Sovereign Debt Restructuring: Recent Episodes and Views from Academics

Sovereign Debt Restructuring: Recent Episodes and Views from Academics Tamon Asonumaa IMF

Fourth Annual Sovereign Debt Restructuring Conference: Sovereign Debt, Restructuring, and Risk Management in the Post-COVID-19 Era February 26, 2021 The views expressed herein are those of the authors and should not be attributed to the International Monetary Fund, its Executive Boards, or its Management. a

TAsonuma@imf.org 1

Outline of Presentation I. Past Reforms on the IMF’s Lending Framework and Sovereign Debt (IMF 2013, 2014a,b, 2015a,b) II. Recent Sovereign Debt Restructurings: IMF (2020) III. View from the Academics – Findings from Academic Research 2

I. Past Reforms on the IMF’s Lending Framework and Sovereign Debt (IMF 2013, 2014a,b, 2015a,b) A. Supporting Bail-in oRemove the systemic exemption and change EAP flexibly

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I. Past Reforms on the IMF’s Lending Framework and Sovereign Debt (IMF 2013, 2014a,b, 2015a,b) B. Reform of “Lending Into Official Arrears (LIOA) policy o Align it with that for private creditors (i.e., “Lending-Into-Arrears (LIA) policy”) o Allow the IMF to provide financing in the presence of sovereign external arrears to official bilateral creditors in circumscribed situations

o Strengthen incentives for collective action when official sector support is required, and to prevent non-contributing official bilateral creditors from blocking IMF-supported programs.

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I. Past Reforms on the IMF’s Lending Framework and Sovereign Debt (IMF 2013, 2014a,b, 2015a,b) C. Improving Contract Design to Address Collective Action Problems oReaffirm its commitment to the contractual approach

oEndorse key feature of enhanced collective action clauses (CACs) - Enabling decisions to be taken by a majority of creditors across all bond issuances oModify pari passu clauses for international bonds - Clarifying that this clause does not require ratable payment to all creditors but only equal legal ranking) 5

I. Past Reforms on the IMF’s Lending Framework and Sovereign Debt (IMF 2013, 2014a,b, 2015a,b)

D. Strengthening Risk Assessment on Debt Sustainability

oMAC DSA introduced in 2013 – applying it to all AMs and EMs (“market access countries”) oReview of MAC DSA (2021)

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II. Recent Sovereign Debt Restructurings (IMF 2020) A. Recent Trend in Sovereign Debt Restructurings in 2014-20 o A majority were preemptive (i.e., pre-default) – post-default restructurings were common in 1978-2010 (62% of 179 episodes: Asonuma and Trebesch 2016) o Shorter duration of restructurings (1.2 years on average) – shorter than average duration of 3.5 years (Asonuma and Trebesch 2016) o A majority were restructuring of mainly external debt, a few episodes were restructuring only domestic debt

o CACs were used to achieve full participation in a half of episodes 7

II. Recent Sovereign Debt Restructurings (IMF 2020) B. Challenges in Creditor Coordination in Recent Bond Restructurings o Fragmentation of the creditor base o Challenges raised, but managed in two cases

o Argentina (2019-20) - Three separate creditor committees were formed (40-45% of debt) - Other bondholders not joining any of the committees o Ecuador (2020) - Diverse creditor base and three creditor committees were formed - Authorities facilitating creditor coordination 8

II. Recent Sovereign Debt Restructurings (IMF 2020) C. Limitation of CACs

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II. Recent Sovereign Debt Restructurings (IMF 2020) D. Current Contractual Approach o Largely effective in resolving sovereign debt cases since 2014 o Gaps that could pose challenges in future debt restructurings • Still large bonds without enhanced CACs • Frequent use of collateral and collateral-like instruments

oSeveral reform options for strengthening the resolution • Further augmentation of current contractual approach • Planned review of key IMF policies leading to further reforms that impact the current architecture 10

III. View from Academics: Findings from Academic Research A. Asonuma et al. (2020): “Costs of Default” o Post-default, weakly preemptive, strictly preemptive restructurings (Asonuma and Trebesch 2016)

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III. View from Academics: Findings from Academic Research A. Asonuma et al. (2020): “Costs of Default” o Financial intermediation higher or lower bank credit-to-GDP ratio than median

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Thank you!

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