External debt position and debt reduction

8.13 Debt forgiveness reduces the gross external debt position by the value of the outstanding principal that has been forgiven. Any reduction in principal is recorded under the appropriate debt instrument when it is received, i.e., when both the debtor and creditor record the forgiveness in their books. Where possible, debt forgiveness in nominal terms should be separately identified and recorded under debt reduction in Table 8.1.

8.14 If forgiveness relates to payments on debt obligations that are past due and are yet to be paid, i.e., arrears of interest and principal, a reduction in the gross external debt position under the appropriate debt instrument is recorded. Forgiveness of interest costs that have accrued during the period or amounts disbursed in the current recording period has no impact on the gross external debt position at the end of the period because any increase in the outstanding value of the debt instrument is matched by the debt forgiveness. However, any such forgiveness should be reported under debt reduction in Table 8.1.

8.15 A special case of debt forgiveness is where the creditor provides a grant to the debtor that is used to pay the debt-service payments as they fall due. In such instances, the gross external debt position is only affected when debt-service payments are made, i.e., the same as for all debt instruments being serviced. Nonetheless, such assistance is recorded in the table as debt reduction when the debt-service payments are made.

Flow data

8.16 In flow terms, debt forgiveness is recorded in the balance of payments as a capital transfer receipt of the debtor economy (capital transfer payment of the creditor economy), and in the DAC system and the DRS as a debt-forgiveness grant. The counterpart transaction in the balance of payments and DAC is an offsetting entry for the amount of principal owed. When debt forgiveness is in the form of a grant by the creditor to the debtor (as in the previous paragraph), no transaction is recorded in the DRS; the amount forgiven is reflected as a reduction in the position data.

External debt position

8.22 Any agreed change in the terms of a debt instrument is to be recorded as the creation of a new debt instrument, with the original debt extinguished at the time both parties record the change in terms in their books. If no precise time is determined, the time at which the creditor records the changes in its books is decisive. If the rescheduling of obligations due beyond the current period is linked to the fulfillment of certain conditions by the time the obligations fall due (such as multiyear Paris Club rescheduling), entries are recorded only in the period when the specified conditions are met. Whether the gross external debt position—both under debt rescheduling and debt refinancing—increases, decreases, or remains unchanged depends on whether the value of the new instrument(s) is respectively greater than, smaller than, or the same as the original debts being replaced. This is the case regardless of the valuation method employed to measure external debt instruments.⁹ In other words, both before and after a debt rescheduling, the value of the gross external debt position is simply determined by the value of outstanding external debt liabilities of residents owed to nonresidents at the reference date.

8.23 As explained in Chapter 2, and as the examples in that chapter illustrated, the stock of external debt at any moment in time can be calculated by discounting future payments at a specified rate of interest. This interest rate can be the contractual rate (for nominal value), or a market rate for the specific borrower (for market value), or another rate. Using these different rates to discount payments will provide different position data for the same payment schedule. Debt reduction in present-value terms arising from rescheduling might be calculated using any of these rates, e.g., in the HIPC Initiative, a market-based rate is used.

8.24 If, as part of official and private debt-reduction packages, loans denominated in foreign currency are swapped for debt securities denominated in the domestic currency, the difference between the value of the loan and the value of the debt security in the domestic currency will be reflected in the gross external debt position. The extinguishment of the old debt liability, the loan, results in a decrease in the value of short-term or long-term loans, as appropriate, while an increase in debt securities is recorded.

Flow data

8.25 In the transaction data in the balance of payments, both the extinguishment of the old debt liability and the creation of the new debt(s) are recorded. In the DAC system these flows are also recorded, except when the category of debt does not change, in which case only the capitalization of interest gives rise to a new flow. The DRS does not record these transactions in flow data (but they are reflected in the position data). In the balance of payments, the transaction is recorded at the value of the new debt instrument and any difference between the value of the old and new debts is treated as a valuation change, ¹⁰ such as in the case of exchanges of Brady bonds (see Box 8.1) for new global bonds. However, when nonmarketable debt owed to official creditors is involved, any reduction in the nominal value of debt is recorded as debt forgiveness.¹¹

^{Box 8.1}

Sovereign Debt Restructuring with Private Creditors^*

Sovereign debt restructurings have been a pervasive phenomenon, amounting to more than 600 cases in 95 countries between 1950 and 2010. One-third of these external debt restructurings were debt exchanges with private creditors (commercial banks and bondholders) and about two-thirds have been Paris Club agreements for official bilateral debt (see Box 8.2). There have also been debt restructuring operations under the Heavily Indebted Poor Countries (HIPC) and MDRI initiatives, which provided extensive relief and debt forgiveness (see Appendix 5).

Sovereign Debt Restructuring by Type of Creditor
	Private creditors		Official creditors
Creditor	Commercial banks	Bondholders	Bilateral (governments)	Multilateral (World Bank, IMF)
Restructuring vehicle	London Club (creditor committees)	Exchange offers	Paris Club	Preferential treatment; restructuring only for poorest countries

View Table

Sovereign Debt Restructuring by Type of Creditor
	Private creditors		Official creditors
Creditor	Commercial banks	Bondholders	Bilateral (governments)	Multilateral (World Bank, IMF)
Restructuring vehicle	London Club (creditor committees)	Exchange offers	Paris Club	Preferential treatment; restructuring only for poorest countries

Ninety percent of the debt exchanges with private creditors affected bank loans, while the remaining 10 percent were sovereign bond restructurings.

The process of debt renegotiations between governments and commercial banks is typically labeled as “London Club” restructuring (see Box 8.2). Despite its name, the London Club is neither a statutory institution based in London nor a well-organized club. Instead, the term loosely describes the case-by-case restructuring routine developed between major Western banks and developing country governments in the late 1970s and early 1980s. Notwithstanding legal, coordination, and logistical issues, holdouts, and inter-creditor disputes, there have been more than 100 restructurings between 1980 and 1990 under the umbrella of the London Club.

The Brady Plan was launched in March 1989 to address debtor insolvency and commercial bank exposure. The plan signaled a shift in the official policy stance on debt restructuring from short-term relief to face value reductions in debt to restore debtor solvency. It had three key elements: first, banks exchanged their loans for sovereign bonds; second, creditors were offered a menu of options in respect of instruments with different terms and implications for present value and face value reductions; and third, it provided for the capitalization of the interest arrears that were not written off by commercial banks. There were 17 deals (mostly in Latin America) between 1989 and 1997 under this plan; debtor countries normalized their relations with creditors, and the agreements also allowed them to regain access to capital markets.

Sovereign Bond Restructuring

The restructuring of a country’s sovereign bonded external debt (Eurobonds and Brady bonds) began with Pakistan at the end of 1999, following the extension of the “comparability of treatment” principle to bondholders in Pakistan’s agreement with the Paris Club in January 1999. A new generation of sovereign bond debt restructurings has since extended to a number of emerging market countries such as the Ukraine (2000), Russia (2000), Ecuador (2000 and 2009), Moldova (2002), Uruguay (2003), Dominica (2004), Argentina (2005), Dominican Republic (2005), Grenada (2005), Belize (2007), Seychelles (2010), and Cote D’Ivoire (2010).

Sovereign bonds are typically restructured through an exchange offer. This involves identifying bondholders, verifying their claims, preparing an exchange offer (most likely after consultation with the bondholders), launching the exchange offer, waiting for bondholder participation, and exchanging the debt.

In terms of restructuring debt, sovereign bonds have a number of characteristics that distinguish them from other types of debt instruments:

• First, there is usually a wider range of investors than for nonnegotiable external debt instruments, and hence, various investor groups all with potentially different investment motivations, e.g., the investment motivations of retail—nonfinancial institution—investors may be different from those of financial institutions

• Second, market prices are invariably quoted. Thus, those investors that mark-to-market frequently—having borne the market-value loss in the secondary market price of the to-be-exchanged bonds, or having purchased at a low market value—might well compare the present value of the exchange offered (discounting payments at a particular interest rate) with the current market price of the to-be-exchanged bonds; in the simplest case, if the present value of the exchange bond is higher than the market price of the original bond, the holder of the to-be-exchanged bond has an incentive to tender his bonds in the exchange

• Finally, most Eurobonds have cross-default clauses or cross-acceleration clauses in their covenants, thus, perhaps, making it impossible for a sovereign debtor to pick and choose which bondholders are repaid and which are not, so markets debate the issue of whether a restructuring of external bonded debt needs to be comprehensive across other foreign currency debt instruments as well.

The consequence of the above is that successful bond restructuring—mostly bond exchanges—has involved the debtors exchanging securities at a premium to the market price, although well below the face value, or providing other “sweeteners” to encourage bondholders to participate. Bonds with the larger percentage of retail investors have tended to pay a higher premium. But, as with creditors for other types of debt instruments, a key consideration of creditors in any restructuring is whether the sovereign borrower is facing a liquidity or solvency problem, or neither.

Sovereign bond restructurings have not always been smooth, and in some cases negotiations have been protracted. It is often argued that the presence of Collective Action Clauses (CACs) can facilitate creditor-debtor negotiations in a restructuring situation, since they reduce the hurdle of having to achieve unanimity on a restructuring agreement (via the majority restructuring clause) and can limit the potential threat of litigation from “holdout” creditors. However, the actual use of CACs in past debt restructurings shows mixed results (see Das, Papaioannou, and Trebesch, 2012). CACs specify how creditors are represented in negotiations, define majority voting procedures to alter the financial terms of the outstanding instruments, and can limit the incentive or ability of individual creditors to initiate litigation against the debtor. The use of CACs is now a well-established market practice for international bond issues.

^* This box is mainly based on Das, Papaioannou, and Trebesch (2012), “Sovereign Debt Restructurings 1950–2010: Literature Survey, Data, and Stylized Facts,” IMF Working Paper 12/203.

Debt reduction

8.26 The Guide recommends that debt reduction arising from debt rescheduling and debt refinancing—i.e., a reduction in the nominal amount outstanding, excluding any external debt-service payments made by the debtor as part of the arrangement—be measured and presented as in the debt-reduction table provided in this chapter. If the new external debt liability is denominated in a different currency from that of the external debt liability it is replacing, then any debt reduction should be determined using the market exchange rate between the two currencies prevailing on the transaction date (i.e., the midpoint between the buying and selling spot rates).

8.27 In many instances of debt rescheduling, the method by which debt relief is provided is more complex than a simple reduction in nominal amount outstanding. For instance, a debt might be rescheduled with the same nominal value, but with a lower interest rate or with extended maturities. By simply comparing the nominal amounts outstanding before and after the rescheduling, no debt reduction would be evident, but there may be debt reduction in present value terms, calculated by discounting future debt-service payments, both on the old and new debts, at a common rate. In such circumstances, a key issue is which rate to use. In debt-reorganization operations such as those under the HIPC Initiative and similar arrangements, debt reduction in present-value terms is calculated using an interest rate equal to a market-based so-called risk-neutral rate, such as the OECD’s CIRRs.¹² In other cases, debt reduction in present value may be based on a rate that includes a risk premium, reflecting the creditor’s assessment of the value of the claim (this is generally the case for the restructuring of claims held by private creditors).

8.28 Also, in some debt rescheduling, such as with concessional Paris Club agreements (Box 8.2), creditors are offered a choice between different options, one of them being a partial debt reduction, the other being a rescheduling at a reduced interest rate (debt reduction in present value terms). Some creditors may forgive part of the claims and reschedule the outstanding part at the appropriate market rate (“debt-reduction” option), whereas other creditors reschedule the whole claim at a lower interest rate (“debt-service-reduction” option), resulting in a debt reduction in present value equivalent to the one granted by creditors that chose the “debt-reduction” option. Table 8.2 shows the variety and evolution of Paris Club debt-rescheduling terms.

^{Table 8.2}

Evolution of Paris Club Rescheduling Terms

Source: Paris Club Secretariat.

¹Since the 1992 agreements with Argentina and Brazil, creditors have made increasing use of graduated payments schedules (up to 15 years’ maturity).

²DR refers to the debt-reduction option; DSR to the debt-service-reduction option; CMI denotes the capitalization of moratorium intests; LM denotes the non-concessional option providing longer maturities. Under London, Naples, and Lyon terms, there is a provision for a stock-of-debt operation, but no such operation took place under London terms.

³These have been called “Enhanced Toronto” and “Enhanced Concessions” Terms.

⁴Most countries are expected to secure a 67 percent level of concessionnality; countries with a per capita income of more than $500, and an overall indebtedness ratio on present-value loans of less than 350 percent of exports may receive a 50 percent level of concessionality decided on a case-by-case basis. For a 50 percent level of concesionnality, terms are equal to London terms, except for the DSR option under a stock-of-debt operation that includes a three year grace period.

⁵These terms are to be granted in the context of concerted action by all creditors under the HIPC Initiative. They also include, on a voluntary basis, an official development assistance (ODA) debt-reduction option.

⁶Fourteen years before June 1992.

⁷Interest rates are based on market rates (M) and are determined in the bilateral agreements implementing the Paris Club Agreed Minute. Reduced rates = R.

⁸The interest rate was 3.5 percentage points below the market rate or half of the market rate if the market rate was below 7 percent.

⁹Reduced to achieve a 50 percent present-value reduction.

¹⁰Reduced to achieve a 67 percent present-value reduction, under the DSR option for the stock operation, the interest rates is slightly higher, reflecting the three-year grace period.

¹¹Reduced to achieve an 80 percent present-value reduction.

¹²The reduction of present value depends on the reduction in interest rates and therefore varies. See footnote 8.

¹³In 2003, Paris Club creditors agreed on an new approach, called the Evian approach, to deal with non-HIPC countries. In this context, the Paris Club aims at taking into account debt sustainability considerations to tailor its response to the financial situation of the debtor countries.

all or part of its external debt. It may be undertaken on the secondary market or through negotiations with creditors.

^{Table 8.2}

Evolution of Paris Club Rescheduling Terms

					Low-Income Countries2
			Lower-Middle-Income Countries (Houston Terms)1 13
		Middle Income Countries13		Toronto terms options			London terms options3				Naple terms options4					Lyon terms options5				Cologne terms options5
				DR	DSR	LM	DR	DSR	CMI	LM	DR	DSR (maturing flows)	DSR (stocks)	CMI	LM	DR	DSR	CMI	LM	DR
	Implemented	Since September 1990		Oct.1988–Jun.1991			Dec.1991–Dec.1994				Since January 1995					Since December 1996				Since December 1999
Non-ODA credits
	Grace (in years)	5–61	Up to 81	8	8	14	6	-	5	166	6	-	3	8	20	6	8	8	20	6
	Maturity (in years)	91	151	14	14	25	23	23	23	25	23	33	33	33	40	23	40	40	40	23
	Repayment schedule	Flat/	Flat/	-----Flat-----			-----Graduated-----					-----Graduated-----				-----Graduated-----				-----Graduated-----
		Graduated	Graduated
	Interest rate7	M	M	M	R8	M	M	R9	R9	M	M	R10	R10	R10	M	M	R11	R11	M11	M
	Present value effort	--	--	33	20–30	--	50	50	50	--	67	67	67	67	--	80	80	80	--	90
	(in percent)
Memorandum items
ODA credits
	Grace (in years)	5–6	Up to 10	14	14	14	12	12	12	16	16	16	16	16	20	16	16	16	20	16
	Maturity (in years)	10	20	25	25	25	30	30	30	25	40	40	40	40	40	40	40	40	40	40

Source: Paris Club Secretariat.

¹Since the 1992 agreements with Argentina and Brazil, creditors have made increasing use of graduated payments schedules (up to 15 years’ maturity).

²DR refers to the debt-reduction option; DSR to the debt-service-reduction option; CMI denotes the capitalization of moratorium intests; LM denotes the non-concessional option providing longer maturities. Under London, Naples, and Lyon terms, there is a provision for a stock-of-debt operation, but no such operation took place under London terms.

³These have been called “Enhanced Toronto” and “Enhanced Concessions” Terms.

⁴Most countries are expected to secure a 67 percent level of concessionnality; countries with a per capita income of more than $500, and an overall indebtedness ratio on present-value loans of less than 350 percent of exports may receive a 50 percent level of concessionality decided on a case-by-case basis. For a 50 percent level of concesionnality, terms are equal to London terms, except for the DSR option under a stock-of-debt operation that includes a three year grace period.

⁵These terms are to be granted in the context of concerted action by all creditors under the HIPC Initiative. They also include, on a voluntary basis, an official development assistance (ODA) debt-reduction option.

⁶Fourteen years before June 1992.

⁷Interest rates are based on market rates (M) and are determined in the bilateral agreements implementing the Paris Club Agreed Minute. Reduced rates = R.

⁸The interest rate was 3.5 percentage points below the market rate or half of the market rate if the market rate was below 7 percent.

⁹Reduced to achieve a 50 percent present-value reduction.

¹⁰Reduced to achieve a 67 percent present-value reduction, under the DSR option for the stock operation, the interest rates is slightly higher, reflecting the three-year grace period.

¹¹Reduced to achieve an 80 percent present-value reduction.

¹²The reduction of present value depends on the reduction in interest rates and therefore varies. See footnote 8.

¹³In 2003, Paris Club creditors agreed on an new approach, called the Evian approach, to deal with non-HIPC countries. In this context, the Paris Club aims at taking into account debt sustainability considerations to tailor its response to the financial situation of the debtor countries.

all or part of its external debt. It may be undertaken on the secondary market or through negotiations with creditors.

View Table

^{Table 8.2}

Evolution of Paris Club Rescheduling Terms

					Low-Income Countries2
			Lower-Middle-Income Countries (Houston Terms)1 13
		Middle Income Countries13		Toronto terms options			London terms options3				Naple terms options4					Lyon terms options5				Cologne terms options5
				DR	DSR	LM	DR	DSR	CMI	LM	DR	DSR (maturing flows)	DSR (stocks)	CMI	LM	DR	DSR	CMI	LM	DR
	Implemented	Since September 1990		Oct.1988–Jun.1991			Dec.1991–Dec.1994				Since January 1995					Since December 1996				Since December 1999
Non-ODA credits
	Grace (in years)	5–61	Up to 81	8	8	14	6	-	5	166	6	-	3	8	20	6	8	8	20	6
	Maturity (in years)	91	151	14	14	25	23	23	23	25	23	33	33	33	40	23	40	40	40	23
	Repayment schedule	Flat/	Flat/	-----Flat-----			-----Graduated-----					-----Graduated-----				-----Graduated-----				-----Graduated-----
		Graduated	Graduated
	Interest rate7	M	M	M	R8	M	M	R9	R9	M	M	R10	R10	R10	M	M	R11	R11	M11	M
	Present value effort	--	--	33	20–30	--	50	50	50	--	67	67	67	67	--	80	80	80	--	90
	(in percent)
Memorandum items
ODA credits
	Grace (in years)	5–6	Up to 10	14	14	14	12	12	12	16	16	16	16	16	20	16	16	16	20	16
	Maturity (in years)	10	20	25	25	25	30	30	30	25	40	40	40	40	40	40	40	40	40	40

Source: Paris Club Secretariat.

¹Since the 1992 agreements with Argentina and Brazil, creditors have made increasing use of graduated payments schedules (up to 15 years’ maturity).

²DR refers to the debt-reduction option; DSR to the debt-service-reduction option; CMI denotes the capitalization of moratorium intests; LM denotes the non-concessional option providing longer maturities. Under London, Naples, and Lyon terms, there is a provision for a stock-of-debt operation, but no such operation took place under London terms.

³These have been called “Enhanced Toronto” and “Enhanced Concessions” Terms.

⁴Most countries are expected to secure a 67 percent level of concessionnality; countries with a per capita income of more than $500, and an overall indebtedness ratio on present-value loans of less than 350 percent of exports may receive a 50 percent level of concessionality decided on a case-by-case basis. For a 50 percent level of concesionnality, terms are equal to London terms, except for the DSR option under a stock-of-debt operation that includes a three year grace period.

⁵These terms are to be granted in the context of concerted action by all creditors under the HIPC Initiative. They also include, on a voluntary basis, an official development assistance (ODA) debt-reduction option.

⁶Fourteen years before June 1992.

⁷Interest rates are based on market rates (M) and are determined in the bilateral agreements implementing the Paris Club Agreed Minute. Reduced rates = R.

⁸The interest rate was 3.5 percentage points below the market rate or half of the market rate if the market rate was below 7 percent.

⁹Reduced to achieve a 50 percent present-value reduction.

¹⁰Reduced to achieve a 67 percent present-value reduction, under the DSR option for the stock operation, the interest rates is slightly higher, reflecting the three-year grace period.

¹¹Reduced to achieve an 80 percent present-value reduction.

¹²The reduction of present value depends on the reduction in interest rates and therefore varies. See footnote 8.

¹³In 2003, Paris Club creditors agreed on an new approach, called the Evian approach, to deal with non-HIPC countries. In this context, the Paris Club aims at taking into account debt sustainability considerations to tailor its response to the financial situation of the debtor countries.

all or part of its external debt. It may be undertaken on the secondary market or through negotiations with creditors.

8.29 Because of the complexities involved, and the different interest rates that may be employed, international statistical standards have not developed to the point where there is general agreement on how to measure and make comparable the different methods of providing debt reduction in present-value terms.

8.30 Given the above, the Guide provides no recommended guidance on measuring and presenting debt reduction arising from debt rescheduling and refinancing in present-value terms. Nonetheless, economies that undergo debt rescheduling and refinancing are encouraged to disseminate (1) the total nominal amounts involved; (2) the amount of debt reduction in present-value terms they have achieved—the difference between the present values (using a common interest rate) of the rescheduled/refinanced debt-service payments before and after rescheduling/refinancing (present-value method);¹³ and (3) detailed information on how the amount of the present-value reduction was calculated, including the interest rate(s) used.

8.31 Similarly, no guidance is provided for measuring debt relief in terms of an increase in duration because of the difficulty in measuring such relief and presenting it in a manner that is comparable with other forms of debt reorganization.

External debt position

8.35 For both debt conversions and debt prepayments, a reduction in the gross external debt position is recorded to the value of the debt instruments that are extinguished, irrespective of the value of the counterpart claim (or assets) being provided. This reduction in gross external debt position should be recorded at the time when the debt instrument is extinguished; more accurately, the gross external debt position no longer includes debt that has ceased to exist.

Flow data

8.36 In the transaction data in the balance of payments, the reduction in the outstanding debt instrument is recorded at the value of the counterpart claim (or assets). Any difference between the value of the debt being extinguished and the corresponding claims or funds provided is recorded as a valuation change in position data in the integrated IIP statement (as well as in the integrated external debt position statement—the statement that emphasizes how changes in the position result from transactions, valuation changes, and other changes in volume during the reference period—see Table 7.15). For instance, if the market value of the equity is lower than the value of the old debt, a valuation adjustment is recorded in the integrated position statement under the instrument that is being extinguished. An exception arises when nonmarketable debt owed to official creditors is involved, and the counterpart claim (assets) has a lower value than the debt, in which instance both the debt instrument and the counterpart claim (or assets) are separately valued, and any difference in value is recorded as debt forgiveness (a capital transfer) in the balance of payments. The DAC system employs a similar approach, except that all differences in value are classified as transactions and not as valuation changes provided that they are the result of bilateral negotiation and there is a development motive for the operation. The DRS records both the reduction in the nominal value of the debt instrument and the value at which the debt was repurchased, allowing the discount to be measured.

Debt reduction

8.37 Where official debt is exchanged for equity or counterpart funds to be used for development purposes, the difference between the value of the debt being extinguished and the counterpart claim or funds provided is classified as debt reduction.¹⁴ This includes cases where the buyback of debt is by a third party, such as a nongovernmental organization or a corporation, which then sells the debt back to the debtor at a discount, under a deal that is arranged under a bilateral arrangement between the debtor and government creditor.

8.38 In other cases, replacing a debt instrument with another type of claim may only be the recognition of reality. In other words, and particularly for marketable instruments, the price at which the debtor is willing to repurchase the debt may be greater than the price at which the debt previously traded. So, if the creditor purchased the security at the lower market price, the creditor might be making a holding gain.

8.39 The Guide recommends that in measuring and presenting data on debt reduction from such transactions, a distinction is made between (1) collaborative arrangements arising from discussions between the creditor(s) and debtor; and (2) buybacks that are initiated by the debtor through purchases in the secondary market. When buybacks arise from collaborative arrangements, any difference between the value of the counterpart claims (or assets) provided by the debtor and the nominal amount bought back should be recorded as debt reduction in Table 8.1. Debt reduction arising from buybacks in the secondary market initiated by the debtor should not be recorded as debt reduction in the table.¹⁵

8.40 For both public and private sector transactions, if external debt and the counterpart claims (or assets) are denominated in different currencies, any debt reduction should be determined using the market exchange rate between the two currencies prevailing on the transaction date (the midpoint between the buying and selling spot rates).

External debt position and debt reduction

8.42 Debt assumption is recorded in the transaction and position data when the creditor invokes the contract conditions permitting a guarantee to be called. If debt assumption arises under other circumstances, it is recorded when the liability is actually removed from the debtor’s balance sheet, and the corresponding entries made in the new debtor’s balance sheet, and not necessarily the time when agreement was reached to make the debt assumption. The recording by the entity assuming the debt has to be made in one time period: the successive dates of repayment previously foreseen in the context of the former debt are not relevant.

8.43 After it has been assumed, the debt, which was originally a liability of the former debtor, becomes a liability of the new debtor. The debt may carry the same terms as the original debt, or new terms may come into force because the guarantee was invoked. The amount to be recorded by the new debtor is the full amount of the outstanding debt that is assumed. No debt reduction is recorded, unless there is an agreement with the creditor to reduce the external debt. The recording of positions depends on whether the two entities—the entity assuming the debt and the original debtor—are located in the same economy or not, and whether or not the entity that assumes the debt receives a financial claim on the original debtor in respect of the debt that has been assumed. In many cases it is likely that the entity assuming the debt and the original debtor are resident in the same economy. If the original and new debtors are from different institutional sectors in the same economy, the external debt of the institutional sector of the original debtor is reduced, and the external debt of the institutional sector of the new debtor increased; however, the gross external debt position of the economy remains unchanged.

8.44 However, if the assuming entity is in a different economy from the original debtor, then the external debt of the assuming economy (new debtor) is increased, and the external debt of the original debtor reduced by the full amount of the outstanding debt that is assumed. The terms of the debt assumption may include a legal obligation for the original debtor to pay back to the new debtor the amount of debt assumed. If so, the original debtor economy would record this new liability in the external debt position, under the relevant debt instrument(s),¹⁶ and thus its gross external debt position would remain unchanged. If no claim was established, then no new liability is recorded in the external debt position of the original debtor. Every transfer of liabilities between a quasi-corporation and its owner is reflected in the value of its equity stake.¹⁷

Flow data

8.45 If the entity assuming the debt and the original debtor are resident in the same economy, then no balance of payments transactions are recorded. If both entities are resident in different economies, the debt-assuming economy would record the creation of the new liability to the creditor. Thereafter, the transactions in the balance of payments depend upon whether the assuming economy obtains a claim on the original debtor and, if not, the relationship between the two entities—whether the original debtor was in a direct investment relationship with the entity in the assuming economy or not. If a claim on the original debtor is established, the new debtor records an increase in a debt claim on the original debtor. If no claim is established, a capital transfer (debt forgiveness) from the assuming debtor economy to the original debtor economy is recorded,¹⁸ unless the new and original debtors are in a direct investment relationship, under which circumstances an increase (or decrease) in equity is recorded.¹⁹ The DRS system will record a transfer of liability as the reduction in the stock position of the original debtor and an increase in the stock position of the new debtor, if the entity assuming the debt and the original debtor are resident in the same economy. If both entities are resident in different economies, and a claim is established between the original and the new debtor, the debt assumption will be recorded in the original debtor’s economy as a reduction in the stock position of the amount owed to the original creditor and an increase in the stock position of the new creditor. DAC statistics include guarantees—when they are invoked—as debt assumption.²⁰