Global Prospects for Sovereign Debt restructurings and Implications for Future Restructurings

LeBow College of Business and the Global Interdependence Center Conference on Emerging Global issues February 23, 2018

Sovereign Debt Restructurings: The Case of Venezuela

Session 3: Creditors’ Views and Future Perspectives Global Prospects for Sovereign Debt restructurings and Implications for Future Restructurings

Thordur Jonasson Monetary and Capital Markets Department International Monetary Fund tjonasson@imf.org The views expressed herein are solely the author’s and should not be attributed to the IMF, its Executive Board, or its management.

Sovereign Debt Management During Debt Distress Periods 2

 Under debt distress situations, a sovereign debt restructuring

usually implies some form of debt reduction in present value terms  Sovereign debt restructurings can have drastic adverse consequences for economic growth, trade, capital flows, banks, and other financial institutions  A debt restructuring should therefore only be initiated if, on the basis of a debt sustainability analysis, it is concluded that a macroeconomic adjustment program cannot realistically restore sustainability, and the scope of debt relief should always be proportional to the country’s debt sustainability problem

Debt Restrucuring Based on Good Faith Negotiations 3

 Involves private creditors in an adequate way  Private creditors generally wish to avoid a debt restructuring,

therefore pressing for a bailout by the official sector, if possible  Risk of a minority of holdout creditors can slow or disrupt an agreement that a qualified majority would be prepared to support  CACs mitigate this risk and can contribute to more orderly and rapid public debt resolutions

Debt managers Play a Role in Preparing the Debt Restructuring Process

by Verifying Characteristics of the Debt Portfolio 4

 Face and market value of bonds or loans  Amortization schedule (bullet versus amortization and/or the    

existence of a sinking fund) Interest rate and coupons (fixed versus flexible and/or the existence of step-up or linked features) Currency of denomination of the instruments (local versus foreign currency) Enhancements, including embedded options or collateral Laws that govern the debt instrument, including CACs and nondefault clauses, and the ability to include exit consents

Determining whether a Loss of Market Access has Occurred or Not Requires Analysis 5

 The IMF only can lend to countries where debt is assessed to be

sustainable. Key to the assessment of debt sustainability is market access. If a country wants to borrow from the IMF, staff has to determine whether loss of market access (LMA) has occurred. This determination requires inter alia an analysis of:       

Debt Sustainability Sovereign Spreads Patterns of recent primary market bond issuances and use of instruments Financing: frequency, maturity and terms Evolution of nonresident holding of public debt Sovereign Credit Ratings Bond Trading Activity

Stylized Timeline of a Sovereign Debt Restructuring 6

Source: Das et al, 2012.

Regaining Market Access is an Important Component 7

 Sovereign borrowers that experience serious debt distress may start with a

set of new challenges because a new class of investors holds their credit  Debt managers can re-access the market when yields fall to sustainable levels, as well as when the yield curve starts normalizing and becomes positively sloping  In general, countries stress the following elements as critical on the path to re-accessing markets:    

Decisive action by policymakers and focus on debt sustainability No complacency in implementation of reforms and focus on the structure of debt Internal coordination and focus on investor needs and expectations Communication throughout all phases with investors (regular, realistic, and in person) (Moody’s, 2013)

Relevant IMF Publications 8  International Monetary Fund, “Third Progress Report on Inclusion of Enhanced Contractual Provisions in

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International Sovereign Bond Contracts,” IMF Staff Report, December 2017. https://www.imf.org/en/Publications/Policy-Papers/Issues/2017/12/15/pp113017third-progress-report-on-cacs International Monetary Fund, “The Fund’s Lending Framework and Sovereign Debt—Preliminary Considerations,” IMF Staff Report, June 2014. http://www.imf.org/external/np/pp/eng/2014/052214.pdf International Monetary Fund, “Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring,” IMF Staff Report, October, 2014. http://www.imf.org/external/np/pp/eng/2014/090214.pdf International Monetary Fund, “Sovereign Debt Restructuring—Recent Development and Implications for the Fund’s Legal and Policy Framework”, IMF Policy Paper, April 26, 2013. http://www.imf.org/external/np/pp/eng/2013/042613.pdf Das, Udaibir S., Michael G. Papaioannou, and Christoph Trebesch, 2012, “Sovereign Debt Restructurings 1950–2010: Literature Survey, Data, and Stylized Facts,” IMF Working Paper 12/203 (Washington: International Monetary Fund). https://www.imf.org/external/pubs/ft/wp/2012/wp12203.pdf Guscina, Anastasia, Malik, Sheheryar, Papaioannou, Michael, 2017, “Assessing Loss of Market Access: Conceptual and Operational Issues,” IMF Working Paper (Washington: International Monetary Fund). https://www.imf.org/en/Publications/WP/Issues/2017/11/15/Assessing-Loss-of-Market-Access-Conceptual-and-Oper ational-Issues-45347 Jonasson, Thordur and Papaioannou, Michael, 2018 “A Primer on Managing Sovereign Debt-Portfolio Risks,” IMF Working Paper (forthcoming)