Chapter

Chapter 8. Debt Restructuring in the Caribbean—The Recent Experience

Author(s):
Krishna Srinivasan, Inci Otker, Uma Ramakrishnan, and Trevor Alleyne
Published Date:
November 2017
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Author(s)
Joel Chiedu Okwuokei and Bert van Selm 

Introduction

Many economies in the Caribbean region have been caught in a low growth–high debt trap for decades. Debt has been built up over the years through large fiscal deficits, the costs associated with natural disasters, public enterprise borrowing, and off-balance-sheet spending, including for financial sector bail-outs. High levels of debt have, in turn, had a negative impact on growth, notably because high debt contributes to macroeconomic uncertainty and because the high cost of debt service reduces the fiscal space for investing in human and physical infrastructure that would support growth.1

In the years leading up to the 2008–09 global financial crisis, moderate growth helped some countries stabilize and reduce their debt levels, but the crisis reversed this trend (Figure 8.1). A number of Caribbean countries are now among the most highly indebted in the world. At the end of 2016, four countries in the region (Jamaica, Barbados, Antigua and Barbuda, Belize) had debt-to-GDP levels close to, or even above, 100 percent of GDP (Figure 8.2). In commodity-exporting countries, such as Trinidad and Tobago and Suriname, lower global commodity prices have led to large fiscal deficits and rapid debt accumulation in recent years, with public debt-to-GDP ratios now about 50 percent, and on the rise.

Figure 8.1.The Caribbean: Total Government Debt, 2000–16

(Percent of GDP, weighted average)

Sources: IMF, World Economic Outlook; and IMF staff estimations.

Figure 8.2.The Caribbean: Total Government Debt, 2016

(Percent of GDP)

Sources: IMF, World Economic Outlook; and IMF staff estimates.

Note: Data labels in figure use International Organization for Standardization (ISO) country codes.

The Caribbean region has seen several episodes of sovereign debt restructuring to commercial creditors over the past few years (Annex Tables 8.1.1. and 8.1.2). This chapter looks at the four countries in the region that have engaged in such restructuring since 2011: Jamaica, Belize, Grenada, and St. Kitts and Nevis.2

Three of these cases entail examples of a second or even third restructuring of what is essentially the same debt to private creditors: Jamaica (domestic debt twice—2010 and 2013), Belize (external debt three times—2006–07, 2012–13, and 2016–17), and Grenada (both domestic and external debt were restructured twice—in 2004–06 and in 2013–15). Among the recent episodes, St. Kitts and Nevis’s 2011–12 restructuring is the only one that was not a repeat operation.

The chapter looks at ways to assess the relative successes of these operations, including impact on debt sustainability, debt-to-GDP ratios, and developments in yields and market access.3 In other words, the “success” of the debt operation is looked at through the perspective of debt-related indicators rather than broader growth indicators that are typically influenced by general domestic reforms and policies as well as external factors. The inquiry also discusses factors that may have contributed to success, including (1) the size of the restructuring (principal haircut or not; impact on the net present value [NPV] of the debt); (2) the type of debt selected for restructuring (external, domestic, or both); (3) the role of debt modalities, including collective action clauses (CACs), hurricane and clawback clauses, and step-up and step-down clauses; and (4) the sustained implementation of a supporting macroeconomic reform program. A concluding section draws key policy lessons.

Jamaica: JDX and NDX

Jamaica has restructured its debt to private creditors twice in recent years: in the 2010 Jamaica Debt Exchange (JDX), and then again in 2013, in an operation labeled National Debt Exchange (NDX). The design choices for these operations and their outcomes—their immediate and medium-term impact on public debt and their impact on financial markets—contain valuable lessons for the design of successful debt-restructuring operations.

Both JDX and NDX were embedded in, and executed at the start of, IMF-supported economic reform programs—the 2010 Stand-By Arrangement (SBA), and the 2013 Extended Fund Facility (EFF), respectively. In fact, both operations were prior actions for IMF Executive Board approval of the broader, IMF-supported reform program, including IMF financing (300 percent of quota under the 2010 SBA and 225 percent of quota under the 2013 EFF). Both programs aimed to put public finances on a sustainable footing with a combination of fiscal consolidation, measures to boost growth, and debt restructuring. Performance under these programs was different: while the 2010 SBA went off track after three quarterly reviews owing to fiscal slippages, the 2013 EFF remained on track for the duration of the program, until November 2016, with 13 reviews completed and targets for the 14th review met. Under the EFF, Jamaica maintained a primary surplus of 7 percent of GDP or higher for four years in a row—2013 through 2016—and these targets continued to be sustained in the 2016 SBA. In contrast to the 2010 SBA, the 2013 EFF managed to put public debt on a clear downward path and restore debt sustainability.

In both cases, the Jamaican authorities opted to restructure domestically issued debt only (Figure 8.3). The exchanges excluded bonds issued in foreign jurisdictions or held by nonresidents—a choice guided by the Jamaican authorities’ emphasis on the voluntary nature of the operation (Grigorian, Alleyne, and Guerson 2012, 8). Even so, in both JDX and NDX, participation rates ended up being very high, at 99 percent or more (Grigorian, Alleyne, and Guerson 2012, 12; IMF 2013a,14). Both JDX and NDX targeted lower coupon rates and extensions of maturities, with no principal haircut. Under JDX, the rate on Jamaican dollar–denominated debt with an average interest rate of 19 percent was reduced to an initial rate of 12.5 percent, and the average maturity of domestic debt was increased from 4.7 to 8.3 years, resulting in significant immediate fiscal savings for the government (Grigorian, Alleyne, and Guerson 2012, 11–12). Under NDX, coupons were reduced by 1–5 percent and maturities extended by three to 10 years, depending on the instrument; NDX also served to address a large bunching of maturities at the end of February 2013 (IMF 2013a, 13–14).

Figure 8.3.Jamaica: Public Debt, 2013

(Percent)

Sources: Country authorities; and IMF staff calculations.

JDX and NDX were also similar in that they targeted a limited reduction in the NPV of the public debt. The immediate reduction in the NPV of public debt was a bit higher under JDX (an estimated 15–20 percent) than under NDX (8.6 percent of GDP reduction against 2020 GDP).4 Concerns about the impact of the debt restructuring on the stability of the domestic financial sector—and in particular, the relatively large securities dealers sector, with total assets equivalent to 40 percent of GDP in 2013, and a significant portion in government bonds— played an important role in this element of the design of JDX and NDX (see, for example, Wynter 2016, 3). To help mitigate this risk, in both cases, a Financial Sector Support Fund was set up to provide liquidity support, if needed, to individual financial institutions that might experience difficulties as a result of the debt exchange. Both the 2010 SBA and the 2013 EFF also included measures to strengthen the securities dealers sector’s capital and liquidity buffers and improve its legal and prudential framework.

Despite these similarities in design, the impact of JDX on domestic financial markets was very different from the impact of NDX. No individual financial institutions applied for Financial Sector Support Fund resources under either JDX or NDX. But while trading in government bonds quickly resumed after JDX, the market for government bonds remained inactive for three years after NDX, until February 2016, when the government issued domestic bonds for the first time after NDX (Schmid 2016, 6–7 and Figure 8.4). This evidence from Jamaica’s domestic bond market points to the importance of getting it right the first time—including by underpinning the restructuring with a sustained fiscal consolidation program. Repeated restructuring of what is essentially the same debt will lead creditors to anticipate the likelihood of similar operations in the future, and is thereby detrimental to market development.

Figure 8.4.Secondary Government Bond Market Activities

Sources: Country authorities; and IMF staff calculations.

Note: EFF= Extended Fund Facility; GOJ=government of Jamaica.

The Jamaican authorities’ decision to restructure domestic bond debt twice while leaving external bond debt untouched led investors to perceive domestically issued bonds as a higher risk than bonds issued in foreign jurisdictions. As a result, the external credit channel was able to reopen much earlier after the NDX than the domestic bond market, with the issuance of a new US$800 million (about 6 percent of GDP) Eurobond in July 2014. This channel was again used in July 2015, with a US$2 billion issuance that supported the buyback of Jamaica’s US$3 billion debt to Venezuela, accumulated under the PetroCaribe program, at a sharp (about 50 percent) discount. This debt restructuring with Venezuela reduced Jamaica’s debt-to-GDP ratio by about 10 percentage points in a single operation. Having the external credit channel available relatively quickly after NDX thus played a critical role in Jamaica’s ability to manage and reduce its public debt (Figure 8.5).

Figure 8.5.Jamaican Bond Spreads

(Percent)

Source: Bloomberg.

Note: EMBIG = JPMorgan Emerging Market Bond Index Global.

With access to global capital markets but not to domestic markets for several years, the share of Jamaica’s external, United States dollar-denominated debt in overall public debt gradually increased, with United States dollar-denominated debt now well over half of overall public debt. This has made debt dynamics more vulnerable to exchange rate developments—a clear downside to Jamaica’s “domestic-only” approach to sovereign debt restructuring.

Another important difference between JDX and NDX was that after NDX, starting in 2013, implementation of the reform program supporting the debt exchange was monitored not just by an IMF-supported program with quarterly reviews, but also by a domestic monitoring mechanism with monthly reviews (including a monthly report in national newspapers and a monthly press conference by the private sector co-chair). The Economic Program Oversight Committee was set up at the initiative of the government’s four largest domestic creditors who were affected twice by the debt restructurings, and included representatives of labor unions and government as well as sectoral interests (for example, agriculture). Broad-based program ownership by various stakeholders, including the private sector, public sector, media, unions, academia, think tanks, civil society, and opposition, provided an environment for the Economic Program Oversight Committee to effectively hold the government to its commitments. With this broad support, Jamaica was able to sustain an exceptionally high primary surplus—initially 7½ percent of GDP, and 7 percent of GDP starting in 2016— over a prolonged period. Four years after NDX, it became clear that the broader strategy, of which the 2013 NDX was an important part, put Jamaica’s debt on a firm downward trajectory (Figure 8.6).

Figure 8.6.Jamaica: Public Debt-to-GDP Ratio

(Percent)

Sources: IMF, World Economic Outlook; and IMF staff estimations.

Note: EFF = Extended Fund Facility; JDX = Jamaica Debt Exchange; NDX= National Debt Exchange; SBA= Stand-By Arrangement.

In sum, three key lessons stand out from Jamaica’s recent experience. First, debt restructuring can help put debt on a downward trajectory, but only when it is an element of a broader, well-executed strategy that includes fiscal consolidation and policies to support economic growth. Second, debt restructuring works best as a single-shot operation—repeated restructurings undermine the credibility of the government and will lead investors to anticipate similar operations in the future, with a negative impact on market development. Third, effective monitoring of the supporting reform program that reinforces the debt restructuring is critically important, and can be facilitated by a credible domestic monitoring mechanism that involves key domestic stakeholders. The Jamaican experience shows that sustained implementation of the underlying reform plan is key— NDX secured a smaller NPV gain than JDX, yet it was the 2013 NDX operation that marked the turning point toward debt sustainability.

Belize: Toward Superbond 3.0

Belize completed its third debt restructuring in a decade in 2017. On November 9, 2016, the Belizean authorities announced their decision to seek a restructuring of Belize’s debt to holders of United States dollar-denominated bonds (US$526 million, or about 30 percent of GDP), following similar operations in 2006–07 and 2012–13 (Figure 8.7). In their press release, they attributed their decision to “serious economic and financial challenges currently facing the country,” and referred to low growth, rising fiscal deficits, U.S. dollar strength, Hurricane Earl, and higher-than-anticipated arbitration awards, among other factors.5 A little more than four months later, on March 15, 2017, the Belizean authorities announced that they had reached agreement with private external bondholders. The new agreement reduced the interest rate on the bonds to 4.9375 percent (the rate was set to step up from 5 percent to 6.767 percent in August 2017), and amended the principal repayment schedule by pushing back principal repayments to 2030–34 (instead of starting semiannual installments in August 2019). The final maturity date of the bond was brought forward from 2038 to 2034.

Figure 8.7.Belize: Central Government Public Debt, 2016

(Percent)

Sources: Country authorities; and IMF staff calculations.

Ten years earlier, in 2006–07, Belize first exchanged various external debt instruments for a single United States dollar-denominated bond (“Superbond”) with a face value of US$547 million. This initial exchange lengthened maturities, extended the grace period (with no principal repayment until 2019), and lowered interest rates, but did not reduce the face value of the debt (no principal haircut). The operation was driven by an acute liquidity shortage (Asonuma and others 2014, 4). Participation in the exchange was high, reaching 98 percent after the activation of a CAC on one of the bonds. The NPV haircut of the operation has been estimated to be 24 percent (Asonuma and others 2014, 10).

Similarly, when this debt was again rescheduled in 2012–13, the focus of the operation was on improving the government’s cash flow over the near-to-medium term rather than on longer-term debt sustainability considerations. The maturity of the bond was lengthened again (from 2029 to 2038), and the interest rate was reduced. There was a modest haircut (3 percent of the principal amount), and the NPV gain of the operation was estimated to be 29 percent (Asonuma and others 2014, 19). Execution of the CAC raised the participation level from 86 percent to 100 percent (Asonuma and others 2014, 18).

Both Superbond 1.0 (the 2006–07 operation) and Superbond 2.0 (the 2012–13 operation) built in significantly more demanding debt-servicing terms after an initial period of low interest rates (a step-up coupon) and no principal repayments. The first operation set interest rates at 4.25 percent until 2010 but had rates jump to 8.5 percent after 2012. Similarly, the design of the second operation included an increase in the coupon rate from 5 percent to 6.767 percent starting in 2017, and maintained a grace period (no principal payments) until 2019. This design feature of the first two debt-restructuring operations (debt service becoming more onerous over time) may have contributed to the three-in-a-row scenario that eventually played out (Asonuma and others 2014, 9–10). The 2017 Superbond 3.0 avoids a step-up coupon but does concentrate principal repayments in the final five years of the loan, so that debt service becomes more onerous toward the end of the life of the bond.

Over the period of the three restructurings, economic policies and outcomes changed little despite a turbulent global environment. A small primary surplus was maintained in most years (1.2 percent, on average, over 2007–16), corresponding to a small overall deficit (1.9 percent of GDP). Growth remained anemic, at 2.1 percent, on average, since 2007. Meanwhile, the exchange rate peg of the Belizean dollar to the U.S. dollar ensured low inflation (1.4 percent, on average, over the period). With these trends, the debt-to-GDP ratio remained high—in the range of 75–100 percent over the period (Figure 8.9).

Figure 8.8.Belize: Superbond Price Developments

(U.S. dollars)

Source: Bloomberg.

Note: GOB = government of Belize.

Figure 8.9.Belize: Public Debt-to-GDP Ratio

(Percent)

Sources: IMF, World Economic Outlook; and IMF staff estimations.

As in Jamaica, Belize has repeatedly targeted the same debt for restructuring— in this case, its external debt (denominated in U.S. dollars, and issued under U.S. law) to bondholders. This focus on external commercial debt is partly explained by domestic financial stability concerns (Asonuma and others 2014, 8), which in turn has implications for market access—Belize has not been able to issue new debt to international bondholders in a long time, but retains the ability to issue domestic debt to domestic financial entities. After the government announced the third debt restructuring, the yield on the Superbond shot up to more than 20 percent (Figure 8.8).

Neither the first nor the second debt restructuring was supported by a sustained fiscal consolidation program and growth-supporting initiatives—Belize’s most recent IMF program expired in 1986, long before these debt restructurings. The focus of the two restructurings on improving the government’s immediate cash flow issues, rather than on longer-term debt sustainability, has meant that neither the 2006–07 nor the 2012–13 operation managed to place government finances on a sound footing, and neither operation put the debt-to-GDP ratio on a clear downward trajectory. On the eve of the third debt restructuring, at the end of 2016, public debt remained about 100 percent of GDP.

The 2017 agreement with bondholders is anchored by fiscal adjustment, but the adjustment is not ambitious enough to restore debt sustainability. The authorities have committed to tighten the fiscal stance by 3 percentage points in fiscal year 2017/18, and to maintain a primary surplus of 2 percent of GDP for the subsequent three years (fiscal years 2018–21), implying no additional adjustment effort after 2017/18. The agreement also includes a monitoring mechanism for the fiscal adjustment effort: if Belize fails to meet the 2018–21 primary surplus target, the authorities will submit a report to the National Assembly to explain why the target was missed. In addition, if this occurs, Belize has committed to requesting an IMF technical assistance mission to determine why the primary surplus target was missed and recommend remedial measures.6 The authorities have also committed to publishing the findings of any such IMF technical assistance. Furthermore, if the primary surplus target is missed, interest payments on the bond will become payable on a quarterly rather than semiannual basis (for the subsequent 12 months after the target is missed).

These repeated efforts to restructure private debt risk undermine Belize’s credibility and access to international capital markets for an extended period, in turn hurting prospects for strong and sustainable growth. The authorities appear to be well aware of this issue: as the government indicated in its December 2016 solicitation of comments from bondholders, “No one—least of all the Government of Belize—wishes to contemplate the prospect of a fourth restructuring of these instruments.” The first two operations made clear that ambitious fiscal consolidation is critical to underpinning any debt rescheduling and to establishing credibility with the markets. Absent such adjustment, any debt rescheduling is likely to be only a temporary palliative.

To secure durable gains, the 2017 debt restructuring needs to be supported by a medium-term strategy that combines more ambitious, and high-quality, fiscal consolidation with structural measures to boost growth. Although the debt rescheduling provides meaningful cash flow relief, and the agreed upon fiscal tightening is a step in the right direction, the agreement is just one element of a more comprehensive package needed to lift Belize out of high debt and low growth. The agreement reduces the cost of servicing a relatively expensive part of external debt, and the NPV gain is significant, at 28 percent.7 However, the overall level of public debt remains very high. Further fiscal adjustment—targeting a primary surplus that is greater than 2 percent of GDP—will be necessary to put debt on a clear downward trajectory. Containing government spending on wages and pensions, which is already high by international standards and projected to increase over the medium term, will be important. Concrete steps to improve the business climate, including by making it easier to start a business and get credit, could help foster growth.

Grenada: Hurricane Clause

Grenada has restructured its sovereign debt to private (and bilateral official) creditors twice since 2004: first during 2004–06, after a devastating hurricane (Ivan, with estimated damage equivalent to 200 percent of GDP) and then again during 2013–15. Both operations were complicated and took considerable time to complete—much longer than the Jamaican and Belizean experiences discussed above. Both operations were also eventually accompanied by IMF-supported reform programs, as in Jamaica, although in Grenada the debt operations were not a formal condition for IMF support (that is, they were not a prior action for program approval).

Hurricane Ivan struck Grenada on September 7, 2004, and the Grenadian authorities announced their intention to seek “the cooperation of creditors” three weeks later, on October 1. The stated objective was to return Grenada to a position of economic stability and debt sustainability (Asonuma and others, 2017, 9). Both external and domestic debt to private creditors, as well as official bilateral debt, were targeted, excluding Treasury bills and debt to multilateral institutions. The commercial debt rescheduling agreed to more than a year later, on November 15, 2005, encompassed US$77 million of domestic debt and US$172 million of external debt (both partly denominated in Eastern Caribbean dollars and partly in U.S. dollars) and featured (1) no principal haircut; (2) extension of final maturity (to 2025); (3) a significant NPV haircut, estimated at about 38 percent; and (4) importantly, lower interest rates, but also a step-up coupon rate: 1 percent until 2008, 2.5 percent until 2011, 4.5 percent until 2013, 6 percent until 2015, 8.5 percent until 2018, and 9.0 percent until maturity. As in Belize’s first and second debt restructurings, this design feature makes debt service more onerous over time. The exchange achieved 91 percent participation (without using CACs), and was followed by a Paris Club agreement with bilateral creditors in May 2006 (Asonuma and others 2017, 16). Losses incurred by Paris Club creditors were substantially smaller than private sector creditors’ losses (Asonuma and others 2017, 17). With no nominal haircut, debt remained high at about 90 percent of GDP in 2005.

Although the IMF provided emergency assistance not long after Ivan (in November 2004), negotiations on an IMF-supported program to help address Grenada’s challenges took until April 2006 to complete. The debt exchange with commercial creditors thus took place independent of an IMF-supported program.

Although the 2004–06 restructuring achieved liquidity relief, Grenada’s debt sustainability was not restored (Asonuma and others 2017, 18). Two IMF-supported economic reform programs—a 2006–10 Poverty Reduction and Growth Facility and a 2010–13 Extended Credit Facility—made limited headway in improving debt dynamics; a 2014 Ex Post Assessment evaluated performance under these programs as weak (see IMF 2014b, 1). Public debt once again increased to more than 100 percent of GDP at the end of 2012 because the government tried to use fiscal policy to counteract the negative impact of the global financial crisis on Grenada (mostly the reduced numbers of tourists but also a decline in foreign investment). The government’s cash flow came under severe pressure as multilateral financing dried up and domestic banks limited their exposure to the government. This set the scene for a second round of debt restructuring, conducted over 2013–15 and announced by the Grenadian authorities on March 8, 2013 (Figure 8.12).

Figure 8.10.Grenada: Public Debt-to-GDP Ratio

(Percent)

Sources: IMF, World Economic Outlook; and IMF staff calculations.

Note: ECF=Extended Credit Facility; PRGT=Poverty Reduction and Growth Trust.

Figure 8.11.Grenada: Public Debt, 2013

(Percent)

Sources: Country authorities; and IMF staff calculations.

Note: CG = central government.

Figure 8.12.Grenada: Commercial Bond Price Development

(U.S. dollars)

Source: Bloomberg, L.L.C.

As in Jamaica and Belize, Grenada’s second round focused on the same debt as the first one: public debt to both private and official creditors, with the exception of Treasury bills and debt to multilaterals (Asonuma and others 2017, 23; Figure 8.11). The bulk of the restructured debt in this operation was debt to external bondholders (as in the earlier operation)—US$194 million. Agreement with these private creditors was reached in March 2015—a full two years after the initial announcement, with the formal closing of the agreement another eight months later, in November 2015. This extended negotiation period is at least partly explained by the Grenadian authorities’ capacity constraints. For these bonds, a principal haircut of 50 percent was agreed to, interest rates were fixed at 7 percent, and the maturity of the debt was extended by five years, to 2030. The NPV haircut amounted to 49 percent. Activation of a CAC increased participation from 94 percent to 100 percent. As with the first restructuring, Paris Club agreement on debt rescheduling (in November 2015) accompanied the commercial debt rescheduling. Similar to previous experience with the 2004–06 debt restructuring, losses incurred by official creditors were lower than those incurred by private creditors.

A three-year, IMF-supported, “home-grown” reform program was approved by the IMF Executive Board in June 2014, after one year of discussions that occurred in parallel with debt negotiations. The program targets significant up-front fiscal consolidation accompanied by broad and deep reform of the legislative framework—including a fiscal responsibility law—to install a more permanent framework for fiscal prudence and debt sustainability. Performance under this program has been strong to date, with the government meeting fiscal targets and completing reviews on a regular basis. Implementation of structural benchmarks under the program has been solid, though usually with some delay, often related to capacity constraints. As in Jamaica, monitoring of program implementation has been complemented by a domestic monitoring mechanism, with broad participation. Grenada now appears to be on the right track: the November 2016 IMF staff report notes that the debt-to-GDP ratio is now on a clear downward trajectory, projected to fall to 57.5 percent by 2020, thereby meeting the 60 percent Eastern Caribbean Currency Union target (IMF 2016b; Figure 8.10). To achieve that, sustained fiscal prudence will be required and the government will need to conclude restructuring of its remaining debt on terms comparable to those already received.

Grenada’s new bonds include a two-step nominal haircut stipulating that half of the haircut agreed to at the time of the exchange would be contingent on, and granted after, the successful completion of the IMF program (in 2017). This provision provides an incentive for the government to continue to pursue prudent macroeconomic, and in particular fiscal, policies and should help ensure that debt remains on a sustainable track.8 Another interesting feature of Grenada’s new government bond is the inclusion of a risk-transfer element in the form of a “hurricane clause” that would defer payment of all debt service in the event of a qualifying hurricane. This clause was also a feature of Grenada’s debt restructuring with Taiwan Export-Import Bank, where it appeared first. The clause provides for deferred payments for up to 12 months, deferred interest is capitalized, and deferred principal is distributed equally on top of scheduled payments until final maturity (Asonuma and others 2017, 27). This new clause would provide significant cash flow relief for Grenada if there were to be a natural disaster, with qualifying criteria determined by an outside entity and triggered when the government’s accident insurance policy is activated by the Caribbean Catastrophe Risk Insurance Facility. This improved debt design should help reduce the need for and likelihood of a follow-up debt restructuring. The November 2015 Paris Club deal also includes a hurricane clause, though in much weaker terms of relief since it allows only “for creditors to consider further debt relief in the event of a natural disaster,” without automaticity or specifics, and with additional criteria such as evidence of “imminent default.”

Key lessons learned from Grenada’s two recent debt restructurings can be summarized as follows: First, without a credible, ambitious, front-loaded, multi-year fiscal consolidation effort accompanied by priority structural reforms to enhance growth prospects, debt restructurings will not lead to debt sustainability because it is just one element of a broader strategy needed to put public debt on a sustainable footing. Second, debt design matters: hurricane clauses can help the government manage cash flows and smooth consumption and investment following natural disasters, thereby minimizing output losses and making debt more sustainable over time; and phased debt relief (the two-step nominal haircut) can strengthen incentives for sustained policy and fiscal reform.

St. Kitts and Nevis: Success Story?

St. Kitts and Nevis’s case differs in important respects from the three country cases discussed above. First, a large principal haircut secured a significant immediate reduction in the debt-to-GDP ratio, after which debt has remained on a declining trend (Figure 8.13). The 2016 IMF staff report estimates the debt-to-GDP ratio at 68 percent at the end of 2015, down from 159 percent in 2010. Rapid real GDP growth (more than 6 percent in both 2013 and 2014) and strong implementation of the supporting reform program (a 2011–14 SBA) ensured that gains in achieving debt sustainability were maintained; large government revenue from a successful citizenship-by-investment program supported a fiscal consolidation effort. Second, this episode could be viewed as an example of getting it right the first time: it did not involve a repeat restructuring of already restructured debt.

Figure 8.13.St. Kitts and Nevis: Public Debt-to-GDP Ratio

(Percent)

Sources: IMF, World Economic Outlook; and IMF staff estimations.

At the end of 2010, St. Kitts and Nevis faced dire macroeconomic conditions and an imminent debt crisis. GDP had fallen by a cumulative 7½ percent since 2009. The country sought IMF support through a program, and public announcement of a debt restructuring was a prior action for that program (IMF 2011, 45). The program approved by the IMF Executive Board in July 2011 included front-loaded fiscal adjustment along with measures to safeguard financial stability and boost growth. The objective of the debt restructuring was to address the debt overhang and restore debt sustainability.

A comprehensive debt restructuring, including all public debt except Treasury bills and debt to multilateral creditors, was announced in June 2011 (Figure 8.14). A debt exchange with external commercial creditors was completed in April 2012; a total of US$135 million was eligible to be exchanged in this operation. Participation was initially at 97 percent, and then increased to 100 percent using CACs. One-third of creditors opted for a “par bond”—an Eastern Caribbean dollar–denominated, 45-year, mortgage-style instrument, with a 1.5 percent coupon. The remaining two-thirds preferred a “discount bond”: a United States dollar-denominated bond with a 50 percent cut in face value. Interestingly, the latter instrument has a step-down coupon, in sharp contrast to the step-up coupons found in Belize and Grenada. It carried a 6 percent coupon for the first four years, which then steps down to 3 percent. Obviously, this is a modality that promotes debt sustainability over the medium and long term. The aggregated NPV haircut on the total exchange was large, at 65 percent (IMF 2012b, 7; IMF 2015, 43).

Figure 8.14.St. Kitts and Nevis: Government Public Debt, 2010

(Percent)

Sources: Country authorities; and IMF staff calculations.

The 2012 St. Kitts and Nevis restructuring with external commercial creditors featured a number of innovative attributes. The restructured debt contains a partial guarantee from the Caribbean Development Bank—an important creditor in this case, holding 85 percent of multilateral debt. The CDB had provided an earlier guarantee on a bond issued by the government in 2008, and this guarantee facility was restructured with the debt (Jahan 2013, 270).9 The restructured debt also contains a clawback feature, which provides for creditors to be issued additional bonds if the authorities failed to implement the underlying reform program (specifically tied to completing the sixth review under the SBA by a certain date). As in Grenada, the size of the haircut was made contingent on reform program implementation, thereby building in a clear incentive for the country authorities to stay the course and continue to pursue prudent fiscal policies. The debt exchange with commercial creditors was followed by a flow restructuring with Paris Club creditors.

Given the large holdings of domestic debt by commercial banks, financial sector stability considerations loomed large in the design of the domestic part of the debt restructuring. The SBA program that supported the restructuring involved establishing a banking sector reserve fund to ensure the stability of the financial system (similar to the Financial Sector Stability Fund set up in Jamaica to support JDX and NDX). A debt-for-land swap played a key part in the restructuring of domestic debt: government land was placed in a special purpose vehicle, and funds received from sales were used to settle creditors’ (mostly domestic banks’) claims. This part of the debt restructuring took a long time to execute—in fact, five years afterward, it was still a work in progress. In the 2016 Article IV report, it was noted that “establishing a clear framework for completing the debt-land swap is crucial to preserve the credibility of the debt restructuring and hard-earned gains in debt sustainability, while protecting financial stability” (IMF 2016e, 14).

Innovations and Policy Lessons

Recent attempts in the Caribbean to restructure debt to commercial creditors have had mixed results. On the basis of impact on debt-to-GDP ratios, yields, and market access, some episodes can be labeled a success, in that they resulted in a decisive break in the debt-to-GDP trend. Jamaica 2013, Grenada 2013–15, and St. Kitts and Nevis 2011–12 all fall into this group. Other episodes have had less success in achieving stated objectives (Jamaica 2010, Belize 2006–07 and 2012–13, Grenada 2004–06).

Two of the recent cases—St. Kitts and Nevis 2011–12 and Grenada 2013–15—saw some innovative features built into new debt contracts. The claw-back feature included in the former case and the two-step haircut approach in the latter provide incentives for sustained prudent fiscal policy, and are thus conducive to successful debt restructuring. In addition, the hurricane clause included in Grenada’s new debt provides automatic liquidity relief if there were to be future misfortune. Innovative solutions tailored to individual country circumstances can help to put and keep public debt on the right trajectory.

More traditional elements of debt design also play an important role. CACs matter: in several cases in the Caribbean in which external bond debt was restructured, CACs were instrumental in overcoming holdout investors and increasing participation rates to 100 percent. Step-up or step-down coupons can have an important bearing on the ability of the sovereign to remain current on its debt obligations.

The cases analyzed in this chapter suggest that the size of the debt restructuring (as measured by NPV) is not necessarily a decisive factor in securing debt sustainability, although of course a large haircut can help bring debt down quickly, as the St. Kitts and Nevis restructuring shows. More important is to embed the restructuring in a credible fiscal-consolidation and growth-boosting program that is well designed and implemented, with adequate monitoring.

Finally, the analysis shows that getting it right the first time helps—repeatedly restructuring the same debt is detrimental to market development and access and to government credibility. Maintaining access to credit, or quickly regaining access to capital markets after a restructuring operation, is critically important for the continued ability to manage public debt, as the Jamaica PetroCaribe buyback operation shows.

Annex 8.1. Features of Caribbean Debt Restructuring
Annex Table 8.1.1.Caribbean: Public Debt Composition Prior to Restructuring
BelizeGrenadaJamaicaSt. Kitts and Nevis
20062012201620052012200920122010
Debt (US$ million)
Domestic Debt149.9194.9526.2173.5286.18,879.711,419.1769.8
External Debt985.61,047.31,197.5392.2540.57,553.08,133.4331.2
Multilateral211.4327.8327.8116.7214.72,468.93,224.7124.3
Bilateral213.2170.6312.576.477.0940.1801.530.1
Commercial561.0548.9557.2199.2199.14,144.04,107.2176.8
Other1000049.7000
Debt (percent of total)100.0100.0100.0100.0100.0100.0100.0100.0
Domestic Debt13.215.730.530.734.654.058.469.9
External Debt86.884.369.569.365.446.041.630.1
Multilateral18.626.419.020.626.015.016.511.3
Bilateral18.813.718.113.59.35.74.12.7
Commercial49.444.232.335.224.125.221.016.1
Other00006.0000
Sources: Authorities; and IMF staff estimates.

For Grenada, central government guaranteed debt, external arrears on interest, and overdue membership dues.

Sources: Authorities; and IMF staff estimates.

For Grenada, central government guaranteed debt, external arrears on interest, and overdue membership dues.

Annex Table 8.1.2.Caribbean: Key Features of Recent Debt-Restructuring Cases
Targeted DebtPreemptive or Post DefaultAnnouncement of RestructuringStart of NegotiationFinal Exchange OfferDate of ExchangeTotal Duration (months)Debt Exchanged1 (US$ billion)IMF ProgramCut in Face Value2 (%)Outstanding Instruments ExchangedNew Instruments
BelizeExternal bonds and loansPreemptiveAug. 2006Aug.2006Dec. 2006Feb. 200760.52No0.0Seven bonds, eight loansOne bond
BelizeExternal bondsPreemptiveAug. 2012Aug.2012Feb. 2013Mar. 201370.55No10.0One bondOne bond
Belize3External bondsPreemptiveDec. 2016Dec. 2016No0.0No exchangeNo exchange
GrenadaExternal and domestic bonds and loansPreemptiveOct. 2004Dec. 2004Sep. 2005Nov. 2005130.21Yes0.0Seven external bonds, nine domestic bonds, two external loans, six domestic loansOne US$ bond and one EC$ bond
GrenadaExternal and domestic bonds and loansPost defaultMar. 2013Apr. 2013Nov. 2015Nov. 2015310.26Yes50.0One US$ bond and two EC$ bondsOne US$ bond and two EC$ bonds
JamaicaDomestic bondsPreemptiveJan. 2010Jan. 2010Jan. 2010Feb. 201087.8Yes0.0About 350 US$- and J$-denominated domestic bonds25US$-and J$-denominated domestic bonds
JamaicaDomestic bondsPreemptiveFeb. 2013Feb. 2013Feb. 2013Feb. 201318.9Yes0.011 external bonds, two domestic bonds, four loansOne US$ bond and one EC$ bond
St. Kitts and NevisExternal bonds and loans, and domestic bonds and loansPreemptiveJun.2011Aug.2011Feb. 2012Mar. 2012100.14Yes32.828 US$- and J$-denominated domestic bonds and loans26US$-and J$-denominated domestic bonds and loans
Sources: Authorities’websites; Das, Papaioannou, andTrebesch 2012; IMF 2013b; and IMF staff reports.

Total eligible debt to be restructured in the debt operation.

Excludes past due interest; for Belize, missed coupon payments were added to the face value of the new bond (about 7 percent), resulting in a net face value haircut of about 3 percent.

Negotiations to change the amortization schedule and coupon rate were completed on March 15, 2017.

Sources: Authorities’websites; Das, Papaioannou, andTrebesch 2012; IMF 2013b; and IMF staff reports.

Total eligible debt to be restructured in the debt operation.

Excludes past due interest; for Belize, missed coupon payments were added to the face value of the new bond (about 7 percent), resulting in a net face value haircut of about 3 percent.

Negotiations to change the amortization schedule and coupon rate were completed on March 15, 2017.

References

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    AsonumaT.Mike (Xin)LiMichael G.PapaioannouSajiThomas and ErikoTogo. 2017. “Sovereign Debt Restructuring in Grenada: Causes, Processes, Outcomes, and Lessons Learned.” IMF Working Paper 17/171International Monetary FundWashington, DC.

    AsonumaT.G.PerazaK.Vitola and T.Tsuda. 2014. “Sovereign Debt Restructurings in Belize: Achievements and Challenges Ahead.” IMF Working Paper 14/132International Monetary FundWashington, DC.

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The authors thanks Chuan Li for excellent research assistance.

Several studies have looked at the high indebtedness of the Caribbean region, including CDB 2013; Jahan 2013; McIntyre and Ogawa 2013; and Amo-Yartey and Turner-Jones 2014.

Older cases, such as Dominica’s 2004 debt restructuring and that of Antigua and Barbuda in 2010, are discussed in Jahan 2013. In both cases, both domestic and external debt were restructured in the context of IMF programs.

To ensure comparability with IMF country reports, this chapter uses the definitions of public debt used in those individual reports.

The 2013 EFF program specified the prior action for debt restructuring against projected 2020 GDP.

In June 2016, a ruling by the Permanent Court of Arbitration increased total compensation payments for the nationalized Belize Telecom Limited to US$275 million, equivalent to about 16 percent of 2016 GDP.

The IMF has not committed to provide such technical assistance.

Including fees and using an exit yield of 9.1 percent on March 15, 2017. NPV gain calculated as (1-NPV new/face value existing).

A similar clause was also included in the 2009–10 restructuring of Seychelles’ debt, and in St. Kitts and Nevis as discussed below.

Seychelles’ 2009–10 debt restructuring was the first time a guarantee from a multilateral organization—the African Development Bank—was offered in the context of a sovereign debt restructuring (Jahan 2013, 243).

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