III Serial Rescheduling Agreements
- International Monetary Fund
- Published Date:
- January 1986
Official creditors concluded MYRAs for Ecuador (April 1985) and Côte d’Ivoire (June 1986). Both MYRAs cover extended consolidation periods through the implementation of a succession of shorter consolidations (serial reschedulings) which come into effect automatically after certain conditions are satisfied. An extended consolidation period was also provided for in the Agreed Minute for Yugoslavia (May 1986), although in this case the terms of the second stage have not been fully defined and a further meeting between creditors and the debtor would be required for the second stage to take effect.
The granting of extended consolidation periods in official reschedulings, while very exceptional, was not without precedent. In a small number of earlier cases official creditors had also agreed on a commitment to a future rescheduling in one or more subsequent years. In such cases of “conditional further rescheduling,” it was agreed at the initial meeting that a subsequent stage of the rescheduling could take effect automatically without a further meeting between creditors and the debtor, provided specified conditions were met. An alternative approach involved the use of an “improved” goodwill clause under which creditors agreed in principle to meet to consider a further rescheduling covering a specified future consolidation period. Under both approaches, the conditions for subsequent stages to take effect included a requirement that a new Fund arrangement covering the relevant period be in place or that the conditions under which the country could purchase during successive years of a two-year or three-year Fund arrangement had been established by the Executive Board of the Fund. The improved goodwill clause represents a more specific commitment to a future rescheduling than does the standard goodwill clause since it establishes at the outset some of the rescheduling terms and the length of the future consolidation. Official creditors used these same two types of serial rescheduling clauses in the three recent agreements that provided for extended consolidation periods.
Developments in the international economic environment after 1982 led creditors to consider carefully the circumstances under which extended consolidations might contribute to normalizing debtor-creditor relations. In particular, it was foreseen that there might be circumstances where a country had achieved significant progress in its domestic and external adjustment but was confronted with a bunching of amortization payments so sizable as to prevent a resumption of spontaneous lending. In such circumstances, it was considered that the granting of an extended consolidation period could facilitate the return to normal access to commercial credits, including officially supported export credits. Indeed, the three-year consolidation granted for Turkey in 1980, and successfully implemented, appeared to have played such a role.
In view of these objectives, creditors decided to define fairly precisely the criteria for granting extended consolidations in these new circumstances. Given that this approach was intended only for countries that had already made substantial progress in their adjustment efforts, it was considered that the debtor country should normally be in a position to finance its current account without resort to concerted “new money”; the Paris Club effectively provides “new money” when it reschedules interest. Second, it was considered that the criterion of capacity to return to market financing by the end of the extended consolidation period would imply that the percentage of principal rescheduled should decline over the consolidation period in line with the expected progressive transition to commercial financing.
Given that extended consolidation periods were envisioned only in cases where a strong adjustment performance had been demonstrated and there was no longer a need for recourse to exceptional net new money, it was recognized that such extended consolidations would not normally be associated with a prolonged use of Fund resources. Creditors, nevertheless, considered it important in these cases that the Fund continue to be involved in advising and assisting a country in the design of its economic program and in monitoring developments under the program, and that information on the program and its implementation, as well as the Fund’s assessment of the situation, would be made available on a timely basis.9
In defining the monitoring procedures they would require for the period of an extended consolidation, official creditors took note of the new enhanced surveillance procedures that had been developed by the Fund. Enhanced surveillance was originally instituted to facilitate commercial bank MYRAs in cases in which they were needed to pave the way for a return to spontaneous financing for debtor countries that had shown a record of adjustment. It involves supplemental Fund staff visits to the debtor country and supplemental Fund staff reports and discussions of these reports by the Executive Board of the Fund, with particular focus on performance under a quantified financial program prepared by the country’s authorities and presenting a comprehensive description of the major macroeconomic objectives and the policies to be followed to achieve them.
The MYRA for Ecuador took the form of a three-stage conditional further rescheduling, where each stage becomes effective without a further Paris Club meeting if certain conditions are met. Prior to the Paris Club meeting at which the serial rescheduling was agreed, the Executive Board of the Fund had approved a stand-by arrangement for Ecuador for the 12 months through March 1986. The Ecuadoran authorities had, moreover, indicated to their creditors their intention to seek a subsequent one-year stand-by arrangement when the existing one expired, and the second tranche of the Paris Club MYRA for Ecuador was made conditional, inter alia, on Ecuador having an upper credit tranche Fund arrangement expiring not sooner than March 1987. The third tranche of the rescheduling was, however, made conditional either upon Ecuador having a Fund arrangement effective through December 1987 or upon specified Fund surveillance procedures. Under the latter option, the third tranche of the rescheduling will become effective provided, inter alia, that the participating creditors have reached a positive assessment that Ecuador has set forth in the process of consultation with the Fund, and is implementing, a comprehensive and satisfactory economic program, including quantitative quarterly targets and limits, covering the period up to December 1987.
The Paris Club agreement for Ecuador provides for the rescheduling of principal falling due over a three-year period, with the percentage rescheduled declining from 100 percent in 1985 to 85 percent in 1986 and to 70 percent in 1987.
Côte d’Ivoire (1986)
Paris Club creditors agreed in June 1986 to a MYRA for Côte d’Ivoire covering a three-year consolidation period to end in December 1988. The agreement was preceded by the approval by the Executive Board of the Fund of a stand-by arrangement for Côte d’Ivoire for the 24-month period through June 1988.
As in the case of Ecuador, the MYRA for Côte d’Ivoire consisted of a three-stage conditional further rescheduling, where each stage is implemented automatically if certain conditions are met. The first and second stages required, inter alia, that Côte d’Ivoire continue to have an arrangement with the Fund in the upper credit tranches expiring not sooner than June 1988. The third stage of the rescheduling was made conditional either upon Côte d’Ivoire having an upper credit tranche Fund arrangement expiring not sooner than December 1988 or on the implementation of a satisfactory economic program developed in consultation with the Fund.
The rescheduling agreement for Côte d’Ivoire also contemplates the possibility of calling a further meeting to extend the consolidation period through calendar 1989 if the country’s external financial situation warrants such consideration at that time, and provided certain conditions are met. As mentioned above, this alternative approach (“improved” goodwill clause) for granting extended consolidation periods had been used before by official creditors. It differs from the rescheduling under a MYRA on two counts. First, it requires a further meeting to approve the subsequent consolidation period. Second, some of the rescheduling terms for that stage of the consolidation are not determined at the outset and must be agreed with the debtor at the time of the future meeting. This contrasts with the automatic implementation allowed for in the case of serial reschedulings within the framework of an official MYRA where all rescheduling terms for the different consolidation stages are clearly specified at the outset and, if all the conditions are met, no further meeting with the debtor is necessary for future stages to take effect.
The rescheduling agreement for Côte d’Ivoire covers principal only, with the percentage of principal rescheduled decreasing from 80 percent in 1986, to 70 percent in 1987, and to 60 percent in 1988. In the event of a restructuring covering 1989, the improved goodwill clause specifies that it will cover 50 percent of principal due on the same debts covered by the MYRA. This in effect implies that, if the 1989 rescheduling were to take place, the cutoff date would be maintained unchanged. The rescheduling percentages agreed upon for 1986-89 are identical to those agreed in principle between Côte d’Ivoire and the steering committee of commercial bank creditors for the same period. The pursuit of comparability of treatment with bank creditors in this case was a key factor in the decision regarding the rescheduling percentages agreed to by official creditors. Although the official MYRA only covers three years, with an improved goodwill clause for the fourth, while the bank MYRA covers four years, official creditors noted that in other respects, particularly the grace period, their agreement with Côte d’Ivoire was more generous than that of the banks.
The restructuring agreement for Yugoslavia represented the first case in more than a decade where official creditors concluded a multilateral official rescheduling agreement for a Fund member without an upper credit tranche arrangement with the Fund in place.10 The agreement with Yugoslavia covers a 12-month consolidation period and foresees extending the consolidation period for an additional 10½ months through March 31, 1988 if certain conditions are met; a further meeting would be necessary to determine the percentage of principal to be rescheduled in the second stage. For both the first and the possible second stage of the consolidation, the agreement is conditional upon a positive assessment by creditors of the country’s program which it has set forth in the context of enhanced surveillance. In the Agreed Minute, official creditors also noted the Yugoslav authorities’ objective of resuming regular debt service payments no later than 1989 and expressed their willingness to remain involved until then in Yugoslavia’s process of medium-term adjustment.
In deciding to agree to enhanced surveillance as an acceptable basis for a rescheduling in this case, official creditors took note of Yugoslavia’s long record of Fund-supported adjustment programs; Yugoslavia had entered into a series of upper credit tranche arrangements with the Fund spanning a practically uninterrupted six-year period starting June 1980. Official creditors also considered it important that Yugoslavia had implemented its previous rescheduling agreements.
The agreement for Yugoslavia covers principal only, with the percentage rescheduled declining from 85 percent for the 12-month period ending on May 15, 1987 to an as yet unspecified smaller amount in the subsequent period through March 31, 1988. Yugoslavia and its creditors would need to meet again to determine the percentage of principal to be rescheduled during the second stage of the consolidation, subject to the satisfactory compliance by Yugoslavia with all the relevant preconditions for that meeting.
Undertakings were also reached between creditors and the Yugoslav authorities regarding the form that bilateral agreements could take in this particular case of serial rescheduling. It was mentioned that most creditor countries would be ready to consider the possibility of negotiating bilateral agreements covering a consolidation period through March 31, 1988, with the period from May 16, 1987 through March 31, 1988 being conditional on the multilateral implementation of the second stage of the consolidation.
As noted earlier, official creditors had in 1980 granted Turkey a three-stage, three-year consolidation. However, that agreement was made conditional on Turkey implementing its program undertaken with the support of a three-year upper credit tranche standby arrangement with the Fund.
An exception was Mozambique which had become a Fund member only a few days prior to the 1984 Paris Club meeting and did not have a Fund arrangement in place at the time of the rescheduling.