent in this regard is also Suriname, where the IMF approved a program without clear financing assurances from China and India. The Fund writes in the initial Staff Report:

China and India have provided assurances, although less specific than those provided by the Paris Club creditors, that they intend to work with Suriname towards a debt restructuring that will restore sustainability. China has consented to Fund financing notwithstanding these arrears. India has requested more time to consider consenting to Fund financing notwithstanding these arrears.

And then in the first review:

Paris Club creditors have provided specific and credible financing assurances indicating that they will provide debt relief in line with program parameters. China and India continue to consent to the use of Fund resources despite Suriname running arrears on their official debt

Jeromin Zettelmeyer gave a more thorough explanation in a podcast, indicating that the IMF judged in Suriname that it would ultimately be in the interest of China and India to restructure their claims.

Whether the IMF could act similarly with regards to China and India in the case of Sri Lanka – not requiring a formal commitment to debt treatment – is highly uncertain, notably since political stakes are running high and pressure has been increasing vis-à-vis the involvement of China in debt restructurings.

An additionnal hurdle will be to define the scope of Chinese creditors to be considered as bilateral creditors. As Brad Setser pointed out, the IMF in Zambia seemed to opt for a broad scope for bilateral claims which might include banks like CDB or ICBC that China claimed were commercial creditors. This question might especially arise in Sri Lanka for so-called “indirect exposure” to China consisting of ECA-backed claims amounting to more than USD 3.2 billion, which are for now listed as bilateral claims in the creditor presentation (slide 16).

In order to reduce inter-creditor tensions and coordination problems going forward, it would be interesting to have a clearer view ex ante of the qualification of Chinese creditors. The IMF could engineer a similar classification methodology to the one it uses for multilaterals within the arrears policies, in the form of a binary decision tree assessing the treatment of this creditor in previous restructurings, the breadth of its membership, etc.

Some specific criteria to assess whether a bank is to be considered as a bilateral creditor could include financial ownership by the state or the presence of officials in the governance structure. In their “How China Lends” paper, Anna Gelpern and colleagues note that some loan contracts include the termination of diplomatic relations with China as an event of default: such clauses could be considered as supporting factors for the inclusion of loans in the bilateral debt stock, though obviously they are rarely available to the public or even IMF teams.

Finally, once the scope has been agreed for what constitutes the bilateral debt stock of Sri Lanka, there might be further internal tensions among Chinese creditors, as Brad Setser noted a few weeks ago when we discussed the Zambia program. The Chinese government might indeed have a say on how to allocate the debt relief among different entities and policy banks.

The ball remains in the IMF’s court

The IMF will be the final judge of what can be considered as sufficient financing assurances to approve the program in Sri Lanka and make the first disbursement. The financing assurances and arrears policies do provide a lot of caveats and wiggle room for judgement calls, which might turn the tide in either direction.

Sri Lanka will in any case create a precedent for sovereign debt restructurings after the COVID-19 pandemic in middle-income countries. For instance the attitude of the IMF and the application of its policies with regards to the ad hoc coordination platform will be very interesting to watch. Since a political push to significantly improve and expand the Common Framework in coming months seems unlikely at the G20, ad hoc processes will be the only choice for many countries seeking debt treatment, e.g. small middle-income island countries.

A glimmer of hope might come from the apparent willingness of the US – the main IMF shareholder with a de facto veto on all major decisions – to move forward swiftly on Sri Lanka, including outside of the Common Framework. It was best illustrated in the conclusion of Brent Neiman’s landmark speech on sovereign debt:

Sri Lanka urgently needs a debt restructuring and, unfortunately, is not eligible for the Common Framework. (…) We are in new territory, but the coming weeks offer a real opportunity for progress. (…) Swiftly concluding the first Common Framework case, and making clear progress on multilateral restructuring outside of the Framework, would be a big win not only for current and future debtors and their citizens, but also for all official creditors, whether traditional ones or new ones. We must build on recent experiences, apply lessons learned, and push ahead in these cases to prevent any depreciation of our global financial infrastructure.

What is at stake appears to be more than the fate of Sri Lanka, rather to some extent that of the international financial architecture for sovereign debt restructurings. Interesting times ahead.

I am grateful to Sophie Borra and Martin Kessler for valuable comments, and to Brad Setser for his insights and guesses on all things IMF Arrears Policies.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret

Barbados is the latest country to execute a debt-for-nature conversion, with the help of TNC and IaDB providing technical assistance and financial guarantees. Through the USD 150 million transaction, Barbados expects to save c. USD 50m over the next 15 years in debt service, to be redirected towards marine conservation efforts.

This transaction fosters significant financial innovations – dealing with external and domestic commercial debt instruments at the same time or including hurricane and pandemic clauses – and hence broadens the scope of countries which could turn to similar mechanisms, alleviating debt burdens and freeing up badly needed fiscal space to address the climate and nature crises.

On the flip side, some thoughts ought to be given to the precise design of such transactions and instruments, ensuring they are an efficient use of taxpayers and charity money, and they do not create additional fragilities in countries’ debt stocks down the road.

Takeaways from Barbados and Belize

The most striking aspects of the Barbados conversion are probably that it was executed with commercial creditors – as opposed to Seychelles 2016 with Paris Club creditors – and outside of a distress situation – as opposed to Belize 2021.

When Belize engineered a similar transaction back in 2021, many analysts stressed that it could happen mostly because creditors were “ready to take a hit” with bonds trading deep into distress territories. For instance, Mitu Gulati heard some market chatter that creditors were aiming for 60 cents on the dollar for the buyback and accepted to settle on 55 once the ESG twist was thrown into the mix.

First, it is worth noting that although the distress aspect played a part it is not sure that all creditors did have to take a hit in order to fund the conservation efforts, as discussed earlier on Twitter. For instance, it might be that some investors bought the Belize bond as low as 35 cents on the dollar a few months before the transaction, and hence made more than decent returns when settling at 55 cents on the dollar instead of 60 while also showcasing their ESG commitments. On this topic, Jochen Andritzky and Julian Schumacher have an interesting paper looking at the investors’ perspective in sovereign debt restructurings.

Back to our point, a more defining factor was arguably that Belize retired its whole tradable debt stock through the debt for nature conversion, buying back the whole amount outstanding of its “superbond”. It meant that there would be no second-round effects in the market in terms of pricing, liquidity or market access.

The fact that Barbados was able to successfully execute the conversion by buying only a portion of its outstanding domestic and foreign tradable debt instruments paves the way for many more countries to follow suit, e.g. Kenya as noted by Mark Bohlund.

Killing two birds with one stone?

Since everyone agrees that countries in the Global South face twin climate/nature and debt crises, it appears enticing to have at our disposal a “one size fits all” instrument to deal with both at the same time, killing two birds with one stone as Dennis Essers and colleagues put it. However, it appears as shown in their paper that the conclusion is not that straightforward and that there are many situations in which debt conversions are not necessarily relevant.

Diego Rivetti raised this question specifically for Barbados, and it would be interesting indeed to look at a counterfactual, i.e. how much money could have been mobilized for marine conservation had TNC and IaDB used their firepower directly to fund conservation projects instead of doing it through a complex debt buyback transaction. Lot has been written about the shortfalls of sovereign debt buybacks, and how they can be a particularly inefficient use of donor money as illustrated by the Bolivia example back in 1988.

A new IMF paper does a great job of narrowing down the set of situations in which debt for climate conversions (applies also to nature) make economic sense. Particularly, they note that such swaps are generally less efficient than conditional grants when debt is sustainable because part of the benefits is “lost” on non-participating creditors.

The paper notes however that conversions can make sense in cases where fiscal risks are high and climate adaptation is efficient. For the precise case of Barbados, the IMF coincidently noted in its latest program review that “Barbados’ public debt remains sustainable but subject to high risks”, and that “investment to build more climate resilient infrastructure should be stepped up.” Barbados appears to tick the two boxes, and there are indeed few countries in which climate adaptation is as efficient as in Small-Island States highly exposed to hurricanes and the rise of sea levels.

An uncertain impact on the debt stock?

A topic that is much less discussed about these debt-for-nature conversions however is the longer-term impact on the characteristics and fragilities of beneficiary countries’ debt stocks. In Belize like in Barbados, bonded debt is concretely transformed into non-bonded debt, e.g. bank loans and facilities (a “term loan facility” in the case of Barbados), which can then be further distributed to market participants.

This might come back to bite countries if they need to restructure their debts again down the road. Indeed, non-bonded debt usually does not include majority-voting provisions – equivalent to the collective action clauses commonly found in sovereign bonds – a fact studied in depth in a 2020 IMF paper on the international financial architecture. This means that any amendment to the instrument’s terms, e.g. principal haircut or coupon reduction, often requires unanimous consent. Holders of small shares of syndicated loans for instance can in theory prevent a restructuring process from moving forward.

The G7 private sector working group is making progress on developing templates for majority voting provisions in non-bonded debt with support from market participants, as noted by US Treasury Secretary counsellor Brent Neiman in a speech. However, we’re still a long way from seeing these included routinely in debt contracts, and countries like Belize or Barbados are always a hurricane away from having to go through a sovereign debt restructuring.

Of course, an important innovation in Barbados is that the new debt instruments will feature natural disaster clauses which have been broadened to cover not only hurricanes but also pandemics. It could alleviate the need for a protracted ad hoc restructuring process when disaster hits, but at the same time we should remember that natural disaster clauses in financial instruments are often an art more than a science, as illustrated by the World Bank’s infamous pandemic bonds.

Finally, I am left wondering what impact the scaling up of guarantees by multilateral and official institutions as part of these debt-for-nature conversions could have in terms of seniority in the debt stock of beneficiary countries. Indeed, a defining factor for the successful execution in Belize and Barbados was the guarantees extended respectively by the US Development Finance Corporation, and the Interamerican Development Bank (IaDB).

Such guarantees are usually pretty straightforward, meaning the institution will step up as soon as there is a missed payment without the need for creditors to seek any form of judgement or ruling. Then comes the harder part: the institution turns to the country as part of a “counter-guarantee” or “indemnity” agreement, asking to be paid back for all the funds it had to disburse to the country’s creditors on its behalf.

What this means is that if the guarantee is triggered, the creditor landscape of the country shifts partly from commercial creditors to official institutions, many of which benefit from some form of preferred creditor status. This reduces the share of “restructurable” debt in any subsequent debt workout, forcing the country to inflict more pain on other creditors.

Moreover, failing to make payments when asked to do so could have major consequences. The IaDB states for instance that “a default in repayment of the Counter-Guarantee triggers same treatment as non-performing loans.” Incurring arrears to a multilateral institution is a peculiar occurrence, not least because of the IMF’s non toleration policy for arrears to multilaterals, meaning it can derail IMF program negotiations which form the bedrock of most sovereign debt workouts.

If you want to discuss this further, please reach out: tmaret@globalsov.com

You can also follow me on twitter @TheoMaret