Chapter

I Trends in Official Debt Reschedulings

Author(s):
International Monetary Fund
Published Date:
January 1986
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This paper describes developments in multilateral official debt renegotiations over the 18 months up to the end of June 1986.1 The most important development in recent multilateral debt renegotiations has been the increased attention paid by debtors and creditors to the impact of Paris Club reschedulings, and the terms of those reschedulings, on new credit flows to debtor countries. To facilitate the return to normal market access for countries considered to have made substantial progress in their adjustment efforts, official creditors recently concluded multiyear rescheduling agreements (MYRAs) with both Ecuador and Côte d’Ivoire.2 Official creditors have also indicated that they were prepared to grant an extended consolidation period for Yugoslavia, although in this case a further meeting would be necessary to agree on the terms for the second stage of the rescheduling.

The desire to encourage new credits also led debtors and creditors to attach increased importance to the cutoff date, which is the date by which debts must have been contracted for their service to be included in rescheduling agreements; in none of the 24 agreements concluded since May 1984 with countries that had previous reschedulings in recent years was the cutoff date changed.3 Export credit agencies and their governmental authorities regard a firm cutoff date as essential to the maintenance or resumption of new official export credits and cover, as it gives a measure of assurance that new loans will not be caught up in future reschedulings. Indeed, export credit authorities have expressed the view that one of the most important features of a MYRA is that it increases confidence that the cutoff date will be maintained.4

Creditors also, for the first time, indicated their willingness to consider excluding from the rescheduling debts of the private sector without a debtor government guarantee, if the debtor country so requests. Previously such an exclusion had been ruled out on grounds of equity among creditors. This changed stance regarding private sector debt reflects in part the fact that many export credit agencies will maintain cover for private sector buyers, even when public sector debt has been rescheduled, provided private sector debt continues to be serviced on a current basis. The Paris Club also continued its long-standing practice of excluding service on short-term debt from reschedulings in order to preserve the debtor’s access to normal short-term trade financing; arrears on short-term debt, however, were rescheduled in certain cases where the debtor’s situation was exceptionally difficult and such arrears were large.

Apart from this increased focus on restoring the flow of new credits, recent trends in official reschedulings show primarily an extension and intensification of earlier developments.5 The number of reschedulings and amounts rescheduled continued to increase, reaching record levels in 1985 when official creditors concluded 21 agreements with countries that are Fund members, providing US$18 billion in debt relief. The number of countries returning to seek further reschedulings also continued to rise. In such cases creditors appear to have become less willing to reschedule obligations due under previous consolidations. On the other hand, when a debtor’s financial situation necessitated the rescheduling of service on previously rescheduled debt, creditors were more inclined than in the past to reschedule such amounts on the same terms as those applying to other obligations.

The tendency toward increased differentiation in terms according to the circumstances of the debtor country, already apparent in 1983–84, has been carried further during the last 18 months. Indeed, the rescheduling agreements concluded during this recent period tend to fall fairly clearly into two very different groups. In six agreements the debt relief granted was quite limited, as interest was excluded from the rescheduling and the rescheduling percentage for principal averaged well below 100 percent. These agreements covered countries which were generally considered to have, or to be returning to, normal access to new officially supported export credits and cover. The debt relief provided in other agreements was much more comprehensive, with the effective relief averaging 96 percent of total principal and interest on the debts covered by the agreement. The maturities and grace periods granted to the first group of countries were also somewhat shorter than those granted under other agreements.

While the differentiation in rescheduling terms among countries in different circumstances increased in the more recent period, the earlier tendency to apply much stricter terms to the rescheduling of arrears than to current maturities was reversed somewhat. This does not, however, reflect a change in creditors’ views that stricter terms should apply to arrears in order to encourage timely adjustment efforts by countries incurring arrears. Rather, it reflects the fact that during this period a number of agreements were concluded with countries in very difficult circumstances for which, realistically, stricter terms on arrears could not have been expected to be met.

Questions of comparability of treatment among various creditor groups also acquired increased importance. Paris Club creditors and banks have for several years each followed carefully the efforts of each other, through either rescheduling or new money, in support of countries’ adjustment efforts and each sought to ensure comparable action by the other. In practice, however, Paris Club creditors have not sought strict comparability on a case-by-case basis when the debt service due to one creditor group was relatively small. This approach has been reflected in the greater efforts made by official creditors for certain African countries and in their expectation that banks might similarly make a more-than-comparable effort where bank debt clearly predominates. Also, for countries undertaking adjustment efforts considered likely to restore their commercial creditworthiness, it was recognized that export credit authorities’ increased willingness to respond in a timely manner is likely to result in new export credit flows. While export credit agencies can neither project the demand for export credits and cover nor target new flows, the impact of this more flexible policy stance could be taken more broadly into account in assessing comparable action.

Finally, there was an increase in the number of cases where lack of comparable action by official creditors not participating in the Paris Club has not only been counter to the principle of comparable action but has also posed difficulties for the successful implementation of the debtor’s Fund-supported program. Paris Club creditors, therefore, sought to improve implementation of the comparability provisions in Agreed Minutes by requiring from debtors a written report on the reschedulings concluded with other creditors.

Official multilateral debt renegotiations that took place in previous years are described in the following earlier studies: Bahram Nowzad and Richard C. Williams, External Indebtedness of Developing Countries, Occasional Paper No. 3 (Washington: International Monetary Fund, May 1981); Eduard Brau and Richard C. Williams, Recent Multilateral Debt Restructurings with Official and Bank Creditors, Occasional Paper No. 25 (Washington: International Monetary Fund, December 1983); and K. Burke Dillon, C. Maxwell Watson, G. Russell Kincaid, and Chanpen Puckahtikom, Recent Developments in External Debt Restructuring, Occasional Paper No. 40 (Washington: International Monetary Fund, October 1985). References in this paper to official multilateral reschedulings exclude renegotiations conducted under the auspices of aid consortia as well as reschedulings that involved non-Fund members. Reschedulings with Poland signed prior to its date of membership in the Fund (June 12, 1986) are included.

For a definition of this and other technical terms used in this paper, see the Glossary provided in the Appendix.

An exception was made in one case where the rescheduling was retrospective, covering three years of past due obligations.

The term export credit authorities is used in this paper to refer to the governmental unit that sets policy on export credits and cover. Such arrangements differ significantly among creditor governments.

See Occasional Paper No. 40 cited in footnote 1.

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