Chapter

Chapter 9: Experiences with Sovereign Debt Restructuring: Case Studies from the OECS/ECCU and Beyond

Author(s):
Alfred Schipke, Aliona Cebotari, and Nita Thacker
Published Date:
April 2013
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Author(s)
Sarwat Jahan

When countries are faced with very high public debt levels, fiscal adjustments alone are frequently not enough to close financing gaps and put debt on a sustainable path, especially if growth also remains weak.1 Fiscal adjustments might need to be complemented by other measures, such as sovereign debt restructuring. Given the state of public balance sheets in many countries, sovereign debt restructuring is receiving quite a bit of attention again. When there is no feasible set of policy adjustments to resolve the crisis unless accompanied by a restructuring, it is in the interests of neither the debtor nor the majority of its creditors to delay the inevitable (Krueger, 2002). How debt should be restructured is an important question. Although no single model can be applied to all countries, a number of lessons can be drawn from countries that have already restructured their debt. The Eastern Caribbean, for example, provides a number of useful insights. Because the countries of the Eastern Caribbean Economic and Monetary Union (OECS/ECCU) are among the most indebted countries in the world (see Chapter 5 on Public Debt), it comes as no surprise that four out of the six sovereign countries in the union have experienced debt restructuring in the past 10 years. Dominica (2003) and Grenada (2005) have completed their debt restructuring; Antigua and Barbuda started its negotiations in 2010; and St. Kitts and Nevis, which launched its exchange offer in February 2012, completed the exchange offer for commercial external debt and reached agreement on the largest share of domestic debt in April 2012. To enrich the sample, the case studies are supplemented by four countries outside the OECS/ECCU. See Figure 9.1 for a sample of debt restructurings that have occurred since 1990.

Figure 9.1Public-Debt-to-GDP Ratios for Selected Debt Restructurings, 1990–2011

Source: IMF, World Economic Outlook database.

Note: The years denote the year the debt restructuring started except for St. Kitts and Nevis and Greece, for which restructuring started in 2012 but the latest annual data available are for 2011. The years of debt restructuring are taken from Das, Papaioannou, and Trebesch (2012). The OECS/ECCU comparators fulfilled two criteria: (1) the debt restructuring had to have been conducted within the last 10 years, and (2) the country had to either be part of the Caribbean or be a tourism-dependent island state.

Sovereign debt restructuring episodes have been widespread globally, with more than 600 individual cases in 95 countries during the past 60 years (IMF, 2012c). Of these, 186 were debt restructurings with private creditors (foreign banks and bondholders) and more than 450 involved restructurings with the Paris Club (government-to-government debt). Restructurings in low-income countries often proceeded differently from those in emerging markets. Therefore, a wide variety of country examples is available to compare with the OECS/ECCU.2 In the end, cases were selected based on two criteria: (1) the debt restructuring had to have been conducted within the last 10 years, and (2) the country had to either be part of the Caribbean or be a tourism-dependent island state, thus ensuring some degree of similarity with the OECS/ECCU countries. The four selected cases are Belize (2006–07), the Dominican Republic (2004–05), Seychelles (2009–10), and Jamaica (2010). Lessons from these varied examples are synthesized to provide useful information to other countries that may have to embark on a similar process.

The six cases presented in this chapter provide a wide range of debt-restructuring scenarios. The non-OECS/ECCU countries except Jamaica restructured only their external debt. Jamaica restructured only its domestic debt. The OECS/ECCU countries, however, restructured both external and domestic debt with only a few exclusions such as short-term debt. Most countries opted for flow relief, but a few targeted substantial haircuts (Dominica, Seychelles, and St. Kitts and Nevis). In all but one case (Belize), the debt restructuring occurred under the umbrella of an IMF arrangement. Grenada was also an interesting case in which the debt restructuring with commercial creditors was completed outside of an IMF arrangement but the negotiations with the Paris Club occurred during an IMF arrangement. In one case (Jamaica), the IMF conditioned the completion of the local currency debt restructuring prior to the approval of an IMF arrangement.

A sample of six case studies is too small to allow generalization of the experiences, but it can provide some broad insights. This chapter examines the initial conditions that gave rise to the debt operations, illustrates the new approaches adopted to reduce debt, analyzes the impact that the restructuring had in each of these cases, and discusses the role played by the IMF. Studies on debt restructurings are extensive,3 but this chapter aims to add to the existing literature by placing a special focus on “novel” approaches undertaken by each country. In each case, the country either set a precedent, was among the first few countries to adopt a new toolkit, or adapted existing tools in an interesting fashion. Although the measures ultimately implemented will depend on specific circumstances, other countries can replicate or adapt these tools to address their needs.

The next section of this chapter provides a non-OECS/ECCU cross-country overview of the economic conditions, including the composition of sovereign debt and its dynamics, prevailing before the debt operations, and discusses the debt-restructuring strategy and the debt relief provided by creditors. It is followed by a section that conducts the same analysis for three OECS/ECCU countries.

Non-OECS/ECCU Cross-Country Experience

Four recent cases from non-OECS/ECCU countries have been selected to provide insightful information on the various approaches to successfully restructuring debt. The selected countries—Belize, the Dominican Republic, Seychelles, and Jamaica—were identified as comparators to the OECS/ECCU countries.

Belize (2006–07): First Debt Restructuring to Use the Collective Action Clause

Synopsis

Motivated by a concentration of debt-service obligations, Belize engaged with its external private creditors in 2006 to achieve a debt restructuring. As part of its debt-reduction strategy, Belize used a collective action clause (CAC) to restructure a sovereign bond governed by New York law, becoming the first sovereign to do so in more than 70 years.4 In addition, Belize made two substantial contributions to the debt-restructuring toolkit—it adopted a transparent approach and it invited creditors to form a committee. These features led to nearly full participation, which contributed to a 21 percent debt reduction in net present value (NPV) terms and provided significant liquidity relief for the government. Nevertheless, Belize’s debt burden remained high at 90 percent of GDP (compared with 93.5 percent before restructuring). The IMF provided an important input into the formulation of an adjustment scenario through the 2006 Article IV consultation that helped to inform the terms of the debt restructuring.

Points of Pressure

Belize’s highly expansionary macroeconomic policies during 1999–2004, undertaken in part as a response to damage from two major hurricanes, caused external current accounts to widen sharply, public debt to soar, and international reserves to decline substantially. From 2005 on, the authorities took steps to correct serious macroeconomic imbalances using a “home-grown” adjustment strategy. As a result, the primary balance improved from a small deficit in fiscal year 2004/05 to a surplus of 3 percent of GDP in fiscal year 2005/06. The adjustment efforts, however, were not sufficient to bring the economy back onto a sustainable path; therefore, Belize approached its commercial external creditors for debt-service relief.

Debt Structure and Ensuing Crisis

Belize’s stock of official debt stood at close to US$1.1 billion in mid-2006 (close to 100 percent of GDP), 92 percent of which was external. Commercial creditors held more than 60 percent of the external public debt. About 80 percent of the external public debt to private creditors consisted of five large and relatively recent bond and note issuances. The remainder of the external debt was held by multilateral creditors (23 percent), mainly the Caribbean Development Bank (CDB) and the Inter-American Development Bank (IDB); bilateral creditors (16 percent), mainly Taiwan Province of China; and export credit (1 percent). See Figure 9.2.

Figure 9.2Structure of Belize’s Debt before Restructuring

Sources: IMF, 2005a, 2006a; and IMF staff estimates.

Interest payments were absorbing about 30 percent of Belize’s fiscal revenue and close to 50 percent of its foreign currency earnings. As rating agencies successively downgraded Belize, the cost of refinancing this debt rose substantially, with the average effective interest rate at 11.25 percent. Some arrears were accumulated on specific debt instruments. In September 2006, the authorities missed a payment on two special purpose vehicles, which were part of an issuance of insured bonds. It became increasingly clear that the fiscal problem could degenerate into a currency crisis, potentially forcing Belize to abandon its fixed exchange rate regime.

Restructuring Strategy

In August 2006, the Belizean authorities announced their intention to seek a cooperative agreement with external creditors to restructure sovereign debt. The restructuring was motivated primarily by a concentration of debt-servicing obligations in early 2007. The authorities decided to embark on an intensive consultation process with creditors, which helped to define the restructuring terms. In early December 2006, a press release from the Minister of Finance announced the main financial terms of the offer.

The debt instruments eligible for the restructuring (six international bonds with maturities ranging from 2008 to 2015, and various loans and suppliers’ credits) had a face value of US$571 million (out of the total US$1.1 billion debt). The authorities did not seek to restructure official bilateral debt. In fact, although official bilateral obligations to countries such as Taiwan Province of China and Venezuela were significant, Paris Club debt was marginal, amounting to only US$15 million at the time of the crisis. In addition, the authorities excluded multilateral and domestic creditors from the restructuring. The authorities also excluded two mortgage-backed securities that they had placed a few years earlier with the help of Bear Stearns, primarily because the arrangements (and documents) were too complicated to untangle.

In December 2006 and January 2007, the government executed the following exchange offer:

  • A new single bond with a 22-year maturity for all existing debt instruments held by external private creditors would be issued.

  • Principal repayments on the new bond would be made in equal semiannual installments beginning in 2019 and finishing at maturity in 2029.

  • The new bond would carry a step-up interest rate structured as follows: 4.25 percent in years one through three; 6 percent payable in years four and five; and 8.5 percent payable from year six to maturity.

  • The government would temporarily suspend debt-service payments until the exchange was official. In return, it offered to pay accrued interest and principal payments up to the date of the exchange as a “participation fee” to participating creditors.

Interesting Features

  • Transparency. Belize adopted a transparent approach in providing information to its creditors. It was among the first countries to post information on a publicly accessible website related to the restructuring, which included an economic analysis of its fiscal position, its financial prospects and debt-servicing capacity, possible debt-restructuring scenarios, and the extent of the debt relief needed.5

  • Creditors’ committee. Belize took the unprecedented step of publicly inviting the formation of a creditors’ committee. Belize established the criteria for the formation of a creditors’ committee and its procedural rules, drawing on other countries’ earlier experiences with these committees, incorporating those elements that enhanced dialogue and participation among creditors and avoiding those that obstructed negotiations. The authorities were motivated by the fact that a truly representative creditor committee would effectively vet information, communicate a sense of “creditor community” on various issues, and probe the sovereign’s assessment of its future debt-service capacity (Buchheit and Karpinski, 2007). In the end, one bondholders’ committee was formed (the only creditors’ committee formed in the entire debt restructuring process), but it did not meet the requirements established by the government to be recognized as an official creditors’ committee. Nonetheless, Belize met constructively with this unofficial creditors’ committee, which in turn paved the way for the committee’s endorsement of the exchange offer through a press release (issued December 2006), stating that the members of the committee had unanimously decided to participate.

  • Collective action clause. Belize had issued a bond under New York law in the spring of 2003 that included a CAC permitting it to change the payment terms of the instrument with the written consent of holders owning at least 85 percent of the bonds. This greatly facilitated the debt exchange. Holders of 87.3 percent of the New York bond accepted Belize’s exchange offer, thereby consenting to the amendments, which included matching the terms of the old bonds with those of the new bonds. Although Belize was not the first country to introduce a CAC into a New York–law bond, it was the first sovereign issuer in more than 70 years to use such a clause to restructure a New York–law instrument6 (Buchheit and Karpinski, 2007).

Outcome

A final agreement with creditors, completed in February 2007, opened the path to restoring fiscal and external sustainability. Holders of 97 percent of Belize’s debt voluntarily tendered their claims. In addition, the authorities used the CAC to apply the terms of the restructuring to the untendered notes in one of the debt instruments as a result of which more than 98 percent of Belize’s debt could be exchanged. This nearly full participation contributed to a 21 percent debt reduction in NPV terms and provided significant liquidity relief for the government (IMF, 2008a). Reflecting the country’s improved debt-service outlook as a result of the debt exchange, both Moody’s and Standard & Poor’s upgraded Belize’s sovereign debt ratings, to Caa1 and B, respectively (El-Masry, 2007). Nevertheless, at the end of the restructuring process, Belize’s debt burden remained high (90 percent of GDP compared with 93.5 percent just before restructuring) and the country’s external reserves were low. This debt restructuring mainly provided liquidity relief. See Figure 9.3 for the sequence of events that led to the restructuring of the country’s debt.

Figure 9.3Chronology of Events in Belize’s Debt Restructuring

Source: Author’s illustration.

Role of the IMF

Although the debt restructuring did not occur under the umbrella of an IMF arrangement, Belize did involve the IMF for advice and technical assistance. IMF staff were in close contact with both the authorities and their financial advisers during the restructuring period (Robinson, 2010). The 2006 IMF Article IV consultation provided an important input into the formulation of an adjustment scenario that the authorities were preparing with their financial advisers. On December 20, 2006, in response to a request by the authorities, the IMF managing director provided an assessment letter to the international investors supporting participation in Belize’s debt exchange.

Belize’s government did not request the IMF’s financial assistance because it had managed to secure financing from other official sources, that is, the IDB and the CDB, and other bilateral sources (Taiwan Province of China and Venezuela). This financial assistance enabled the government to honor its external obligations and to rebuild its stock of international reserves (Díaz-Cassou, Erce-Domínguez, and Vázquez-Zamora, 2008a).

The Dominican Republic (2004–05): Novel Legal Features in Debt Restructuring

Synopsis

In the Dominican Republic, the discovery of fraud and losses in the banking system triggered a banking crisis in 2002–03. A run on bank deposits prompted large official injections of liquidity. Inadequate fiscal management practices undermined the intended fiscal restraint, setting off a vicious cycle of high inflation, peso depreciation, capital flight, and growth of public debt. In the context of a stabilization program with the IMF, the Dominican Republic opted to restructure its debt, seeking a lengthening of maturities of public debt with official and private creditors. Between April 2004 and October 2005, the Dominican Republic successively renegotiated the terms of its bilateral official (Paris Club) debt, international bonds, and private commercial debt. The debt restructuring involved no haircuts and primarily addressed liquidity rather than solvency issues. This debt restructuring resulted in a high participation rate due in part to novel legal features in the bond exchange and creditor coordination through the comparability of treatment clause set out by the Paris Club.

Points of Pressure

After a decade of relatively strong economic growth, the Dominican Republic faced a severe recession in 2002–05. The subsequent economic and financial crisis was primarily rooted in the mishandling of a banking problem. The situation originated in the private banking sector following revelation of significant fraud at one of the country’s larger banks (Banco Intercontinental S.A. or BanInter). Although the central bank intervened in BanInter in April 2003 and financed the payout of its deposits without restrictions, contagion soon spread to two other mid-size banks, whose deposits were also guaranteed. The banking sector bailout amounted to 15 percent of GDP and forced the central bank to issue large amounts of short-term peso-denominated certificates of deposit at increasingly higher interest rates to mop up the ensuing liquidity.

A central problem with the management of the crisis was that the liquidity support extended to the troubled banking system was not fully sterilized, thus generating intense inflationary pressures. Together with a financial panic, the deteriorating macroeconomic environment triggered capital flight, depleting the stock of international reserves, and setting the stage for an attack on the Dominican peso, which depreciated 66 percent in 2003 and another 37 percent in 2004. The twin banking and currency crises brought about a sharp rise in the debt-to-GDP ratio, which more than doubled from 27 percent in 2002 to 56 percent in 2003 (Díaz-Cassou, Erce-Domínguez, and Vázquez-Zamora, 2008a). Debt-service obligations increased from 11.6 percent of goods exports in 2001 to 21.5 percent in 2005 (before the debt restructuring). Gross reserves fell from 151 percent of short-term debt to 31 percent in 2003. External arrears started to accrue to the Paris Club (beginning in 2003) and commercial banks (2004). However, the Dominican Republic remained current on its external bond obligations. In the run of the crisis, public debt peaked at 56 percent of GDP in 2003. This surge in indebtedness was mainly due to the massive assumption of liabilities in the government’s banking crisis resolution strategy (bailout to depositors and liquidity support to troubled banks), but also to the impact of a depreciating peso on the stock of government debt, most of which was external and denominated in foreign currency.

Debt Structure and Ensuing Crisis

The Dominican Republic began to experience severe liquidity pressures and fell into arrears. As a consequence, in tandem with a strong fiscal adjustment, the authorities launched a debt-restructuring process to settle pending arrears and to restore the sustainability of the debt-repayment profile. Close to two-thirds of total debt was foreign-currency denominated; the bulk of the domestic debt was short term, mainly central bank certificates (Figure 9.4). The authorities restructured only the external debt, excluding multilateral institutions.

Figure 9.4Structure of the Dominican Republic’s Debt before Restructuring

Sources: IMF, 2005c; and IMF staff estimates.

Restructuring Strategy

The Dominican Republic’s sovereign debt exchange operation had two main purposes: (1) to provide debt-service relief in the short term, and (2) to improve the debt and debt-service profile over the medium term. These objectives were to be attained by extending maturities approximately at par, while broadly preserving the average existing coupon rates on outstanding debt.

Overall, external debt of US$1,628 million (7 percent of GDP, or 14.3 percent of total public debt) was restructured over a period of 18 months. The restructuring strategy can be broken down into four phases (see Figure 9.5):

  • Phase I consisted of restructuring with the Paris Club to clear the arrears accumulated on bilateral debt since 2003 and to set the tone of the deal to be reached with private creditors. A first agreement was signed in April 2004. Under this treatment, Paris Club creditors rescheduled the repayment of almost US$193 million, including arrears as of December 2003 and maturities falling due in 2004. The Paris Club essentially opened the restructuring process and IMF engagement was a prerequisite for obtaining the Paris Club treatment (Díaz-Cassou, Erce-Domínguez, and Vázquez-Zamora, 2008b).

  • Phase II was a restructuring of external bonds by designing a voluntary bond exchange that restructured outstanding external securities totaling US$1.2 billion. The exchange involved no nominal principal or interest haircut, but the maturity of the bonds was increased by five years. Its purpose, therefore, was to provide short-term liquidity relief, and it carried an NPV loss estimated at only 1 percent. To encourage participation in the debt exchange, the authorities included several disincentives to holdout creditors, such as the introduction of exit consent clauses (see below) and the delisting of the old instruments from the Luxembourg stock exchange to reduce their liquidity. In addition, the new bonds included CACs as well as cross-default clauses. Ultimately, participation in the bond exchange reached 97 percent.

  • Phase III consisted of restructuring of external commercial banks’ and suppliers’ debt by rescheduling arrears accumulated during 2004 as well as amortizations due in 2005 and 2006. Two memoranda of understanding were signed with the London Club of commercial creditors. The agreement established a two-year grace period, with semiannual amortizations resuming in mid-2007. In line with the previous restructuring of bonded debt, the agreement with the London Club7 was primarily aimed at bridging short-term liquidity pressures and had minor NPV losses of about 2 percent.

  • Phase IV was a second agreement with the Paris Club to reschedule official bilateral debt of US$137 million, including maturities falling due in 2005. The restructuring of London Club debt and the bond restructuring were preconditions for this second treatment, in compliance with the comparability of treatment clause.8

Figure 9.5Chronology of Events in the Dominican Republic’s Debt Restructuring

Source: Author’s illustration.

Note: MOU = memorandum of understanding.

The Dominican Republic followed a dual track in creditor involvement: good faith negotiations with those creditors with whom the country was in arrears (consistent with the IMF’s lending into arrears policy), and consultations with other creditors (bondholders) with whom the country was not in arrears. The latter consultations with bondholders did not, in principle, involve creditor committees, although a bondholder committee representing about 20–25 percent of the outstanding bonds was formed.

Outcome

Because the Dominican Republic faced more of a liquidity problem than a solvency problem, the debt restructuring did not feature a reduction in principal and yielded a negligible NPV reduction (1 percent for bond exchange and 2 percent for commercial banks, at a discount rate of 10 percent) (Finger and Mecagni, 2007; and IMF, 2006b).

Success in debt restructuring led to improved credit ratings and reductions in external bond spreads. Spreads fell from about 700 basis points in early 2005 to less than 400 basis points in late 2005 after completion of the debt restructuring. In addition, rating agencies changed the Dominican Republic’s long-term foreign-currency sovereign debt rating from selective default before the crisis (when the authorities announced the restructuring) to the B range.

Interesting Features

  • Formal consultation process. In December 2004 the authorities, with their advisers, conducted a tour of New York and London, holding more than a dozen meetings with investors who held approximately 60 percent of outstanding principal. Discussions centered on economic prospects, the need for the debt exchange, the Dominican Republic’s political and economic strategy, the IMF arrangement, and possible exchange terms. A second round of contacts took place during the two weeks immediately preceding the official launch of the exchange. Consultations resulted in the decision to exclude existing Brady bonds from the exchange, while assuring the Dominican Republic that the remaining proposal had a good chance of acceptance.

  • Comparability of treatment clause. The restructuring of debt held by private creditors was partially motivated by the comparability of treatment provision in the April 2004 Paris Club agreement. “Comparability of treatment” is a key principle of the Paris Club, and the pertinent clause is contained in each agreement. The clause foresees equal burden sharing across all creditor groups, in particular private creditors (banks, bondholders, and suppliers), but also other official bilateral creditor countries that are not members of the Paris Club. A sovereign that agrees to a Paris Club Agreed Minutes commits to give no other creditor better restructuring terms than given to the Paris Club. Thus, the Paris Club’s comparability of treatment rule significantly affects the leeway countries have in negotiations with banks or bondholders, especially because Paris Club agreements often precede restructurings with other creditors. In the case of the Dominican Republic, the authorities first approached the Paris Club to determine the parameters of the restructuring. The scope of debt relief granted by Paris Club creditors was used constructively to negotiate the level of debt relief expected from other creditors.

  • Bond exchange. The bond exchange included several novel legal features aimed at encouraging participation (IMF, 2005d):

    • Exit consents applied to old bonds.9 By tendering the old bonds, investors consented to amendments to the terms of the old bonds that would (1) limit the ability of remaining holders of the old bonds to attach payments made on new bonds, (2) delete the event-of-default provision triggered by cross-default and cross-acceleration of other public external debt in the old bonds,10 (3) delete the event-of-default provision triggered by unsatisfied or discharged judgments in the old bonds, and (4) delete the negative-pledge covenant in the old bonds.

    • Delisting of old bonds. The Dominican Republic could seek to delist the old bonds from the Luxembourg Stock Exchange, which could materially affect the liquidity of the bonds. This provision was a stand-alone provision in the exchange offer and not part of exit consents.

  • Cross-default clauses on new bonds. The new bonds preserved cross-default and cross-acceleration provisions.

  • Trust indenture for new bonds. The new bonds were issued under a trust indenture rather than under the old bonds’ fiscal agency, making future litigation by individual bondholders more difficult without consent of the trustee.

  • CACs on new bonds. The new bonds, issued under New York law, included CACs. Therefore, the Dominican Republic was able to change the payment terms of either series of new bonds with the consent of investors representing at least 75 percent of the aggregate principal amount outstanding of that series. Under the aggregation clause, the terms of any individual bond series can be modified with the consent of only 66⅔ percent of the aggregate principal in that series if bondholders with aggregate principal of at least 85 percent of both affected series approve the change.

IMF Involvement

The Dominican Republic also requested IMF financial support, which came in two stages. The first stage was aimed at mitigating the liquidity pressures caused by the mishandling of the banking and currency crisis. To this end, the government requested a 24-month stand-by arrangement from the IMF, which was approved in August 2003. The arrangement quickly went off track (only the first review was completed), and a new stand-by arrangement was agreed to in February 2004, serving as the basis for treatment from the Paris Club in April 2004.

In the second stage, a new 28-month stand-by arrangement was approved in January 2005. This arrangement helped to establish the parameters of a plan to restructure bonds and commercial debt to ensure comparability of treatment by private creditors. The IMF’s managing director also released a letter to members of the financial community in April 2005 supporting the authorities’ economic program, noting that high participation would be needed for the exchange to help achieve the country’s financing objectives.

Seychelles (2009–10): External Debt Restructuring with Guarantees from a Multilateral Agency

Synopsis

In October 2008, facing the near depletion of its foreign exchange reserves, the government of Seychelles defaulted on interest payments on a US$230 million sovereign bond issue, missed a payment of a private placement, and sought IMF assistance to address its unsustainable debt situation and critical economic environment. The IMF approved the first-ever assistance for Seychelles in the form of a two-year US$26 million stand-by arrangement; purchases under the arrangement were heavily front-loaded. Approval of this arrangement provided the basis for discussions with Paris Club creditors, who were willing to restructure debt under an Evian approach.11 This also cleared the way for the restructuring of debt with other official bilateral creditors and commercial banks and suppliers, and a bond exchange. Seychelles’s debt restructuring had several novel features, including it being the first time a guarantee from a multilateral organization—the African Development Bank (AfDB)—was offered in the context of a sovereign restructuring. The inclusion of the partial guarantee by the AfDB ultimately played an important role in persuading a large proportion of affected creditors to tender their claims. As of January 2012, Seychelles had been able to restructure 98 percent of its eligible external debt, bringing debt down to 48.3 percent of GDP at end-2011 from 90 percent of GDP before the crisis.

Points of Pressure

Beginning in the late 1970s, Seychelles followed economic policies that raised living standards but undermined the work ethic and led to large fiscal deficits. Government revenue was constrained by tax concessions to foreign investors in the growing tourism sector. The government borrowed from international capital markets to finance spending (Mathieu and Imam, 2009).

From 2003 through 2007, the authorities pursued various reform efforts. The pace of reform, however, was too gradual, and the scope too narrow, to address the magnitude of the macroeconomic imbalances. In an effort to maintain the exchange rate peg, pervasive foreign exchange restrictions were introduced with discretionary tax exemptions to compensate foreign investors for the increasingly overvalued Seychelles rupee. An active parallel market emerged and foreign exchange shortages became endemic. International reserves fell to very low levels and arrears on debt to official bilateral creditors began to accumulate. In 2007–08, the petroleum and food price shock hit Seychelles particularly hard and inflation shot up. The crisis came to a head in mid-2008, when, faced with near exhaustion of their foreign reserves, the authorities missed payments on a private placement foreign obligation with the now-defunct Lehman Brothers and on a US$230 million Eurobond.

Debt Structure and Ensuing Crisis

Before debt restructuring in 2008, public debt was considered unsustainable at about 131 percent of GDP12 (Figure 9.6). External public debt represented about two-thirds of the country’s total debt (83 percent of GDP), and an amount equating to 33 percent of GDP was in arrears, mostly to the Paris Club and on privately placed amortizing notes that the authorities stopped servicing in July 2008. A small amount of arrears to multilateral creditors had also accumulated.

Figure 9.6Structure of Seychelles’ Debt before Restructuring

Sources: IMF, 2008b, 2010a; and IMF staff estimates.

In October 2008, facing near exhaustion of international reserves, the authorities announced that they would not be able to make a coupon payment on their Eurobond, and indicated that they would approach creditors seeking agreement on a comprehensive debt restructuring. Standard & Poor’s downgraded Seychelles to selective default. As a result, the authorities engaged with creditors to restructure US$800 million in external debt and approached multilateral creditors to seek agreement on an arrears clearance strategy.

IMF support in the form of a heavily front-loaded two-year $26 million stand-by arrangement was provided in mid-November—the IMF’s first-ever arrangement with Seychelles. In the context of the IMF-supported arrangement, the authorities adopted a comprehensive and far-reaching reform program that included the abolition of all foreign exchange restrictions and a float of the currency. Fiscal policy was tightened markedly (by about 11 percent of GDP), including through a major reduction in government and public sector employment and the introduction of a targeted social safety net. The 2009 budget removed virtually all indirect product subsidies and broadened the tax base significantly.

Restructuring Strategy

The authorities launched a public external debt restructuring initiative in late 2008 to put public debt on a sustainable path by significantly reducing debt-service obligations in the long term to levels consistent with the country’s limited payment capacity. Approval of the IMF arrangement provided the basis for discussions with Paris Club creditors, who were willing to restructure the debt under the Evian approach. It also paved the way for restructuring of external debt with other official bilateral creditors, commercial banks, and suppliers, as well as for a bond exchange with private commercial creditors (see Figure 9.7). Seychelles has been able to restructure the following debt (with a small amount yet to be concluded):

  • Paris Club. In mid-April 2009, Paris Club creditors granted exceptional debt treatment to Seychelles under the 2003 Evian approach, reducing the debt stock by 45 percent in nominal terms in two tranches, with the remainder rescheduled over 18 years with a five-year grace period. The arrangement with the Paris Club included a standard feature of an obligation by Seychelles to seek comparable treatment from other bilateral and private creditors.13

  • Bond exchange. A formal exchange offer to commercial bondholders was launched in February 2010. The exchange offer had the support of the AfDB in the form of a Policy-Based Guarantee Operation (approved in December 2009). This operation proposed to creditors the provision of a partial guarantee on interest payments from the AfDB, the first time a guarantee from a multilateral organization had been offered in a sovereign restructuring. The participation rate was 100 percent as a result of the CAC. About 50 percent of the debt was canceled, providing a high degree of relief compared with other sovereign external debt exchanges of the time. The remaining debt was to be repaid over 16 years with a step-up interest rate structure and a six-year grace period on principal repayment.

  • Commercial banks. Agreements were reached in principle with all commercial banks extending repayment over prolonged periods with long grace periods and low interest rates. Most of the commercial bank loans have been converted to local-currency loans to ease pressure on the country’s foreign reserves.

  • Non–Paris Club official debt. Most creditors have agreed in principle to negotiate debt restructuring on terms broadly comparable with the Paris Club agreement. As of February 2012, Seychelles was in discussions with two remaining official bilateral non–Paris Club creditors.

  • Exclusions. Domestic public debt was not rescheduled because of the risks any such rescheduling posed to Seychelles’s banking system. Multilateral debt was also excluded from restructuring.

Figure 9.7Chronology of Events in Seychelles’ Debt Restructuring

Source: Author’s illustration.

Note: CAC = collective action clause.

Interesting Features

Perhaps the most striking feature of this debt-restructuring effort was the extent of Seychelles’s macroeconomic adjustment and structural reform and the speed at which this was implemented. Creditors, who were initially not receptive to Seychelles on account of a track record of poor performance, were won over by the extent of the authorities’ own efforts. The authorities’ high degree of ownership of the reforms convinced the IMF to highly front-load its support. This support, as well as the early success of the reforms, set the stage for a favorable reception by both official and commercial creditors to the government’s request for highly concessional and exceptional treatment for a middle-income country.

Seychelles’s innovation was the support provided to the bond exchange by AfDB’s Policy Based Guarantee Operation—the first time a guarantee from a multilateral organization had been offered in a debt exchange (Government of Seychelles, 2011). (See Box 9.1.) The authorities were seeking a nominal debt cancellation of 50 percent from its external bondholders and Seychelles was determined not to offer any concessions that could jeopardize its future debt sustainability. The multilateral guarantee on the new bonds was conceived as a way to provide some additional value to participating creditors. Also, the expectation was that bondholders, facing substantial losses on their investments, would draw some comfort from a multilateral agency’s confidence in the country’s policy direction and ability to pay, as evidenced by the guarantee.

Discussions with key bondholders shortly before the expiry of the exchange offer confirmed that the inclusion of AfDB’s partial guarantee played a critical role in persuading a high proportion of affected creditors to tender their claims. In addition to the additional value provided by the guarantee, the participation of a multilateral agency in the restructuring on such unequivocal terms effectively convinced creditors to accept that an improved financial offer from Seychelles would not be forthcoming.

Another interesting feature was that the new bond included a principal reinstatement clause: a provision of the bond would grant bondholders an additional 25 percent of the face value of the new discount bond if Seychelles failed to complete the first review under the arrangement (the Extended Fund Facility) at the end of 2010 (Robinson, 2010). This provision was made to assure bondholders that the authorities were committed to adhering to the IMF arrangement. (A similar clause was included in the exchange offer in St. Kitts and Nevis; see the section later in this chapter on St. Kitts and Nevis.)

Outcome

Negotiations are still in progress (in early 2012) with a few commercial creditors and bilateral non–Paris Club members. As of end-February 2012, the authorities had restructured about 98 percent of total eligible debt. The restructuring canceled $310 million (equivalent to a third of GDP) in principal and accrued interest and cleared nearly $300 million of arrears. As a result of this restructuring, external debt is expected to decline to 54 percent of GDP at end-2012 (from 90 percent in 2009) and total public debt is projected to decline to about 82 percent of GDP at end-2012 (from 124 percent in 2009).14 The average life of the debt was extended from 3 years to 14 years. Some 90 percent of the debt is due in more than 10 years, up from 12 percent before restructuring. Average interest rates were reduced to roughly 3 percent from 8 percent before restructuring. The NPV reduction was 75 percent.

Box 9.1Characteristics of the Partial Guarantee from the African Development Bank

Engaging the African Development Bank

  • Seychelles reengaged with the African Development Bank (AfDB) and the World Bank as part of the IMF-supported reform program after a period of arrears accumulation to both institutions. The AfDB had a facility designed to guarantee new bond issues by sovereign borrowers.a However, this facility had never been used and the AfDB had not considered adapting it for use in a sovereign debt workout. Because it was untried, much policy and technical ground had to be covered and negotiated with the AfDB.

  • Once the guarantee had been approved by the AfDB, Seychelles introduced the prospect of a multilateral guarantee into its ongoing discussions with bondholders, which had a positive impact on the dynamics of the negotiations. Early discussions on the guarantee also helped generate additional momentum toward reaching a consensus on the terms of the restructuring.

Structuring the Guarantee

AfDB’s Executive Board approved the facility on December 2, 2009, and Seychelles launched its US$320 million exchange offer on December 7, 2009.

  • The AfDB guarantee covered interest payments for up to US$10 million. The facility took the form of a rolling guarantee that cannot be replenished once drawn. Because Seychelles’s newly restructured Eurobond had step-up coupons and was based on an amortizing structure, the number of coupons covered at any time can increase from two during the early years to more than six toward the end of the instrument’s life.

  • If a coupon payment on the bond is missed and remains unpaid after the expiry of the applicable grace period, the AfDB will automatically pay out the amount due to bondholders through the bond’s trustee. The process will be repeated if subsequent interest maturities are missed, until the maximum amount available under the guarantee has been drawn.

  • From the AfDB’s perspective, the guarantee is equivalent to a loan in an accounting sense; therefore, the full amount of the guarantee was deducted from Seychelles’s 2010 borrowing envelope. The country will pay an annual fee to the AfDB during the life of the guarantee. Any amounts that the AfDB is forced to pay out to bondholders under the guarantee as a consequence of nonpayment by Seychelles will be converted into a long-term concessional loan.

Outcome of the Bond Exchange

  • Upon expiry of the exchange offer in early January 2010, participation rates in three of the four commercial debt instruments eligible under Seychelles’s exchange offer had reached 100 percent. Participation in the fourth instrument, the Eurobond, had reached 84 percent. Because the transaction was structured to allow the Eurobond’s collective action clause (CAC) to be activated once participation had reached 75 percent, Seychelles succeeded in restructuring 100 percent of eligible claims. (Seychelles became only the second sovereign in the modern era to successfully use CACs in a bond restructuring, with the first being Belize in 2007.)

  • Creditors canceled more than US$225 million in claims (including 50 percent of the face value of their claims), enabling the country to take a leap toward debt sustainability. The transaction also left behind no residual holdout creditor problems because it was successful in restructuring 100 percent of eligible claims.

a The Caribbean Development Bank and the World Bank had similar guarantee facilities, but it was thought that the AfDB was more likely to deliver within the specified time frame.

Seychelles also benefited from an immediate upgrade in creditworthiness as assessed by international credit rating agencies. Immediately after the bond exchange, Fitch Ratings raised the long-term foreign and local issuer default ratings to B minus and B, respectively, and assessed the outlook as positive. Fitch also announced that Seychelles had normalized relations with the international financial community and the default was “cured.”

Role of the IMF

The authorities contacted the IMF in late June 2008, calling for discussions in support of a public-debt-restructuring request to the Paris Club official creditors. Discussions in July and September focused on a coherent set of policy reforms to restore external balance and attract the support of the international community. IMF support in the form of a heavily front-loaded two-year stand-by arrangement at 200 percent of quota (SDR 17.6 million or about US$26.6 million) was approved in mid-November 2008.15 Approval of this arrangement provided the basis for discussions with the Paris Club, thereby opening discussions with other creditors as well.

The stand-by arrangement aimed at restoring macroeconomic stability through (1) a fundamental liberalization of the exchange rate regime supported by a reform of the monetary policy framework, (2) a significant and sustained fiscal tightening complemented by a comprehensive debt restructuring, and (3) reinforced governance and a reduced role for the state in the economy (IMF, 2008c).

In December 2009, the stand-by arrangement was canceled in favor of a three-year Extended Fund Facility (EFF) at 225 percent of quota (SDR 19.8 million or about US$31.1 million). Although an EFF had been considered to be the most appropriate instrument from the very beginning because of the structural nature of Seychelles’s crisis, developing a medium-term structural reform program would have taken too much time, hence a stand-by arrangement was quickly put in place to address the country’s immediate balance of payments needs. Once the situation stabilized, the authorities asked that the stand-by arrangement be replaced with an EFF.16 The objectives of the EFF were to continue supporting the public-debt-restructuring process aimed at reestablishing external sustainability and accompanying the further structural reforms, including (1) improving public finance management, (2) reforming the tax system, (3) redefining the role and raising the performance of para-public entities, and (4) bolstering the financial system (IMF, 2010g).

Jamaica (2010): Debt Restructuring with a Financial Sector Support Fund

Synopsis

Jamaica’s debt exchange was unusual in that it was restricted to domestic debt instruments. The debt exchange was designed to avoid jeopardizing the stability of the domestic financial system. With 65 percent of Jamaica’s debt held by domestic financial intermediaries, any debt-relief operation needed to be carefully designed to minimize the risks of financial sector distress. The interesting feature was the establishment of the Financial Sector Support Fund (FSSF) to buttress financial stability by providing liquidity support to individual financial institutions with high participation rates in the debt exchange and that experienced difficulties as a result of it. The FSSF was never drawn upon (either during or after the restructuring process) because of the limited liquidity impact from favorable terms of the exchange for creditors. The exchange was successful, garnering a participation rate of more than 99 percent. Jamaica was also a unique case because the IMF conditioned the completion of the local currency debt restructuring prior to the approval of an IMF arrangement. However, despite the progress, the stock of debt and its structure still pose serious risks for fiscal sustainability.

Points of Pressure

For many years, Jamaica had been stuck in a cycle of low growth and high debt. Its anemic growth (less than 2 percent a year during the past two decades and flat in per capita terms) and recurring bouts of financial instability contributed to the country’s high public debt (IMF, 2008b). Jamaica’s domestic debt increased substantially during the 2000s largely as a result of the government’s intervention in the collapse of the country’s financial sector in the late 1990s and the assumption of financial sector obligations on the central government’s budget in 2001. Domestic debt, which was at a low of 25.9 percent of GDP at the end of 1995, jumped to 70.5 percent of GDP at the end of 2001 and rose further to 75 percent of GDP at end-2009.

The 2008–09 global economic crisis worsened the situation in Jamaica. Between fiscal year 2009 and fiscal year 2010, GDP decreased by 2.5 percent. Bauxite and alumina production and exports fell about 60 percent (IMF, 2010c), and remittances—a traditional source of balance of payments support—declined 33 percent. Tourism was also negatively affected, although it proved to be more resilient than in the rest of the Caribbean. Total public debt amounted to 135 percent of GDP at the end of 2009, 55 percent of which was domestic and the remaining 45 percent external.

Sustained high public debt-service obligations and large refinancing needs resulted in costly risk premiums, crowded out and distorted private sector investment, and left the country highly vulnerable to shifts in market sentiment. The financial system’s heavy exposure to public debt17 made it vulnerable to the fiscal situation, posing another significant risk to overall macroeconomic stability.

Debt Structure and Ensuing Crisis

In 2009, Jamaica’s fiscal situation became unsustainable, due in part to the adverse impact of the multiple and simultaneous external shocks on the economy caused by the 2008–09 global economic and financial crisis. At this time, Jamaica’s debt overhang was very high, with an interest bill of unmatched proportions—equivalent to 60 percent of fiscal revenue and 16 percent of GDP. Because the government appeared close to debt default, major international rating agencies such as Standard & Poor’s and Moody’s downgraded the country’s domestic and foreign currency bonds on several consecutive occasions. Coupled with the depreciation of the Jamaican dollar by 24 percent between September 2008 and January 2010, this considerably increased the cost of borrowing—and hence the government’s debt-service costs—at a time when the country’s revenue was declining.

The government was suffering its most serious fiscal crisis since the mid-1980s, prompting the administration to introduce short-term procyclical fiscal and monetary policies; to seek new financing from the multilateral financial institutions, in particular the IMF; and to simultaneously propose the Jamaica debt exchange (JDX).

The island’s domestic debt burden was owed principally to domestic merchant and commercial banks, insurance companies, and pension funds; together, they held more than 80 percent of government bonds. The island’s external debt burden was owed mainly to private external bondholders and multilateral lenders, such as the IDB, the CDB, and the World Bank (Figure 9.8). Domestic debt constituted more than half of total public debt and the majority of domestic debt was of the floating-rate variety, adding to the sources of volatility in the market because interest rate shocks could significantly increase debt-service costs.

Figure 9.8Structure of Jamaica’s Public Debt

Source: IMF, 2010e.

1 Assumes 80 percent of Eurobonds are held domestically. Does not include government guaranteed debt.

2 Includes government guaranteed debt.

Restructuring Strategy

Jamaica launched a domestic debt exchange in January 2010. The objective was to comprehensively restructure the domestic debt portfolio by extending maturities and reducing the interest payment burden (Government of Jamaica, 2010).

The debt exchange was restricted to domestic debt instruments. The reason given by the government was that interest rates on domestic debt instruments were considered excessively high, whereas on external debt they were not. Also, external debt rollover risk was not an immediate issue. The interest rate on domestic debt had averaged 19 percent during the previous 10 years. On external bonds, the interest rate had averaged 9 percent and on multilateral loans, slightly less than 4 percent. The government also feared that a wider debt restructuring—including external debt—might have been much more complex and time consuming.

The JDX covered about US$7.6 billion (65 percent of GDP, or almost 47 percent of public debt) in Jamaican dollar fixed- and variable-rate bonds, as well as U.S. dollar–denominated domestic bonds. The government articulated two explicit goals for the operation: (1) to achieve interest savings of at least 3 percent of GDP in fiscal 2010/11 and (2) to reduce by 70 percent the amount of debt maturing during the next three years.

The JDX consolidated the government’s complex array of 345 domestic debt instruments at different maturities and in different currencies into a much simplified set of 24 new instruments. The new debt instruments offered reduced interest rates and longer maturities, however, with a positive real rate of return.18 Old fixed-rate bonds were only exchanged for new fixed-rate bonds, whereas old variable-rate bonds could be exchanged for new variable-rate, fixed-rate, or CPI-indexed bonds. Old U.S. dollar bonds could only be exchanged for new U.S. dollar bonds. See Figure 9.9.

Figure 9.9Allocation Rules in Jamaica’s Debt Restructuring

Source: Hurley, Pham, and Stewart, 2010.

Note: CPI = consumer price index.

The exchange was guided by allocation rules intended to offer some predictability for the government. In particular, they aimed to reduce the amount of variable rate debt and prevent any increase in U.S. dollar–denominated bonds in favor of fixed-rate and longer-dated instruments so as to lock in upfront fiscal savings and reduce rollover risks. To further secure fiscal savings, the coupon rate on variable bonds was fixed (for 3 to 12 months depending on maturities) at 11¾ percent—the coupon on one-year fixed rate bonds. Most new fixed-rate bonds were stripped of call options to make them more attractive for investors to hold.

Investors were offered a par-for-par exchange on old securities for a range of new debt securities. The debt exchange operation did not involve a reduction in the principal amount; each holder of 100 old bonds received 100 new bonds, plus a one-time cash payment of accrued interest. The operation, therefore, focused on debt-service relief (liquidity) rather than debt reduction (solvency). Nevertheless, there was an estimated 20 percent NPV reduction in domestic debt. To reduce the scope for free riding (i.e., holdouts), the government intended to strategically exercise the call options embedded in the old bonds. It also threatened to impose a punitive tax on income earned from the old bonds.

Outcome

The results of the debt exchange turned out to be more favorable than initially envisaged in the IMF arrangement. The amount of eligible bonds was significantly wider than anticipated, and the participation rate was higher, resulting in much larger savings. The exchange, which was closed in February 2010, was successful, with a participation rate of 99.2 percent. The stock of eligible debt amounted to 65 percent of GDP.19 Direct interest savings from the exchange were equivalent to approximately 3.5 percent of GDP (IMF, 2010f). In addition, the average maturity of domestic debt was extended from 4.7 years before the exchange to 8.3 years, resulting in a reduction of projected principal payments in 2010–12 equivalent to about US$3.4 billion. A conservative estimate of the NPV reduction was 20 percent (using a discount rate of 12 percent).

Jamaica benefited from an immediate upgrade from the international rating agencies. Fitch Ratings upgraded Jamaica’s long-term foreign and local currency rating to B minus and assigned Jamaica a stable ratings outlook. Standard & Poor’s also upgraded Jamaica, raising the country’s rating out of selective default and assigning a B minus rating on long-term foreign and local-currency debt.

Despite the progress achieved by the JDX, the stock of debt and its structure still pose serious risks for fiscal sustainability (IMF, 2011a). The existing debt stock is exposed to sizable interest rate risk (as reflected by the share of variable-rate debt and debt maturing within a year of restructuring, accounting for nearly 40 and 7 percent of total debt, respectively) and currency risk (as reflected by the share of foreign-exchange-denominated debt amounting to 47 percent of total debt). Given Jamaica’s not-too-distant history of sizable shocks to prices, aggregate output, and the exchange rate, the risk of these shocks reappearing in the future is not trivial. If these risks were to materialize, they could lead to significant increases in debt servicing and a substantial increase in the debt-to-GDP ratio.

Interesting Features

The JDX was designed to balance the country’s fiscal goals with the need to limit the costs to the financial sector, whose continued involvement in the public debt market was critical. With a large share of debt held by domestic financial intermediaries, any debt-relief operation needed to be designed carefully to minimize the risks of financial sector distress. The nonbank sector in Jamaica was also crucial to stability—it was estimated that half of domestically held debt was held by securities dealers in retail, deposit-like products that could be subject to liquidity pressures.

To buttress financial stability, a key part of the program was the establishment of the FSSF. Stress test analyses were undertaken to better assess the vulnerabilities of the sector. The results of the stress tests were used to adjust the initial debt proposals, with the aim of reducing any potential adverse impact on the sector (Robinson, 2010).

The resources of the FSSF were secured with IMF financing upon approval of the stand-by arrangement20 from the first tranche of the loan under the IMF arrangement to establish the FSSF. This fund was managed by the central bank and its resources were used to provide liquidity support, if needed, to individual financial institutions with high participation rates in the debt exchange and that experienced difficulties as a result of it (Box 9.2). The intention was to ensure that liquidity support would be temporary, with clear incentives for participants to exit. The government was also committed to resolving any institution that did not meet the full solvency requirements, in accordance with existing legal and regulatory frameworks.

IMF Role

The Jamaican authorities requested IMF support, which came in two stages.

  • Before approving the IMF arrangement, a series of prior actions were required, which would demonstrate the authorities’ strong commitment to improving government finances and debt management. These prior actions included adopting a tax policy package yielding about 2 percent of GDP (completed by December 2009), and launching and completing a debt exchange operation that, in comparison with the existing securities, would achieve estimated savings of more than 3 percent of GDP in fiscal 2010/11 and a reduction in the amount of debt maturing during 2010–12 by at least two-thirds (completed by January 2010).

  • In February 2010, the IMF Executive Board approved a 27-month stand-by arrangement in an amount equivalent to 300 percent of quota (SDR 820.5 million). The pillars were (1) fiscal consolidation and institutional reform, including fiscal responsibility legislation and Central Treasury Management; (2) completion of the local currency debt restructuring prior to the approval of an IMF arrangement; and (3) financial sector reform, including to improve consolidated supervision and the regulation of nonbanks.

Box 9.2Jamaica’s Financial Sector Support Fund (FSSF)

The FSSF was established as the government’s mechanism to provide short-term liquidity and general support to the financial sector during the transition period following the debt exchange operation. Because the Jamaica debt exchange (JDX) was designed to be a voluntary exchange, the FSSF was also used as a means of enticing institutions into the exchange.

Mandate

  • The FSSF was designed to be used primarily to provide temporary liquidity assistance to institutions in the event of a liquidity shortage, including from external sources. Institutions would have been required to repay liquidity support as quickly as possible and, after a period of six months, the disbursement would have had to be repaid or become subject to a punitive interest rate.

  • The FSSF was also available for recapitalization support, although this goal was secondary to liquidity support.

Eligibility and Conditions

  • Institutions had to tender at least 90 percent of eligible assets to the JDX, and were required to participate by first exchanging instruments that generated the highest return to the government (taking into account both coupon and maturity).

  • Disbursement of FSSF resources would have had to be secured by eligible collateral, that is, government instruments without a discount. A supervisory framework was put in place to allow for escalating supervisory action (e.g., inspections, intensive monitoring, and intervention) based on the level of liquidity support provided as a percentage of capital.

  • Any institution receiving support for recapitalization would have been required to submit an agreed-on plan of recapitalization and operational restructuring, restrictions on dividend payments, and other measures as determined by supervisors. The supervisory authority would have had to intervene and, if necessary, would have had the authority to take over temporary management, which suspends the rights of shareholders and managers for at least 60 days, to resolve insolvent institutions.

Management

  • The FSSF was overseen by the Financial Reporting Council (a body that was already in existence at the time of the JDX). The council is an interagency policy group comprising the heads of the Bank of Jamaica, the Financial Services Commission, the Jamaica Deposit Insurance Corporation, and the Ministry of Finance, and is chaired by the governor of the Bank of Jamaica.

  • The authorities would have been required to report disbursements from the FSSF to the IMF in daily reporting and also to consult with the IMF once 50 percent of the FSSF resources had been disbursed.

Use of the FSSF

The FSSF played a key role in supporting depositor and investor confidence and fostering financial system stability. Given the absence of entities facing liquidity or capital shortages, no financial institution requested access to the FSSF.

Sources: Elliott and Zanforlin, 2010; and IMF, 2010c, 2010d.

OECS/ECCU Cross-Country Experience

OECS/ECCU member countries are among the most indebted countries in the world.21 The rapid buildup of this debt can in large part be attributed to a deterioration in fiscal balances owing principally to a rise in expenditures rather than a fall in revenues. The rise in expenditures reflects policy slippages, exogenous shocks, and other factors such as bailouts (Sahay, 2005). A number of these countries have already undergone or are currently in the debt-restructuring process. In addition, the countries are in the process of addressing the underlying impediments to growth through the OECS/ECCU-wide growth commission. The following discussion analyzes Dominica, Grenada, and St. Kitts and Nevis. In addition, details on Antigua and Barbuda’s debt restructuring are described in Appendix 9A.

Dominica (2003): Restructuring Multilateral Debt

Synopsis

Dominica endured an economic and financial crisis in 2001–02 when output contracted by 10 percent. After having suffered deep-rooted fiscal problems for more than a decade, public debt was unsustainable at more than 95 percent of GDP at end-2003. In mid-2003, the authorities engaged with the IMF on a two-stage strategy to stabilize the economy to address (1) short-term financing and budgetary problems through an extended stand-by arrangement, and (2) longer-term sustainability issues including a debt restructuring through the Poverty Reduction and Growth Facility (PRGF). The authorities launched a comprehensive debt restructuring in April 2004. Dominica implemented several interesting features to ensure the success of the debt restructuring, such as opening an escrow account for the debt-service payments of holdout creditors and including a mandatory debt-management provision in the bond exchange. The Caribbean Development Bank’s (CDB’s) restructuring of its debt as a part of the burden-sharing process was a notable achievement, the CDB having been Dominica’s single largest creditor. Compared with other restructuring cases, the participation rate was relatively low; Dominica restructured only about 78.5 percent of the eligible debt. Despite the low participation rate, as of early 2012 Dominica is on track to meet the OECS/ECCU’s debt target of 60 percent of GDP by 2020.

Points of Pressure

Dominica’s debt crisis originated with expansionary fiscal policies during the 1990s, when the authorities sought to prop up economic activity by increasing public spending. The primary balance of the central government turned strongly negative in the mid-1990s, public debt quickly reached unsustainable levels, and financing constraints led to a rapid accumulation of mostly domestic arrears.

The situation began to worsen at the beginning of the millennium. Dominica began to face economic challenges due to the retrenchment of the banana industry caused by low world market prices and the initiation of the phase out of preferential access to the European Union (IMF, 2002a, 2005c). Additionally, the adverse impact of a severe drought on agriculture and the effect of the September 2001 terrorist attacks on the nascent tourism sector precipitated a steep recession; output in Dominica contracted by 10 percent in 2001–02. Public investment collapsed to one-third of its 1997 level. Public debt doubled to more than 100 percent of GDP in the period 1997–2001. By 2001, financing was available only at precipitously high interest rates and the government faced a major liquidity crisis.

Recognizing the need to restore order to public finances and reduce debt, the authorities attempted to implement a number of initiatives under a one-year stand-by arrangement with the IMF, which was approved in August 2002. The program quickly went off track because of policy slippages, but the authorities revamped their fiscal consolidation efforts in the second half of the program, and outlined an ambitious debt-reduction strategy. A three-year PRGF-supported program was approved in December 2003 to continue with the reforms. The cornerstone of Dominica’s macroeconomic framework was a fiscal effort to achieve a sustainable primary surplus of 3 percent of GDP, representing an adjustment of 4½ percent of GDP over the program period (IMF, 2005b). Despite adopting a front-loaded fiscal adjustment, the IMF’s debt-sustainability analysis indicated that the debt-to-GDP ratio would continue to increase. In the absence of a restructuring to substantially reduce the NPV of debt, sizable financing gaps would persist in the medium term. The authorities concluded that the debt situation was unsustainable.

Debt Structure and Ensuing Crisis

The majority of Dominica’s debt was held externally (78 percent of total public debt) and multilateral agencies held about 48 percent of the external debt (Figure 9.10). The regional development bank, the CDB, was Dominica’s largest external creditor, holding about 23 percent of total public debt. Therefore, it was crucial for the CDB to play a prominent role in the burden sharing. The remaining external debt was almost equally distributed between official bilateral creditors (21 percent of external debt) and external commercial creditors (28 percent of total external debt).

Figure 9.10Dominica: Public Sector Debt, End-2003

(Percent of total)

Source: IMF staff estimates.

Domestic debt was the smaller share of overall public debt, accounting for about 22 percent at end-2003. But a significant buildup of arrears had emerged, and Dominica’s social security system was one of the most affected entities. The buildup of arrears had also prompted the need for a debt restructuring. See Figure 9.11.

Figure 9.11Dominica: Economic Developments

Source: IMF staff estimates.

Note: EU = European Union.

Table 9.1Dominica’s Exchange Offer: Proposed Terms of New Bonds
ShortIntermediateLong
Exchange ratio0.70.81
Maturity (years)102030
Grace (years)102030
After buyback5615
Interest rate (%)3.53.53.5
Source: IMF, 2004b.

Restructuring Strategy

The authorities approached creditors at an early stage, while continuing to fully service their obligations under the IMF arrangement.22 The authorities, therefore, envisaged a preemptive restructuring of their claims, but recognized that their limited resources called into question the ability to continue honoring the original contracts for long (IMF, 2004a). Following discussions with creditors, the restructuring targeted an NPV reduction of 50 percent. Only Treasury bills, operating overdrafts, and multilateral agencies (except the CDB) were excluded from the restructuring process.

The strategy identified three main classes of creditors: (1) private creditors (including domestic creditors), (2) bilateral official creditors, and (3) the CDB. The Paris Club decided in the fall of 2003 to address Dominica’s bilateral debt outside the framework of the Paris Club, given that only France and the United Kingdom were both official bilateral creditors and members of the Paris Club.

Private and official bilateral creditors. A debt-exchange offer was announced in April 2004. The authorities offered three bonds23 aimed at private creditors and official bilateral creditors. The authorities exchanged eligible creditors’ claims for bonds involving longer maturities and principal haircuts (for two of them) at an interest rate of 3½ percent (see Table 9.1):

  • a short bond with a bullet maturity of 10 years, exchanged at a 30 percent discount of principal;

  • an intermediate bond with a bullet maturity of 20 years, exchanged at a 20 percent discount of principal; and

  • a long bond with a bullet maturity of 30 years, exchanged at par.

The new bonds featured CACs and mandatory debt-management clauses (i.e., required buy-backs; see next section for details) that effectively reduced the grace period from the creditors’ perspective by about one-half. Holders of claims maturing within the next two years (before March 31, 2006) were eligible to receive all three bonds in the proportions they wished, while creditors with claims maturing thereafter would only be eligible for the intermediate and long bonds. The structure of the offer was intended to provide investors with a menu of options, whereby they could trade off NPV losses against term risk. The estimated debt reduction implicit in the exchange offer was approximately 50 percent in NPV terms. Treasury bills, overdrafts, and debt owed to multilateral organizations (except the CDB) were excluded from the debt-restructuring process. See Table 9.2.

Table 9.2Dominica: Public Debt for Restructuring Purposes, End-2003
Millions of U.S. dollarsPercent of GDPShare of totalTerms of restructuring
Public debt334.3131.0100.0
Non-restructurable debt67.426.420.2
Preferred (IMF and World Bank)30.912.19.2No restructuring
Treasury bills17.56.95.2No restructuring
Operating overdraft19.07.45.7No restructuring
Restructurable debt266.9104.679.8
CDB71.327.921.3CDB proposal
Bilateral51.420.115.450 percent debt reduction NPV
Citibank/RBTT bonds47.418.614.2Intermediate and long bonds
Other commercial96.837.929.0
Short term36.014.110.8Short, intermediate, and long bonds
Medium term60.823.818.2Intermediate and long bonds
Memorandum
Domestic debt112.744.233.7
External debt221.686.866.3
Source: IMF, 2004b.Note: Public debt includes obligations to the social security administration. CDB = Caribbean Development Bank; NPV = net present value; RBTT = Royal Bank of Trinidad and Tobago.

Caribbean Development Bank. The CDB, Dominica’s largest single creditor, approved a debt-restructuring proposal involving the bulk of its claims at favorable terms, extending maturities significantly, introducing long grace periods, reducing interest rates—in essence, forgiving debt-service payments in the first few years, while continuing its lending activities. This resulted in approximately 50 percent debt reduction in NPV terms.

Outcome

Initially, creditor participation in the debt exchange offer was limited, and its deadline was extended twice from June 11 to finally close the offer on September 30, 2004. Participation was relatively low, reaching only 70 percent of the eligible debt at closing.24 There were two major reasons for the relatively low participation rate: First, the difficulties in reaching an early preemptive restructuring reflected the diverse creditor base—creditor coordination was, to some extent, weak because of the absence of a leading creditor group (i.e., no bondholder committee or Paris Club). Second, restructuring the private external claims proved difficult in part as a result of the complex nature of the derivatives created with the original bond issues (Robinson, 2010; see Box 9.3 for details).

Participation was higher among Dominica’s domestic private creditors than its external private creditors. There were a significant number of holdout creditors, some of whom decided to litigate to secure payments on their bonds on original terms. As a “good faith” gesture, the authorities decided to continue making payments under restructured terms for nonparticipating creditors into an escrow account, to be disbursed to them on acceptance of the restructuring terms.

Despite the relatively low participation rate, the debt restructuring combined with strong fiscal measures helped the public-debt-to-GDP ratio decline from 95 percent in 2003 to 67 percent in 2010. Dominica is on target to reach the OECS/ECCU’s target debt-to-GDP ratio of 60 percent by 2020.

Interesting Features

Early engagement with creditors. Following the creditors’ meeting in Barbados in December 2003, the authorities and their debt advisers held a series of meetings during January 2004 in Dominica, Barbados, Saint Lucia, and Trinidad and Tobago to exchange views with the wide spectrum of creditors (including domestic creditors). Based on these initial discussions, options were presented to creditors in mid-March with the aim of finalizing the deal by early April. The authorities had also been in contact with the Paris Club Secretariat to inform them about the debt-restructuring strategy. Dominica had preliminary contacts with the United Kingdom and France regarding a meeting of the “Friends of Dominica” group, because there were too few bilateral creditors for a full meeting of the Paris Club.

Box 9.3Dominica’s Debt-Restructuring Challenges

Sinking Funds and Strip Bonds

The largest proportion of targeted private sector creditors were holders of bonds issued to Citibank and RBTT Merchant Bank. Both of these bonds were issued in 1999 and had highly complex structures, with a “sinking fund” provision, requiring the issuer to make partial principal payments through the life of the bond.

These bonds were subsequently stripped “horizontally” by the trustees (Citibank and RBTT Merchant Bank) and sold to a wide range of regional investors, with each coupon payment sold as a separate instrument. As a result, each strip holder owned a zero-coupon bond of a different maturity.

The structure was further complicated because public sector agencies in Dominica had purchased strips, creating in effect an obligation for the authorities to pay themselves. In addition to the principal reductions specified in the new bonds, these bonds also were subject to an “up-front” principal reduction equivalent to the principal amount that had accreted to the sinking fund.

Derivative Structures

The complicated structure of these two bonds created differing interests among the strip holders, because their term risks varied widely, making it difficult to create the formal quorum required to make a decision about accepting or rejecting the terms offered by the authorities in the exchange. In no small part because of this complication, the response to the offer had been slow, and the authorities postponed the closing of the exchange offer twice.

Source: IMF, 2004b.

Treatment of holdout creditors. The authorities instructed the ECCB to open a special escrow account for debt payments. While the authorities continued to work constructively with the remaining creditors, the purpose of the new ECCB account was to receive deposits of interest earnings on claims held by creditors that had not yet participated in the restructuring exercise (on the assumption that they would eventually participate). For such creditors, interest accrued up to June 11, 2004 (the original closing date) under the original terms. Thereafter, the authorities treated the outstanding principal amounts as if they had been converted into the intermediate bond envisaged under the exchange offer and, as payments fell due, made payments into the escrow accounts under restructured terms.

Mandatory debt-management provision. The authorities were required to buy back a specified minimum of the outstanding amount of all three bonds (short, intermediate, and long) at market prices as the bonds moved toward half the period of maturity. For example, at least 20 percent of the short bond would have to be purchased by the authorities starting in the sixth year following issuance. If the authorities failed to make the purchase in any given year, they would be required to make up the shortfall in the following year. This mandatory debt-management feature was beneficial to the investors because it reduced principal risk in the new issues.

Restructuring of debt to the CDB. The CDB would not normally be affected by Dominica’s debt-restructuring exercise because it is a regional development bank. However, given the country’s unsustainable debt profile, the authorities approached the CDB—its single largest creditor—and requested that the institution consider restructuring some of Dominica’s debt.

The financial assistance package from the CDB comprised the following:

  • Interest—Interest rates payable by the authorities were reduced to 2 percent per year on all amounts withdrawn and outstanding from the CDB. Usually, the interest rate on concessionary loans for Dominica is 2.5 percent given its status of Group III of the CDB’s Borrowing Member Countries. The 2.0 percent interest rate granted to Dominica under this package was therefore exceptional.

  • Maturity—The CDB granted an extension of the maturity period of all loans to be restructured to 30 years with a 10-year moratorium on principal.

  • Grant—A grant was provided by the CDB (US$6.4 million, or EC$17.3 million) to meet debt-service payments to the CDB on the CDB’s standard terms and conditions.

Thus, for the first 3 years of the 10-year grace period, Dominica would not pay interest to the CDB because these payments would be met from the grant. However, the authorities would commence interest payments to the CDB beginning in the fourth year of the grace period. This would result in a reduction in the NPV of Dominica’s future debt-service payments to the CDB of US$13.2 million (equivalent to EC$35.6 million).

Dominica was obligated to do the following as a requirement of the CDB’s financial assistance package:

  • achieve a positive current account balance in each fiscal quarter except where an exogenous shock precipitates a significantly adverse fiscal outcome;

  • complete reviews under the IMF’s PRGF arrangement or any replacement thereof; and

  • provide the CDB with a quarterly report for each fiscal quarter, commencing October 1, 2004.

The authorities considered the CDB’s financial assistance package to be a significant achievement in its debt-restructuring exercise, contributing to approximately 50 percent debt reduction in NPV terms. At the time, it was expected that other creditors who had not yet participated in the offer would be encouraged by this major initiative from the CDB and support the debt-restructuring exercise.

IMF Role

Under the auspices of IMF arrangements, the government adopted a bold, two-stage strategy in mid-2003 to stabilize the situation and address the deep-rooted problems in the economy. The idea was to address short-term financing and budgetary problems in the first stage and longer-term growth and sustainability issues in the second stage.

The first stage involved an economic program under a tight budget for fiscal 2003/04 to stabilize the fiscal situation. This stage was supported by a modified and extended stand-by arrangement in July 2003, which gave the authorities time to develop a comprehensive program and a structural reform agenda. By and large, this first stage was successful and a budgetary crisis was averted.

The second stage involved the implementation of a medium-term program with a strong structural component to restore growth and reduce unemployment-related poverty. This was supported by a three-year PRGF arrangement for SDR 7.7 million (94 percent of quota) on December 19, 2003. The PRGF-supported program aimed to accomplish its objectives through a significant strengthening of the fiscal position and an ambitious structural reform agenda, including a comprehensive debt restructuring.

Grenada (2005): Restructuring Debt that Has Government Guarantees

Synopsis

Grenada’s public debt restructuring became unavoidable after Hurricane Ivan struck in September 2004. The country obtained substantial debt relief through a commercial debt exchange in November 2005 and under a Paris Club agreement reached in May 2006. Although the participation rate in the debt-exchange offer was high, there were holdouts. Grenada continued to put good faith efforts into negotiating with the creditors that did not participate in the debt exchange. The debt restructuring in Grenada was innovative in that it addressed the rare case of restructuring debt that had government guarantees. It was also novel in that the commercial debt exchange was conducted without an IMF arrangement (although the IMF had facilitated completion of the Paris Club rescheduling).

Points of Pressure

Debt became high in Grenada following a series of hurricanes across the region in the mid-1990s, and as part of a growth strategy centered on the need to build public infrastructure. This strategy did, in fact, deliver high growth during that period. But growth remained susceptible to adverse shocks. Before Hurricane Ivan, Grenada’s economy was recovering rapidly from the 2001–02 downturn. Real GDP increased by 5.7 percent in 2003 driven by a recovery in tourism. Aided by the economic recovery, the central government primary balance registered a surplus of ½ percent of GDP in 2003 for the first time in almost a decade, but it was not sufficient to reduce public debt levels, which stood at 79 percent of GDP25 at end-2003. The day before the hurricane hit the island, the authorities had approved a medium-term fiscal strategy to bring debt down to more manageable levels (IMF, 2003c, 2004c).

The pressures were aggravated after Hurricane Ivan hit in September 2004, causing economic damage that exceeded 225 percent of Grenada’s GDP. The hurricane rendered inoperable 70 percent of the island’s hotel rooms (Li, Olivares-Caminal, and Panizza, 2011). About 90 percent of structures on the island were damaged and 30 percent were destroyed. Nutmeg plantations, which grew Grenada’s principal export commodity, were largely destroyed and expected to take five to eight years to recover. The damage to tourism and agriculture also had negative repercussions for downstream services such as restaurants, retail shops, taxis, and tour operators. Consequently, unemployment doubled to 30 percent of the labor force. The current account deficit almost tripled, and public debt rose to about 94 percent of GDP by end-2004. When revenues and growth collapsed after the hurricane, the authorities found themselves unable to make the payments that were coming due.

Debt Structure and Ensuing Crisis

A month after Hurricane Ivan struck, the authorities announced that public debt was unsustainable. As revenue contracted sharply and relief expenditures soared, difficulties in servicing debt arose. In October 2004, the authorities declared their intent to seek a cooperative solution with their creditors and donors. After interest payments on two large international bonds were missed in late December 2004, Grenada was downgraded to “selective default” by Standard & Poor’s.

In mid-2004, more than 70 percent of total public sector debt was owed to external creditors—25 percent to multilateral institutions, 15 percent to official bilateral organizations, and 40 percent to private creditors (Figure 9.12). Also, 10 percent of the debt eligible for the exchange offer consisted of government guarantees to certain private sector projects, mainly in the tourism sector.

Figure 9.12Grenada: Public Sector Debt, June 2004

(Percent of total)

Source: IMF staff estimates.

Restructuring Strategy

In January 2005, the government hired legal and financial advisers to assist in the formulation of a comprehensive debt-reduction strategy. Pending the development and outcome of the strategy, Grenada discontinued servicing most commercial and official bilateral debt obligations. In April 2005, a creditor committee representing a majority of Grenada’s commercial debt obligations was formed that accounted for about 70 percent of the eligible external debt. The debt exchange offer was launched in September 2005. The offer covered about half of the country’s total public sector debt, and sought to restructure approximately US$190 million of external debt (including one global bond of US$100 million), as well as US$86 million of domestic debt.

The debt exchange did not involve any write down of principal, and past due interest was fully capitalized. The new bonds had a 20-year maturity and an interest rate of 1 percent for the first three years, which gradually increased thereafter (Table 9.3). For creditors, on average, this equated to an NPV haircut of 40–45 percent for exit yields in the 9–10 percent range (IMF, 2006c). The exchange of commercial debt was successfully completed on November 15, 2005.

Table 9.3Grenada’s Exchange Offer: Coupon of New Bonds
Year after issuanceCoupon (percent per year)
1-31.0
4-62.5
7-84.5
9-106.0
11-128.0
138.5
14-209.0
Source: IMF, 2006c.

Outcome

The outcome of Grenada’s debt restructuring can be divided into two parts.

Commercial debt restructuring. Grenada was able to restructure more than 90 percent of eligible commercial debt (accounting for about 45 percent of total public sector debt).

  • Participation reached 91 percent of eligible commercial claims, or about US$237 million. Participation was especially high on the external side, reaching 93 percent. Participation among domestic creditors exceeded 86 percent.

  • The exchange entailed significant, and front-loaded, cash flow relief to the government. It provided an 83 percent reduction in Grenada’s commercial debt-service costs between 2005 and 2008 and a reduction of 73 percent between 2009 and 2012.

  • Grenada’s credit rating improved following the restructuring. The new bonds issued in the debt exchange received a B minus rating from Standard & Poor’s, thereby lifting Grenada from the sovereign default status it had had since the end of 2004. This rating, however, fell short of Grenada’s BB minus rating before Ivan struck.

Grenada continued to pursue good faith efforts to reach a collaborative agreement with its external commercial creditors that did not participate in the 2005 debt exchange, by offering those who came forward participation under the terms of the original exchange. See Figure 9.13 for an illustration of the events.

Figure 9.13Grenada: Economic Developments

Source: IMF staff estimates.

Official bilateral creditors. In May 2006, the Paris Club agreed to a debt-service reduction of more than 90 percent for the duration of the IMF’s PRGF arrangement (2006–08).26 For non–Paris Club creditors, agreement had not yet been reached with Taiwan Province of China, Grenada’s largest bilateral creditor (with a quarter of all official bilateral debt), as of end-2011.

Interesting Features

Treatment of nonparticipating creditors. Grenada determined that it did not want to repudiate the debts held by nonparticipating creditors. However, neither did it have the resources to pay untendered eligible claims on their original terms. Therefore, the authorities decided to follow in the footsteps of the Dominican debt restructuring27 (see the section on Dominica for details).

Treatment of government guarantees. Addressing contingent liabilities such as guarantees in a generalized debt-restructuring process is relatively rare. Yet, 10 percent of the eligible debt for the exchange offer consisted of government guarantees of certain private sector projects, mainly in the tourism sector. Grenada dealt with this issue in the following manner:

  • Beneficiaries of all government guarantees were given the option to call upon their guarantees at any time before the expiration date of the offer. The face amount would then be exchanged, at par, for the new bonds being issued in the exchange.

  • A beneficiary calling a guarantee in these circumstances was required to subrogate the government to all of the beneficiary’s claims against the primary obligor and any collateral securing the debt of the underlying project.

  • However, if a beneficiary elected not to call on a government guarantee during the offer period, any subsequent call on the guarantee would be discharged by the delivery to the beneficiary of the same bonds being issued in the exchange on terms comparable to those reflected in the exchange offer.

IMF Role

The IMF responded to Grenada’s financial needs after the hurricane through the Emergency Assistance for Natural Disasters initiative (approved in November 2004; SDR 2.93 million or 25 percent of quota). Immediately after Hurricane Ivan, the authorities intended to collaborate with the IMF to formulate an appropriate medium-term adjustment program that combined fiscal consolidation, steps to restore growth, and a commitment to reach a cooperative solution with Grenada’s creditors to reduce the country’s debt burden (IMF, 2004c). The debt exchange with commercial creditors took place outside of the context of an IMF arrangement. However, progress toward the debt restructuring continued throughout the Extended Credit Facility (previously called the Poverty Reduction and Growth Facility, approved in April 2006; 90 percent of quota). It helped stabilize the economy through various channels: (1) limiting the fiscal deficit, (2) paving the way for a Paris Club debt rescheduling in 2006 (IMF, 2010b), and (3) catalyzing additional financing from multilateral donors (IMF, 2010b).

St. Kitts and Nevis (2012): The Sum of Many Debt Restructurings

Synopsis

For years, the twin-island federation of St. Kitts and Nevis had been the most indebted country in the OECS/ECCU and one of the most heavily indebted countries in the world. With a debt-to-GDP ratio of 164 percent at end-2010 (or about 200 percent of GDP under the series before rebasing of the GDP) close to 30 percent of the government’s revenue was used to service the debt. Not only was the debt highly unsustainable, but the structure of the debt was complex. The majority of the debt was financed by a captive domestic financial market, and a significant portion of this debt was collateralized by land. A key aspect of the debt restructuring, therefore, involved a balancing act between reducing the debt to sustainable levels and maintaining the stability of the financial sector, including addressing issues of liquidity. To mitigate these risks and ensure the success of the restructuring, the authorities introduced several interesting measures: First, a stabilization fund to maintain the health of the financial system during the debt restructuring was established by the government at the ECCB to provide temporary liquidity to solvent indigenous banks. Second, to address the country’s extraordinary debt levels, the government envisioned a debt-for-equity or land swap. Third, to facilitate the government’s debt restructuring, the CDB agreed to provide a partial guarantee for the new exchange instruments, which significantly improved the success of the debt exchange. The government publicly announced in June 2011 a comprehensive debt restructuring seeking to significantly reduce debt. The authorities launched an exchange offer with the country’s external commercial creditors and bondholders on February 27, 2012, and concluded the exchange on April 18. On the same day, the authorities and the holders of the largest share of domestic debt agreed on the restructuring. Paris Club creditor countries agreed on a restructuring of its public external debt in May 2012. The debt-restructuring process was initiated under the auspices of an IMF stand-by arrangement with exceptional access.

Points of Pressure

Since 2000, economic developments in St. Kitts and Nevis had been shaped by the need to respond to a series of shocks—a succession of hurricanes in the late 1990s; the sharp drop in tourism after the September 11, 2001, attacks; and the closure of the loss-making sugar industry in 2005, which had been a mainstay of the economy for more than three centuries (see Figure 9.14). Fiscal policy responded through reconstruction and social programs to maintain employment and limit the social impact of these shocks. The result was an accumulation of public debt, with the debt ratio peaking in 2005 at 160 percent of the rebased GDP,28 among the highest in the world.

Figure 9.14St. Kitts and Nevis: Economic Developments

Source: IMF staff estimates.

Recognizing the importance of restoring fiscal and debt sustainability, the authorities began to implement strong fiscal adjustment measures in 2004–05. As a result, the central government primary surplus reached 6 percent of GDP in 2006, an adjustment of more than 6 percent of GDP since 2004. Gross public sector debt began to decline, but only marginally because of significant borrowing by public enterprises.

The situation worsened with the onset of the 2008–09 global economic and financial crisis, which had significant negative spillover effects in this tourism-dependent economy. Real GDP growth fell by more than 5 percent in 2009 and by another 2.7 percent in 2010. Correspondingly, public debt reached an unsustainable level of 164 percent of GDP at end-2010 (or about 200 percent of GDP under the series before rebasing of the GDP), which prompted the authorities to announce the start of a comprehensive debt restructuring.

Debt Structure and Ensuing Crisis

Unlike in most of the other country cases, the authorities in St. Kitts and Nevis had relied predominantly on domestic sources of financing, the banking sector in particular. The total public debt was estimated at US$1.1 billion (about 164 percent of GDP under the rebased GDP series, or about 200 percent of GDP under the old series) at end-December 2010, and the banking sector was the largest creditor (Figure 9.15). In addition, some of this domestic debt was collateralized by land. The majority of this secured debt stemmed from the debt of the St. Kitts Sugar Manufacturing Company.

Figure 9.15St. Kitts and Nevis: Public Sector Debt, December 2010

(Percent of total)

Source: IMF staff estimates.

Note: IFI = International financial institutions.

External debt obligations (49.2 percent of GDP) were mainly to commercial creditors, including bondholders. Multilateral organizations were the second largest group of external creditors, with the CDB holding about 85 percent of the external debt owed to multilateral creditors. The remaining small amount of debt was owed to non–Paris Club bilateral creditors and Paris Club members.

Restructuring Strategy

The authorities’ overarching objectives were to achieve a substantial NPV reduction, close the financing gaps, and place debt on a downward trajectory consistent with the OECS/ECCU public debt target of 60 percent of GDP by 2020. Total debt was divided into four categories: (1) external commercial debt and bonds; (2) debt owed to official bilateral creditors, including the Paris Club; (3) debt owed to multilateral creditors, including the CDB; and (4) domestic debt (see Table 9.4). Furthermore, domestic debt was divided into two subcategories: debt secured by land and unsecured debt. A key element of the overall restructuring strategy was the resolution of secured debt.

Table 9.4St. Kitts and Nevis: Public Debt for Restructuring Purposes, as of September 2011
Millions of U.S. dollarsPercent of GDPShare of total
Total public debt1,098.2153.9100.0
Domestic debt763.2107.069.5
External debt335.046.930.5
Restructurable debt752.8105.569.3
Domestic (excluding Treasury bills)578.781.153.3
External debt (excluding multilateral)174.124.416.0
Source: IMF staff estimates.

All external debt was restructured except that owed to multilateral institutions, although the CDB agreed to burden sharing (see below for details). In addition, all Treasury bills were excluded from the restructuring to keep open a source for short-term financing.

The authorities planned to restructure the eligible debt in four phases. In the first phase, the debt exchange offer was made to external commercial creditors and bondholders. In the second phase, the domestic debt was restructured. Restructuring of the external public debt with the Paris Club creditors took place in the third phase. Finally, in the last phase, the debt restructuring would be conducted with the remaining official bilateral creditors outside of the Paris Club (Figure 9.16).

  • Phase I: As planned, a debt exchange offer to the external commercial creditors and bondholders was announced in February 2012, and the authorities offered an option of two bonds:

    • New discount bonds denominated in U.S. dollars and partially guaranteed by the CDB, with a 50 percent reduction in face value. The balance is to be repaid over 20 years, with coupons set at 6 percent for the first four years, stepping down to 3 percent thereafter. Holders of the new discount bonds will receive a one-off “goodwill payment” equal to US$130 per US$1,000 face value of the new discount bonds held, along with the first regular monthly payment of principal and interest.

    • New par bonds denominated in EC dollars have a final maturity of 45 years, including a 15-year grace period on principal, and interest is fixed at 1.5 percent throughout. Holders of the new par bonds will receive a one-off “goodwill payment” of EC$11.25 per EC$1,000 face value of new par bonds held, along with the first regular monthly payment of interest.

Figure 9.16Chronology of Events in the St. Kitts and Nevis Debt Restructuring

Source: Author’s illustration.

Note: CACs = collective action clauses; CDB = Caribbean Development Bank; SBA = stand-by arrangement.

The new discount bonds also include a claw back option (similar to the debt restructuring in Seychelles). The new discount bonds included a provision granting bondholders additional par bonds (equal to 40 percent of the face amount of the new discount bonds issued in the exchange offer) if the authorities fail to complete the sixth review under the IMF’s arrangement by March 31, 2014. If this provision were to be triggered, the impact on the total stock of debt would be marginal (plus 2 percent of GDP). This provision was made as an assurance to bondholders of the authorities’ commitment to adhere to the IMF arrangement.

  • Phase II: The second phase of the debt restructuring, which involved the domestic creditors, was negotiated in April 2012. The authorities executed two restructuring agreements covering approximately EC$900 million (or about US$333 million) in loans and other debt facilities owed to domestic creditors. These agreements will allow domestic creditors to monetize encumbered lands located both in St. Kitts and in Nevis through participation in special purpose vehicles (SPVs) that have been established according to international best practices. The SPVs will be professionally managed and will allow domestic creditors to realize the full value of their assets.29

  • Phase III: Paris Club creditor countries met with representatives of the government of St. Kitts and Nevis in May 2012 and agreed on a restructuring of its public external debt. This agreement reduced the debt service due to the Paris Club creditors by more than 90 percent. The representatives of the creditor countries agreed on a debt treatment to ensure long-term debt sustainability. To this end, they recommended that their governments deliver a treatment providing a rescheduling of the stock of debt over 20 years, including a 7-year grace period. Concessional interest rates will apply to the rescheduling. According to the authorities’ press release, the agreement signed with the Paris Club is among the most concessional ever to have been granted by the Paris Club to an upper-middle-income country anywhere in the world.30 Consideration is also being given to additional debt relief on a bilateral basis.

  • Phase IV: The final phase of the debt restructuring with the remaining official bilateral creditors and domestic creditors (mainly the Social Security Board and remaining indigenous banks) is yet to be completed. However, the government of St. Kitts and Nevis agreed to seek comparable treatment from other creditors (principle of comparability of treatment), which would aim to ensure a balanced treatment among all external creditors of the debtor country.31

Outcome

The debt exchange offer for external commercial creditors and bondholders closed on March 14, 2012. Approximately two-thirds of creditors opted for the discount bond. Holders of 96.8 percent of eligible claims participated in the exchange. Eligible claims amounted to about EC$400 million, or 21 percent of GDP. Upon the expiry of the exchange offer, the authorities announced that in accordance with the conditions of the exchange offer, they would take the steps required to activate the CACs embedded in four of the instruments. As a result of the implementation of the CACs, holders of the 3.2 percent of eligible claims not tendered in the exchange offer automatically received new discount bonds in exchange for their instruments. After activation of the CACs, 100 percent of the aggregate amount of eligible claims was restructured.

Interesting Features

The debt restructuring in St. Kitts and Nevis included a number of unique features. It was novel in that it combined many of the elements found in other countries’ restructuring efforts. In particular, the debt restructuring included (1) support from a multilateral agency, (2) establishment of a reserve fund for the banking sector, and (3) establishment of a special purpose vehicle (SPV).

  • Support from a multilateral agency. The CDB strongly supported the debt-restructuring process through a number of measures.

    • New guarantee facility. The authorities believed that the CDB would have a far greater impact on the debt restructuring if its assistance came in the form of a guarantee on the new debt instruments. The authorities, therefore, requested a CDB guarantee to enhance the participation rate in the restructuring, knowing that creditors would value a guarantee from a strong multilateral institution, and thereby have a greater incentive to exchange their existing claims even if it meant significant concessions in the process. The CDB Board of Directors approved a US$12 million guarantee on the new debt instruments in December 2011.

    • Restructuring the existing guarantee facility. The CDB had provided a guarantee on a bond issued by the government in 2008.32 Half of this guarantee was called in September 2011, giving rise to a liability payable upon demand. The authorities requested a restructuring of the repayment of the receivable and CDB’s Board agreed to restructure it by converting it into a loan from its concessional resources. To provide for the possibility that the guaranteed bond would not be restructured before the next debt-service payment came due, the Board also approved a loan, repayable over 25 years inclusive of a 5-year grace period at a rate of 2.5 percent. The loan’s terms are those that would normally apply to a Group 3 country; although St. Kitts and Nevis is classified as a Group 2 country, the Board agreed to provide the loan on more favorable terms given the macroeconomic context.

    • Softer financing for projects. The CDB Board agreed to convert the outstanding “hard” component of four existing loans into soft terms. The outstanding amount on the four loans was US$8.8 million, which was converted into loans with a repayment period of 25 years, inclusive of a 5-year grace period.

  • Banking sector reserve fund. Maintaining banking sector stability during the debt-restructuring exercise was deemed to be of paramount importance. Therefore, a key element of the IMF arrangement was to establish an upfront stabilization fund, both to instill confidence and, if needed, to provide temporary liquidity to solvent indigenous banks facing liquidity constraints. The fund was sufficient to cover 15 percent of private deposits, which is commensurate with extreme bank runs.33 The operation of this facility is being governed by a memorandum of understanding between the government and the ECCB, which administers the reserve fund on behalf of the government. So far, there have been no requests for access to the stabilization fund.

  • Special purpose vehicle. A debt-for-land swap formed part of the debt solution, in particular for that debt secured by land, through the establishment of an SPV. The offer to banks will take account of the specifics of the respective bank’s balance sheet. It is likely that the new instruments offered to banks—including equity in the SPV—will be designed in view of the terms of the offer to external creditors and the authorities’ need to secure substantial debt relief. A management company responsible for selling the land assets was incorporated in May 2012.

IMF Role

The IMF played a pivotal role in stabilizing the economy and laying the groundwork for a comprehensive debt restructuring. The IMF’s engagement can be divided into three phases (IMF, 2011b, 2012a).

  • Before approval of the IMF arrangement, the authorities formulated a strong, home-grown fiscal adjustment program to strengthen the fiscal situation. The cornerstone of the reform included implementation of a new value added tax, a drastic 80 percent increase in electricity tariffs, as well as measures to contain the wage bill. Although the fiscal adjustment would reduce public debt levels to about 130 percent of GDP by 2016, those debt levels would remain unsustainable and extremely susceptible to various shocks.

  • Because fiscal adjustments alone were deemed to be insufficient to bring debt down to sustainable levels, the authorities and the IMF agreed on a set of prior actions that would prepare the country for debt restructuring. These prior actions were to be concluded before the IMF Board approved the IMF arrangement and included (1) public announcement of the debt restructuring, (2) appointment of legal advisers for the due diligence on the existing debt contracts, and (3) reaching agreement with the ECCB on the modalities of the Banking Sector Reserve Fund.

  • To accompany the government’s economic reform program, the IMF Executive Board approved in July 2011 a three-year stand-by arrangement with exceptional access,34 which was significantly front-loaded. It supported the authorities’ reform agenda through a three-pronged approach. The first priority was further fiscal consolidation—allowing revenue to rise upfront and containing spending increases, while at the same time making efforts to protect the most vulnerable groups. The second priority was a comprehensive debt restructuring to address the debt overhang. The third priority was to strengthen the financial sector, including through the establishment of a Banking Sector Reserve Fund as a back-stopping mechanism for liquidity support during the debt-restructuring process, if needed.

Together, these steps have helped stabilize the economy through various channels, including creating a steady primary surplus, paving the way for the debt restructuring in 2012, and catalyzing support from the CDB in the debt-restructuring efforts.

Taking Stock

The case studies demonstrate that there is no single model for sovereign debt restructurings. Significant variations occur in the roots of the crises, the size and components of the debt to be restructured, the choice of flow or stock treatment, the proportion of creditors accepting the terms of the agreement, and the ultimate result of the restructuring (Table 9.5). Also, the IMF played widely diverse roles in the various restructurings.

Table 9.5Summary of the Debt Restructurings
CountryStart date of restructuringReduction in net present valueParticipation rateType of debt restructuredTreatment
ExternalDomesticPrincipal haircutInterest haircut
Dominica200350 percent78.5 percentyesyesyesyes
Dominican Republic2004Bond exchange: 1 percent; commercial banks: 2 percent97 percent (bond exchange)yesnonono
Grenada200540-45 percent90 percent (commercial)yesyesnoyes
Belize200621 percent100 percent (bond exchange); 98 percent of eligible debtyesnonoyes
Seychelles200975 percent100 percent (bond exchange); 98 percent of eligible debtyesyesyesyes
Jamaica201020 percent99 percentnoyesnoyes
St. Kitts and Nevis2012Above 50 percent100 percent (external commercial debt and bonds)yesyesyesyes
Source: Author’s compilation.

Despite the heterogeneity of the debt restructurings, a common underlying theme was that the authorities had to put strong stabilization policies in place to correct serious macroeconomic imbalances before engaging in debt restructuring. Only when the adjustment efforts were not sufficient to bring the economy back onto a sustainable path could the authorities approach their creditors to restructure the debt. Therefore, the authorities had to credibly assure creditors of their commitment to adopt reforms targeting the root of the problem. The corrective measures undertaken by each country before the restructurings were “home grown” and depended on their specific circumstances:

  • Belize raised taxes, cut expenditures, and tightened monetary conditions before the debt restructuring. As a result, the central government’s overall deficit fell sharply from 8.6 percent of GDP in fiscal 2004/05 to 3.3 percent of GDP in fiscal 2005/06, while the primary balance shifted from a small deficit to a surplus of 3 percent of GDP (IMF, 2006a, 2008a).

  • The Dominican Republic announced strong policy reforms in tandem with its debt restructuring, but there were initial policy slippages. The authorities showed stronger commitment to fiscal discipline in 2005 and quickly undertook fiscal consolidation, which resulted in primary surpluses after 2005, as well as prudent macroeconomic management to overcome financial turmoil. Structural reforms adopted after 2005 in the banking and financial sector, as well as in the legal framework for fiscal management, also helped in stabilization (Díaz-Cassou, Erce-Domínguez, and Vázquez-Zamora, 2008a).

  • Seychelles enhanced fiscal responsibility before its debt restructuring (Robinson, 2010) and took steps to implement a package of major macroeconomic and structural reforms, including (1) a significant and sustained tightening of fiscal policy backed by a reduction in public employment and the replacement of indirect subsidies with a targeted social safety net; (2) a reduction in the role of the state in the economy to boost private sector development, through further privatization, enhanced fiscal governance, and a review of the tax regime; (3) a fundamental liberalization of the exchange regime, involving the elimination of all exchange restrictions and a float of the rupee; and (4) a reform of the monetary policy framework to focus on liquidity management based on indirect instruments (IMF, 2008c).

  • Jamaica adopted a tax policy package before the debt restructuring, which aimed at yielding revenues of about 2 percent of GDP. To ensure long-term sustainability, key reform areas also included (1) tax policy to improve collection and administration; (2) public sector reform to reduce costs and increase efficiency; and (3) fiscal responsibility legislation to improve budget planning and public financial management, and to make the government more accountable. Jamaica had also shown that debt restructuring can occur with social protection. Although certain kinds of government spending, such as wages in the public sector, were reined in, the government planned to increase spending on better-targeted social programs by 25 percent. The government also increased the amount of cash transfers to lower-income groups through the Programme of Advancement through Health and Education, known in Jamaica as the PATH (IMF, 2010e).

  • Dominica adopted a package of fiscal adjustment measures equivalent to 2.5 percent of GDP before its debt restructuring. This was balanced between revenue (1.5 percent of GDP) and expenditure (1 percent of GDP) measures (IMF, 2003b). Revenue measures targeted widening the tax base and improving the efficiency of the system whereas expenditure measures concentrated on reducing the wage bill. The package also recognized that a large fiscal adjustment could have an adverse impact on the most vulnerable groups in society and required an enhanced social safety net.

  • Grenada had approved a medium-term fiscal strategy to bring debt down to more manageable levels the day before Hurricane Ivan struck, almost a year before its debt restructuring (IMF, 2004c). The hurricane derailed the authorities’ plans and was the tipping point for embarking on a debt-restructuring process. The creditors’ willingness to restructure the debt was, in part, a response to this large disaster.

  • St. Kitts and Nevis implemented a series of reforms before its debt restructuring, including implementation of a new value added tax, a drastic 80 percent increase in electricity tariffs, and measures to contain wages. These measures were expected to achieve an annual average primary fiscal surplus of about 5.6 percent of GDP during 2011–13.

In the end, did the novel debt restructurings and supporting policies lead to debt sustainability? The answer is mixed. Each of the case studies reviewed in this chapter was deemed to have been successful when the restructuring was concluded, despite variations in the NPV reductions ranging from 1 percent to 75 percent. The main reason for the differences in the NPV reduction was that some countries only needed to address liquidity concerns, whereas others also had solvency issues. In some cases, such as Jamaica, the NPV reduction was small to protect the domestic financial sector, not because there were no solvency concerns. Based on the type of crisis, the countries either sought a principal haircut, an interest rate haircut, or both.

The current and projected debt stock and debt service reveal interesting outcomes (Figures 9.17 and 9.18). Almost all countries had a significant reduction in their debt service (comparing the three-year average of pre- and post-debt-restructuring periods). Debt dynamics varied among the countries. Three years after their debt restructurings, both Belize and the Dominican Republic reverted to the debt levels in place before restructuring (see Figure 9.18). All other countries were on a downward trajectory three years after the restructuring, but the debt dynamics have changed for some. Grenada, for example, currently has a debt-to-GDP ratio close to 100 percent of GDP—a level higher than its debt level before restructuring of about 90 percent. Similarly, Jamaica’s debt-to-GDP ratio of more than 100 percent can hardly be considered sustainable despite its successful restructuring. Only Seychelles and Dominica seem to have put debt on sustainable downward trajectories. According to the latest debt-sustainability analysis by the IMF, Seychelles is on target to meet the authorities’ goal of a public-debt-to-GDP ratio of 50 percent by 2018. Dominica is expected to meet the OECS/ECCU’s goal of a debt-to-GDP ratio of 60 percent in 2016—four years earlier than targeted. In St. Kitts and Nevis, the debt restructuring reduced public debt by one-third and will put the country on a trajectory to reach the OECS/ECCU’s goal of 60 percent of GDP by 2020.

Figure 9.17Debt-Service Ratio before and after Restructuring

Source: IMF, World Economic Outlook database.

Note: Three-year average before and after the debt restructuring.

Figure 9.18Ratio of Public Debt to GDP before and after Restructuring

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

Note: The year in parentheses indicates the launch of the debt restructuring (t).

In Conclusion, What was Learned?

A number of conclusions can be drawn from the country experiences that could guide future debt restructurings. Although countries that face future debt restructuring may have to devise their own unique approaches to accommodate their specific circumstances, the seven case studies can provide relevant lessons.

  • Policy reforms. The importance of a convincing set of policy reforms in the country requesting a debt restructuring is a fundamental element of any successful restructuring. As the experiences in all of the cases have shown, a high degree of ownership of the reforms is critical to securing creditor support and ultimately a successful outcome. The degree of macroeconomic adjustment must be sufficient not only to overcome skepticism by creditors, but also to support a degree of debt relief.

  • Engaging creditors. Intensive dialogue with creditors and effective communication strategies contributed significantly to the success of the restructuring efforts in a number of the cases. Countries adopted varied methods for this purpose. Some held meetings or set up public websites to provide information. Early dialogue with creditors also helped to shape the parameters of the debt restructuring in some cases. For example, the Dominican Republic excluded Brady bonds as a result of discussions with creditors, and in St. Kitts and Nevis, the exchange offer included a claw-back option suggested by creditors.

  • Leading creditor groups. Debt restructuring can often be better coordinated if done through a leading creditor group, such as under the Paris Club umbrella. The comparability of treatment clause in each Paris Club agreement, for example, ensures equal burden sharing across all creditor groups. In practice, this means that the scope of debt relief granted by Paris Club creditors will determine how much debt relief other creditors should also grant to the country in question. Similarly, commercial bank debt can be effectively restructured through the London Club, as was done in the Dominican Republic.

  • Treatment of holdout creditors. Despite a country’s best efforts there often are holdout creditors. In these cases, countries such as Dominica and Grenada opened special escrow accounts for debt payments. The objective was to work constructively and in good faith with the hopes of closing the negotiations with the nonparticipating creditors.

  • Restructuring special types of debt. Restructuring can become complicated if the debt has special features, for example, if the debt is guaranteed by the government (Grenada) or is secured by land (St. Kitts and Nevis). Under such circumstances, new types of provisions can be made. For example, in St. Kitts and Nevis a special purpose vehicle was envisioned to conduct a debt-for-land swap, which will form a part of the debt solution. In Grenada, beneficiaries of all government guarantees were given the option to call upon their guarantees at any time before the expiration date of the offer.

  • Legal innovations in bond exchange. The cases illustrate a number of legal innovations that were implemented in the bond exchanges. As Belize, Seychelles, and St. Kitts and Nevis demonstrate, the collective action clause has been especially successful at obtaining full participation in the exchange offer. In addition, participation was encouraged through exit consents, delisting of bonds, cross-default clauses, and the principal reinstatement clause.

  • Stabilization funds. Ensuring the stability of the financial sector is often a major challenge in restructuring domestic debt because in many countries the domestic financial sector may be heavily exposed to the government. Nonetheless, restructuring domestic debt can be crucial for achieving debt sustainability. Both Jamaica and St. Kitts and Nevis conducted extensive stress tests to ensure the stability of the financial system after the debt restructuring. Also, both countries set up stabilization funds to instill confidence and, if needed, provide temporary liquidity. Jamaica also made provisions to use the fund for capitalization needs.

  • International financial institutions’ (IFIs’) involvement. IFIs have demonstrated their support for debt restructuring through new methods. The African Development Bank’s partial guarantee to Seychelles in 2010, the first of its kind, played a critical role in persuading a significant proportion of affected creditors to tender their claims. A similar guarantee provided by the Caribbean Development Bank to St. Kitts and Nevis in 2011 encouraged participation in the debt restructuring. In addition, the Caribbean Development Bank restructured its debt with Dominica and provided softer financing for St. Kitts and Nevis.

  • IMF engagement. The IMF played a pivotal role in each of the debt-restructuring cases although the level of IMF engagement varied greatly. On one end of the spectrum was Belize, where the debt restructuring occurred without the benefit of an IMF arrangement. Nonetheless, the IMF provided an important input into the formulation of an adjustment scenario and the IMF’s assessment letter to international financial investors was critical in the debt exchange. On the other end of the spectrum was Jamaica, where the debt restructuring was a prior action for the start of an IMF arrangement. In the five other cases, the IMF played a significant role along a number of dimensions: (1) providing financial assistance when countries were likely to have lost access to international financial markets; (2) contributing to determining a domestic adjustment path for the short to medium term, which can anchor the negotiations between the sovereigns and their private creditors; (3) ensuring that the government is firmly committed to the fiscal consolidation and structural reform program; and (4) providing information by releasing program-related documents or assessment letters.

Appendix 9A. Antigua and Barbuda’s Debt Restructuring, 2010

Antigua and Barbuda’s tourism-dependent economy was severely impacted by the 2008–09 global economic and financial crisis. Falling tourism and foreign direct investment–related construction activities caused the economy to contract 7 percent in 2009, triggering the worst recession in decades. It also contributed to a 20 percent decline in government tax revenue. This aggravated an already unsustainable fiscal position attributable to longstanding fiscal imbalances and accumulation of a large stock of arrears to domestic and external creditors. The overall fiscal deficit widened from 6 percent of GDP in 2008 to about 19 percent in 2009, public debt increased to 115 percent, and the total stock of arrears rose to about 53 percent of GDP, or 45 percent of the outstanding public debt (Figure 9A.1). In mid-2009, the authorities undertook strong measures to address the fiscal crisis, but it was not sufficient to bring the debt ratio down.

Figure 9A.1Public Debt in Antigua and Barbuda before Restructuring

Source: IMF staff estimates.

As a consequence, the authorities embarked on a debt restructuring under the auspices of an IMF arrangement. On June 7, 2010, the IMF Board approved a 36-month stand-by arrangement for 600 percent of quota (SDR 81 million). The key components were (1) adjustment measures to address underlying fiscal imbalances, (2) debt restructuring to eliminate arrears and provide debt-service flow relief, and (3) structural reforms to strengthen the fiscal position and address financial vulnerabilities (IMF, 2010a).

The government sought to restructure about 80 percent of its public debt. The restructuring aimed to provide interest payment relief in the near to medium term, and to eliminate outstanding arrears. Domestically, the government negotiated a voluntary restructuring of a significant portion of the domestic debt held by commercial banks, lengthening maturities to 20 years (from an average of 5 years) and cutting interest rates to 8 percent (from an average of 13 percent). It also signed debt-restructuring agreements with the two largest statutory bodies—the social security fund and the medical benefits scheme—reducing the face value of its debt outstanding to the two bodies by about 15 percent of GDP, and significantly extending the duration of the loans (Government of Antigua and Barbuda, 2011). In total, nearly 80 percent of the domestic debt was restructured, substantially reducing arrears and yielding large interest savings. The remainder of the domestic debt was primarily arrears to domestic suppliers. The government has also negotiated repayment plans with several of these suppliers—many involving some reduction in principal—and expects to have resolved all of its arrears to these creditors by the end of 2013.

On the external side, Antigua and Barbuda reached an agreement with the Paris Club to restructure payments on US$143 million in bilateral debt outstanding, of which about US$102 million had been in arrears. The agreement did not affect the face value of the bilateral debt, but the repayment of the principal was deferred until 2017–23. The authorities have been in active discussions with non–Paris Club bilateral creditors, and have commenced negotiations on debt restructuring with some of these creditors.

As a result of these measures, the ratio of government debt to GDP fell to 93 percent as of end-2010 from 115 percent a year earlier. In 2010, the savings in interest payments from the debt restructuring amounted to more than 3 percent of GDP, relative to the actual or accrued interest payment anticipated at the signing of the stand-by agreement in June of that year.

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The chapter has benefited from suggestions and comments from Trevor Alleyne, Udaibir Das, Gamal El-Masry, Rishi Goyal, Anastasia Guscina, Gabriel Lopetegui, Paul Mathieu, Gabriel Presciuttini, Alejandro Santos, Wendell Samuel, and Abebe Selassie.

See also Chapter 4 on Economic Growth.

For a comprehensive list of sovereign debt restructuring over the past 60 years, see Das, Papaioannou, and Trebesch (2012).

Although it is not possible to list all studies on debt restructuring, IMF Board papers addressing the topic were published in 2002, 2006, and 2012 (IMF, 2002b, 2006b, and 2012c).

CACs have been used to restructure bonds governed by other laws, including those of England, where the clauses have been commonplace since 1879. But Belize was the first country since the 1930s to use the clause in a bond issued under New York law—which governs the majority of outstanding sovereign bonds—to facilitate a restructuring.

This toolkit was later applied to other sovereign debt restructurings, including in the OECS/ECCU.

See IMF (2003a, 2003d) for more information on collective action problems and collective action clauses.

For detailed explanations of the process of debt restructuring with the Paris Club and London Club, see Das, Papaioannou, and Trebesch (2012).

One of the conditions attached to Paris Club arrangements is the “comparability of treatment clause,” which commits the sovereign to securing debt relief from private creditors on a scale similar to that granted previously by official creditors.

Exit consent is a legal technique used to amend the nonpayment terms of old bonds in a debt exchange. This technique can be particularly useful for altering the payment terms when restructuring bonds that do not contain CACs. Exit consents were first used in Ecuador’s 2000 exchange of a sovereign bond issued under New York law. Uruguay’s debt exchange in 2003 involved exit consents, but had a narrower scope.

For an explanation of these clauses see Das, Papaioannou, and Trebesch (2012).

The Evian approach is a debt-relief method agreed to in 2003 among the Group of Eight countries, which developed a specific implementation policy through the Paris Club. It applies to countries not eligible for relief under the Heavily Indebted Poor Countries (HIPC) initiative, and its objective is to focus more on the sustainability of indebted countries and to implement measures that match the situation of each country. A key feature of the Evian approach is its focus on long-term debt sustainability rather than exclusively on short-term debt relief. Thereby, the Paris Club formally recognized that non-HIPC countries may also face solvency problems.

These debt numbers are based on the revised series. Before the revision of the debt series, total public debt was about 152 percent of GDP and external debt was about 98 percent of GDP.

See the section on the Dominican Republic for details about comparable treatment clauses.

SDRs are special drawing rights allocated to IMF member countries, expressed as a percentage of a country’s quota in the Fund.

Stand-by arrangements are designed to help countries address short-term balance of payments problems. Program targets are designed to address these problems and disbursements are made conditional on achieving these targets. The length of a stand-by arrangement is typically 12–24 months, and repayment is due within 3¼–5 years of disbursement. The EFF, in turn, was established to help countries address longer-term balance of payments problems reflecting extensive distortions that require fundamental economic reforms. Arrangements under the EFF are thus longer than stand-by arrangements—usually three years. Repayment is due within 4½–10 years from the date of disbursement. For details, see IMF Lending Factsheet, Nov. 2011 (http://www.imf.org/external/np/exr/facts/howlend.htm).

As a percentage of their total assets, banks’ exposure to government debt stood at 20 percent, and that of securities dealers’ at 70 percent, before the debt restructuring.

For example, the interest rate paid on new Jamaican dollar fixed-rate bonds now ranges from 11 percent to 13.25 percent (vs. the recent average of about 19 percent). New variable-rate bonds carry an interest rate equal to the Jamaican Treasury bill rate + 1 to 1.5 percent. Consumer price inflation (CPI)-indexed bonds offer interest rates of CPI + 2 to 4.25 percent. Finally, the yield on new U.S. dollar–denominated fixed-rate bonds ranges from 6.75 percent to 7.25 percent (vs. the recent average of more than 9 percent).

The authorities also exercised their call option on the bonds that had not been tendered during the exchange.

Initially, the size of the FSSF was targeted at US$950 million. The size was determined by several factors: (1) the banking supervisors in Jamaica determined that the size of the call margin would be US$300 million; and (2) the IMF calculated that 10 percent of the deposits with the local banking system (US$ 650 million) could be at risk of capital flight. It was envisaged that other international financial institutions would contribute to the FSSF, but because their board approvals were delayed, resources for the FSSF were secured with the IMF’s first disbursement of US$640 million.

Unless otherwise noted, all numbers for the OECS/ECCU member countries reflect the rebased GDP series and not the GDP numbers at the time of the debt restructuring. Because the GDP was rebased upward, the reported debt-to-GDP ratios are often lower in this chapter when compared with reports that came out before the rebasing of the GDP.

Excluding the obligations that were in dispute.

These bonds were subsequently listed on the Eastern Caribbean Securities Exchange in September 2006.

Subsequently, other creditors agreed to exchange their debt after the closing date, and 78.5 percent of the debt was restructured. For details, see IMF (2007).

These numbers are based on the rebased GDP.

In May 2009, Grenada obtained an extension of the Paris Club agreement through end-2009.

This treatment of holdout creditors—neither repudiating nor repaying the debt—has been dubbed the “Caribbean approach.” This was appropriately named not only because the approach was used by Grenada following Dominica’s restructuring experience, but also because the term was coined by Caribbean/Nevis-born U.S. Secretary of the Treasury, Alexander Hamilton, in a U.S. debt-exchange offer in 1790. Although the sovereign is not providing an actual solution, it is not providing legal grounds for claims based on the repudiation of the debt of the debt holders that decide not to participate. See Buchheit and Karpinski (2006) for details.

The closure of the sugar industry in July 2005 increased both government debt and debt-service costs. Public debt increased by 29 percent of GDP and the central government interest bill increased by 1½ percent of GDP a year.

For details, see the authorities’ press release available at http://www.cuopm.com/newsitem_new.asp?articlenumber=2921&post200803=true.

For details, see the authorities’ press release available at http://www.cuopm.com/newsitem_new.asp?articlenumber=3031&post200803=true.

For details on the Paris Club Agreed Minutes and the principle of comparability treatment, see http://www.clubdeparis.org/sections/actualites/saint-christophe-nieves/viewLanguage/en.

In October 2006, the CDB approved a policy-based guarantee of US$8.3 million on a proposed 12-year bond that was floated by the government in early 2008. The guarantee covered one year of debt-service payments, and was to be renewed annually.

As a result of the collapse of the Stanford Group, indigenous banks in another OECS/ECCU member country (Antigua and Barbuda) experienced deposit withdrawals of 20 percent in 2009.

The IMF can lend amounts above normal limits on a case-by-case basis under its exceptional access policy, which entails enhanced scrutiny by the IMF’s Executive Board. Since the 2008–09 global economic crisis, countries facing acute financing needs have been able to tap exceptional access stand-by arrangements. For details, see IMF Factsheet Stand-by Arrangement, September 2011 (http://www.imf.org/external/np/exr/facts/sba.htm).

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