Today is my last day at GSA after 5 exciting years – I’m most grateful for all the discussions and friends made along the way.
I won’t be posting much going forward but please reach out if you want to talk sovereign debt & emerging markets! 🇱🇰🇿🇲
A (very) short paper on (I think) something important. When I have 5 minutes I will do a thread about it. @clemensgvl.bsky.social @diegorivetti.bsky.social @davidmihalyi.bsky.social @theomaret.bsky.social @kpatricio.bsky.social
After the 2024 reform of the IMF’s arrears policies, it’s unclear the need will arise to play hard ball with China in future cases (see Ethiopia). And as Daleep notes, it's unclear the US – or even the IMF – currently have the financial firepower to implement his vision
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Interestingly, he adds the aim would be “getting at least a couple of debtor countries to walk away from Chinese debt if they refuse to restructure on comparable terms to the Paris Club, and making a credible commitment to backfill the financing that these countries walk away from”
Daleep also says the CF is not working because “We have a collective action problem with the largest bilateral creditor” and “The only way to change [China’s] incentive is to have much more aggressive use of the IMF’s lending into official arrears policy”
In fact, official creditors already have a form MFC with the claw back provisions in CF MoUs – MFC provisions usually refer to Eurobond contractual provisions used recently in e.g. Zambia or Ghana to protect bondholders vis-à-vis other commercial creditors (incl. Chinese banks)
On the Common Framework, Daleep supports well-known improvements (interim debt service suspensions, making middle-income countries eligible), but surprisingly also says the DSA should be more “inclusive” (?) at an earlier stage and “we should have most favored creditor clauses”
As a reminder, this debate could be linked to Bloomberg reporting which mentioned that the US Treasury was criticizing the ambition of the IMF/WB “three pillar approach” to liquidity pressures in LICs
www.bloomberg.com/news/article...
However one can argue this should be the baseline of any IMF program, not conditioned to more ambitious reform commitment from the debtor -- adjusting DSAs for political reasons can skew the assessment and lower the ability to detect risks of debt distress
Guessing from recent debates, it could mean IMF programs designed around bigger fiscal space (especially as social pressures push programs off track), stronger bilateral financing assurances (Ecuador, Pakistan), or more conservative assumptions on market access (Ecuador again)
On countries facing liquidity pressures, he says IFIs should provide “ambitious financing and *adjusted DSAs* for countries that have ambitious reform and investment plans” – curious what this adjusted DSA would look like
A thread with some interesting tidbits on liquidity pressures/sovereign restructurings in Daleep Singh’s remarks ⤵️🧵
www.omfif.org/meetings/us-...
We all know the #FinSky party won't really start till Brad comes over :)
Bottom line: good to see IMF staff summing up all these policies and their application in one document, clarifying what information should be featured in staff reports, and showing template language for all these issues as well as relevant historical cases --
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Appendix X sums up the IMF's doctrine on SCDIs, with a mention of the ex ante vs ex post assessment of CoT and the required buffers to accomodate clawbacks in the second case -- a debate which came up recently in Suriname and Sri Lanka
Interesting discussion of the IMF's reluctance to have debt treatments/instruments linked to IMF conditions -- echoes the design of Zambia's Bond B (linked to the IMF's debt carrying capacity) or the non-restructuring case of El Salvador's macro-linked securities
Reminder of the IMF's indirect stance on burden sharing: the non-respect of CoT would threaten the involvement of official creditors (e.g. because of a clawback) and hence hamper the return to debt sustainability
The IMF confirms its reluctance to adjust debt targets ex post, but opens the door to such adjustments in exceptional circumstances -- a problem in recent cases is that the rigidity of debt targets has been compensated by adjustments of the macro framework (e.g. NRH in Zambia)
Neat overview of how debt targets are defined in restructuring cases -- would be good to have more details about how they're defined in cases based on the MAC SRDSF, after the recent debates in Sri lanka
These few paragraphs are especially important when thinking about the role of the IMF in recent borderline cases like Kenya or Pakistan
Interesting discussion on the impossibility for the IMF to "require" a restructuring, in order to avoid legal risks related to tortious interference in private contracts -- a legal oddity that came up recently in the money time of Zambia's restructuring negotiations
Similar to official creditors, the IMF can seek further assurances from commercial creditors with collateral, since debtor countries are unable to gain leverage in negotiations by running arrears to them -- see Chad 2021 with Glencore
The IMF clarifies that a country can require more debt relief than implied by IMF program parameters without breaching the "good faith" requirement, but IMF staff might then judge that a restructuring is less likely to happen -- echoes recent debates in e.g. Sri lanka
When creditor committees are formed, the IMF would expect the debtor to engage with them under certain conditions, e.g. when they have blocking stakes or represent different geographies and instruments
Neat decision tree for the classification of claims between the different arrears policies
Useful clarification: the classification of claims for the purpose of the arrears policies does not determine the treatment in a restructuring -- a misconception that has been especially acute when it comes to the treatment of plurilaterals in recent cases
Interestingly the definition for this leverage of specific creditors encompasses collateral but also broader BoP relationships: the IMF is wary of a bilateral creditor leveraging trade measures to seek better repayment terms on its debt claims
The IMF will only need assurances from bilateral creditors representing 50% of the required contribution, but then reserves the right to seek further assurances from creditors "with influence over the debtor" -- a debate that arose with e.g. China or plurilaterals in recent cases
2 subtelties:
- Assessment depends on the type of treatment, e.g. China has a track record for reschedulings, less so for deep NPV reduction
- Mechanisms like the PC and CF can remove the requirement for individual assurances (that's how the IMF approved the Ethiopia program)
Neat overview of the "Credible Official Creditor Process" in restructuring contexts. It was notably designed to overcome the fragmented institutional landscape of China's overseas lending, with no institution able to provide unified assurances and enforce them on all the lenders