The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management
FEBRUARY 23, 2023
Thor Jonasson, Deputy Division Chief
James Knight, Senior Financial Sector Expert
Monetary and Capital Markets Department
Debt Capital Markets Division
The Common Framework (CF) was formulated by the IMF and the World Bank in response to efforts by the Group of 20 Nations (G-20) to assist low -income countries address the significant rise in financing needs and rapid accumulation in public sector debt positions as a consequence of the COVID-19 Pandemic
The CF was modelled on traditional Paris Club processes and traditions employed during a period when developed western countries' claims on low -income debtors represented a significant percentage of total public sector debts
Creditor bases have evolved over the past few years, with diverse commercial and traditional non-Paris Club creditors such as China now representing a majority segment of total public sector debts in many low -income countries
Ghana external suspension (12/19/22)
IMF announces StaffLevel Agreement (12/12/22)
Launch of domestic debt exchange (12/6/22)
MoF announces formation of Consultative Committee on debt strategy (10/11/22)
Ghana requests IMF program (7/5/22)
Second extension of domestic debt restructuring (12/24/22)
S&P downgrade to CCC+ (8/5/22)
Moodys downgrade to Caa1 (2/4/22)
Fitch downgrade to CCC (8/10/22)
Sovereign Spread (lhs)(bp) Exchange Rate vs USD (rhs)
CBSL fixed the currency again after one month of devaluation
President Rajapaksa fled
CBSL started to devalue the currency by 75%
New government elected
Mass protests start
IMF SLA
India provided FA and China provided a letter to support the debt restructuring
Declaration of debt
JPSSGLK Index - Mid Price (LHS) LKR Curncy - Last Price (RHS)
Credit rating agencies downgrade Suriname
Officials ask to delay payments (1)
Government defaults on external debt
Government requests IMF program SLA on EFF
Exchange rate transition to float
Officials ask to delay payments (2)
EFF approved
Officials ask to delay payments (3)
Sovereign spread (lhs)(bp) Exchange rate (rhs)
Paris Club provides debt treatment
*2020-2022
Defaulting on private external debt leaves debtors facing a certain downgrade of sovereign credit ratings and a period of loss of market access
The views of several market participants and observers indicate that limited progress has been made to resolve complex financial impasses to restructure the public sector debts
Early input by creditors into Fund-supported programs:
• Interaction between debtors and creditors in good faith to discuss assumptions, prior to finalizing a Fund-supported program
Sharing of relevant information with creditor and their committees:
•
(i) the recognition of committee, (ii) the exchange of macro data, (iii) disclosure of the proposed treatment for different creditor classes, (iv) transparency around assumption of macro policies
Debt transparency:
• Issue of major bilateral creditors and their classification, and the use of collateral are examples of challenges more granularity on debt data and contracts was required
Solutions from market participants outline options that facilitate the interaction with all creditors can help facilitate the resolution of a complex situation:
• Generating broader consensus on debt sustainability analysis and assumptions
• For market-access countries: define the sustainable debt stock be consistent with a desirable and realistic level of credit rating and the associated interest rate spread
• Value recovery instruments or modified contractual terms
• In some cases, domestic debt restructuring could be needed at an earlier stage than in the past where recognition of losses need to be followed by a strategy to restore bank capital buffers and care given to central banks’ holdings of domestic sovereign debt, to ensure its normal operations
