III Official Debt Restructuring
- G. Kincaid, K. Dillon, Maxwell Watson, and Chanpen Puckahtikom
- Published Date:
- October 1985
This section describes the principal features of official multilateral debt restructurings that took place during 1983–84, particularly in comparison with agreements reached during the preceding eight-year period from 1975. It documents the sharp increase in the number of reschedulings and focuses on notable recent developments, especially the trend toward an easing in the repayment terms for some countries that have had successive reschedulings. It also addresses issues relating to multiyear debt restructurings by official creditors with reference to the recent MYRA for Ecuador.
Official multilateral debt restructurings deal with the rescheduling of payments to service the debt owed to, or guaranteed by, the governments or the official agencies of the participating creditor countries. They are normally, though not exclusively, undertaken under the aegis of the Paris Club, which brings together the debtor country and all official creditors that accept the principles and practices of the Club. Invitations are sent to individual creditor countries by the Chairman of the Paris Club in consultation with the debtor country and on the basis of a breakdown by creditor of service on external debt that is supplied beforehand by the debtor to the Paris Club Secretariat. Creditor countries attending the meeting sign an Agreed Minute, unless the amounts owed to them that are covered by the rescheduling agreement are less than a prescribed amount (the “de minimis” level), in which case they attend as observers.
The Agreed Minute sets out the broad terms of rescheduling that the participants recommend to their respective governments to be incorporated in the subsequent bilateral agreements between the debtor and each creditor country. These bilateral agreements form the legal basis for the debt rescheduling. Interest rates on the rescheduled debt are set in the bilateral agreement, and the date by which such agreements are to be signed is specified in the Minute.
To achieve a durable improvement in the debtor’s payments position, official creditors have held the view that, concurrent with debt restructuring, the debtor must take adjustment measures to restore its financial viability. For this purpose, creditors require, as a precondition for the initiation of debt renegotiations with a Fund member country, the conclusion of an upper credit tranche arrangement with the Fund. When creditors agree to meet again to consider future debt relief, the debtor is asked to have such a Fund-supported program in place for the subsequent rescheduling.
Frequency of Rescheduling
The emergence of widespread payments difficulties in recent years was reflected in a record number of countries seeking debt relief from official creditors and in a sharp increase in the number seeking successive reschedulings. In 1983 and 1984, 23 debtor countries that are Fund members obtained 29 official debt reschedulings, up sharply from an average of some 4 reschedulings per annum during the preceding eight years (see Table 4). The recent agreements involved 12 countries that had not had a previous rescheduling in the past ten years, including some net oil exporters and several middle-income countries. For the other 11 debtor countries, their reschedulings in 1983–84 represented at least a second rescheduling since 1975; for four countries, their most recent reschedulings were the third while for four others, their fourth to sixth. The majority of rescheduling countries were African, although all major geographic areas were represented. Experience during the first half of 1985 points toward a continuation of the trends just mentioned.
Two important developments in official debt reschedulings have taken place. First, official creditors have shown considerable flexibility in responding to the rescheduling needs of a large and diverse group of debtor countries. Efforts to assure adequate debt relief while minimizing potential repercussions on the pattern of trade finance have led to greater differentiation in the terms and conditions of rescheduling accorded to countries in varying circumstances. Thus, for three of the more advanced developing countries, the coverage of reschedulings was narrower than usual and the grace and maturity periods shorter. At the same time, for debtor countries facing acute debt-servicing difficulties that have had repeated reschedulings, official creditors increasingly extended terms and conditions that could be considered exceptional according to normal Paris Club standards.
A second discernible recent development has been a greater differentiation in rescheduling terms for different types of obligations, such as between arrears and current maturities, principal and interest, and debt that has or has not been previously rescheduled.12 In particular, relatively harder terms and shorter repayment periods have been applied to arrears, especially arrears on previously rescheduled debt. Since a broader coverage of debt under consolidation has become increasingly difficult to avoid for debtor countries with prolonged difficulties, differences in terms can help to strengthen rescheduling standards as exceptional efforts by creditors are to be matched by special efforts of the debtor to regularize as soon as feasible certain overdue obligations to which creditors attach priority.
The amount of debt relief provided during 1983 and 1984 was unparalleled. Four reschedulings were for more than $1 billion and almost half of the cases involved $300 million or more; between 1975 and 1982, only a minority of agreements (7 out of 28) rescheduled over $300 million. All but two of the recent reschedulings were undertaken within the framework of the Paris Club; the exceptions (Mexico and Yugoslavia) took place in the framework of creditor group meetings. The participating creditor countries were mostly, but not exclusively, members of the OECD, and included others such as Israel, South Africa, and the United Arab Emirates (Abu Dhabi) (Chart 6). A notable recent development has been the participation of developing countries (such as Argentina and Mexico) as creditors. The number of participating creditor countries ranged from 5 to 20, but in the majority of cases the number of creditors was between 10 and 15.
Chart 6.Creditor Countries and Number of Official Debt Restructuring Agreements Signed, 1975–84
Source: Agreed Minutes of debt reschedulings.
Coverage and Terms
Official debt reschedulings typically cover both principal and interest payments on medium-term and long-term loans falling due during the consolidation period. Payments in arrears have also been rescheduled in many cases. Creditors have adhered strictly to the fundamental principle of not rescheduling service on short-term debt, in order to soften the impact of rescheduling on access to trade financing, which could be curtailed if short-term debt were consolidated. In the past ten years only one country obtained, on a very exceptional basis, a rescheduling of current maturities on short-term debt. However, short-term debt in arrears has been rescheduled on a case-by-case basis for a small number of countries, mainly those with repeated reschedulings. Official creditors have, in addition, established the principle that service on debt that has been rescheduled once will not be rescheduled again, and until the last two years such reschedulings were in practice quite rare. Nonetheless, symptomatic of the acute debt-servicing difficulties faced by several countries, service on previously rescheduled debt was rescheduled on eight occasions during 1983–84, primarily for countries that were undertaking at least their third rescheduling.
The length of the consolidation period has continued to be one year for the majority of reschedulings; for a few recent cases it was longer, up to 18 months, coinciding with the period covered by a Fund arrangement. However, for the 15 countries with more than one debt renegotiation during the last ten years, the cumulative consolidation periods under successive reschedulings ranged from two years to as long as five years (Chart 7). Creditors have generally responded to a request from the debtor country for a consolidation period longer than 12–18 months by including in the Agreed Minute a goodwill clause under which they agree in principle to consider the restructuring of debt service due in a specified future period. The implementation of the goodwill clause has been subject to fulfillment by the debtor country of a number of conditions. Most recent goodwill clauses have stipulated four conditions: that the debtor agree with the Fund a new financial arrangement subject to upper credit tranche conditionality; that it obtain comparable debt relief from nonparticipating official creditors; that it complete effective arrangements with banks and other creditors meeting certain conditions; and that it comply with the terms of previous Agreed Minutes. On occasion, official creditors have gone further and granted longer consolidation periods subject to certain conditions. Such “conditional further reschedulings,” including a MYRA agreed for Ecuador in April 1985, are described in the next section.
Chart 7.Consolidation Periods of Official Debt Restructuring Agreements, 1975–841
Source: Agreed Minutes of debt reschedulings.
1 Numbers indicate the start of successive consolidation periods. In some cases the number of consolidation periods exceeds the number of rescheduling agreements, owing to conditional future consolidations becoming effective. Representation of dates is approximate.
2 For rescheduling agreements 2 and 3, consolidation period overlaps with previous consolidations.
Debt service on loans contracted after a specified date (the cutoff date) is excluded from the rescheduling and, in order to facilitate the granting of new export credits and cover, creditors are reluctant to change the cutoff date for subsequent reschedulings. Over the past two years the interval between the cutoff date and the beginning of the consolidation period tended to lengthen for those countries that had not had recent reschedulings and in most cases was between three and nine months. For countries that had had previous reschedulings, official creditors agreed to a change in the cutoff date on ten occasions during 1983 and early 1984 and the new cutoff date was set at between zero and six months before the beginning of the more recent consolidation period. In the last seven months of 1984, however, five countries obtained successive reschedulings and in none of these cases was the cutoff date changed. In five of the ten earlier cases where the cutoff date was changed, there was a significant break between the most recent and the previous consolidation period.
The repayment schedule for amounts covered by official reschedulings can be broken down into three parts. The first, a formally rescheduled portion (covering a large percentage of the total due) carries a medium-term maturity. The second, an unconsolidated or deferred portion, carries a relatively short maturity with a short or no grace period. The third portion is the down payment to be paid during the consolidation period. Thus, the amount of the debt that is effectively rescheduled (beyond the consolidation period) corresponds to the total amount due less the down payment. Using this breakdown, the evolution over the past decade of terms granted by official creditors for rescheduled current maturities is shown in Tables 21–23.
The repayment terms for rescheduled debt service have traditionally tended to vary according to the types of debt service concerned. Typically, the easiest terms have been accorded to current maturities, with some 85 percent of total payments due being rescheduled over seven to nine years (including a three-year to four-year grace period). More stringent terms have often been applied to arrears, particularly those on short-term debt, with substantial repayments of arrears frequently being required during the grace period for rescheduled current maturities.
Differences in terms across types of debt service have widened in recent years. In a majority of cases, there have been harder terms for arrears than in the past, primarily for countries without successive reschedulings. Also, three agreements involved no rescheduling of interest due during the consolidation period, and in one case the rescheduling of arrears was confined to principal only. In about half the agreements that covered previously rescheduled debt, the service on such debt was already in arrears and exceptionally stringent terms were provided; for the other half, however, where the reschedulings involved current maturities on previously rescheduled debt, the terms were broadly similar to those on other current maturities.
The differentiation in terms accorded as between debtor countries has also sharpened over the last two years. For countries with successive reschedulings, terms were often eased considerably. On average, about 90 percent of their current maturities were rescheduled on a medium-term basis (compared with about 80 percent for countries that had not had recent reschedulings); including amounts deferred for shorter periods, the effective rescheduling was 98 percent for those with successive reschedulings compared with 87 percent for the others. In certain instances, the coverage of the rescheduling was extended to include previously rescheduled debt and short-term debt in arrears. The flexibility already being exercised in cases of prolonged debt difficulties has resulted in the actual debt-service burden being reduced to a very small fraction of scheduled obligations. In such cases there is, therefore, virtually no scope for further financing through official debt relief.
These overall developments are evident in the repayment profiles. As in the past, the average repayment profile for current maturities was more stretched out than that for arrears (Chart 8). However, the average profile for arrears was clearly more front-loaded in 1983–84 than in earlier years. Also, for those debtors requiring successive reschedulings, average repayment profiles (particularly for arrears) were considerably flatter than for other countries (Chart 9).
Chart 8.Average Repayment Schedule of Official Multilateral Debt Restructurings, 1975–82 and 1983–84
Sources: Agreed Minutes of debt reschedulings; and Fund staff estimates.
Chart 9.Average Repayment Schedule Under Official Multilateral Debt Restructurings for Countries with Successive Reschedulings, 1983–84
Sources: Agreed Minutes of debt reschedulings; and Fund staff estimates.
As noted earlier, while the Agreed Minute arising out of Paris Club meetings specifies the general terms of the debt restructuring, it is the bilateral agreements between the debtor and each creditor country that establish the legal basis for the restructuring. Efforts have been made recently to strengthen the implementation of the Agreed Minute, both through closer communication among the parties concerned and through more formal means. In particular, the bilateral deadline (that is, the period for concluding bilateral agreements) has been extended from six to eight or nine months after the date of the Agreed Minute. Normally, official creditors will not meet to consider a request for a further rescheduling until the bilateral agreements from the previous rescheduling have been concluded. Also, the conditions set out in the Agreed Minute may include a provision that the debtor country agree to establish a special account with a central bank of one of the participating creditors and to pay into it monthly deposits. The total amount to be deposited approximates the amounts estimated to be payable to all participating creditors during the year. The debtor country draws on the account as bilateral agreements are signed and specified payments under these agreements become due. While the special account arrangement has been implemented satisfactorily in some instances, in others the debtor country has not made the payments envisaged. Failure to adhere fully to the special account provision is considered a breach of the goodwill clause.
Multiyear Official Debt Restructuring
As discussed in Section II, a number of countries have recently reached agreements with their bank advisory groups on rescheduling of maturities falling due over a period of several years. The primary objective of such MYRAs has been to facilitate a return to normal debtor-creditor relationships by debtor countries that have made significant progress in their domestic and external adjustment efforts.
On June 9, 1984, after Mexico had initiated discussions with its bank creditors on a multiyear arrangement, the heads of state of seven industrial nations issued at the conclusion of their meeting in London a communique which reconfirmed the need to respond “flexibly case by case” to the debt problems of developing countries and stated that particular importance was attached, inter alia, to the following provision: “in cases where debtor countries are themselves making successful adjustment efforts to improve their position, encouraging more extended multiyear rescheduling of commercial debts and standing ready where appropriate to negotiate similarly in respect of debts to governments and government agencies.”
For official creditors the granting of extended consolidation periods, while at variance with recent trends, did not per se pose important procedural difficulties, as the Paris Club has practices and precedents that could provide for such an approach. These allow, for instance, for conditional further rescheduling, under which creditors agree at an initial meeting to provide rescheduling in one or more subsequent years automatically without a further meeting of creditors, provided certain conditions are met. An alternative approach is the goodwill clause, under which creditors agree in principle to meet to consider a further rescheduling, provided, inter alia, that a Fund arrangement is in place. Creditors introduced a variation of this approach in an agreement for Peru in 1983 in that the goodwill clause specified at the outset the grace period and maturity to be applied to a subsequent rescheduling but left the percentage to be rescheduled and other conditions to be determined at a meeting before the second year’s rescheduling was to take effect. Variations on this “improved goodwill clause” could also provide a vehicle for granting extended consolidations within traditional Paris Club procedures.
While official creditors had demonstrated their willingness to consider somewhat longer consolidation periods, they had adhered firmly to the principle that an upper credit tranche arrangement with the Fund should be a prior condition for each year’s rescheduling to be agreed or to take effect. A central question for official creditors in considering the possibility of granting a MYRA was, therefore, whether to depart from this principle and, if so, how to ensure that the rescheduling was associated with sound economic policies in the debtor country. Another crucial question was how to ensure, both through the selection of possible candidates for a MYRA and through the design of the rescheduling agreement, that the multiyear rescheduling did indeed facilitate a return to normal debtor-creditor relationships.
On April 24, 1985, Ecuador and its official creditors reached agreement on the rescheduling of maturities falling due over the three-year period up to the end of 1987. The agreement provided for the rescheduling of principal only, with the percentage rescheduled declining from 100 percent in 1985 to 85 percent in 1986 and to 70 percent in 1987. In deciding to grant a MYRA to Ecuador, official creditors attached importance to the fact that Ecuador’s external position was expected to be sufficiently strong to enable it to finance the current account of its balance of payments without concerted action by creditors, and hence without the rescheduling of interest payments. In order to provide a transition to normal debtor-creditor relationships, official creditors considered it important that the percentage rescheduled decline over time.
The rescheduling arrangement for Ecuador took the form of a conditional further rescheduling. Prior to the Paris Club meeting at which the MYRA 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 rescheduling 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, 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, covering the period up to December 1987.
Apart from the key criterion that such agreements should be intended to facilitate a return to normal market financing, the circumstances in which official creditors might grant further MYRAs have not been defined. In some of the cases for which multiyear bank arrangements have been discussed, such as Mexico and Venezuela, banks account for a preponderant share of the debt service due over the next few years. The banks have not required parallel official action as a precondition for the bank MYRAs for Mexico and Venezuela, and both of these countries have indicated that they do not intend to seek an official rescheduling. Official debt is more important for Ecuador, and banks in their discussions with that country indicated that a Paris Club rescheduling would be a condition for each year’s tranche of the bank MYRA. Official creditors will want to decide, given the circumstances of each case, whether action on their part would contribute to a return to normal debtor-creditor relationships. There is no reason why banks and official creditors should provide extended consolidation periods to the same group of countries, or even for the responses of banks and official creditors to be similar, in form or time frame. The fundamental issue is to determine the type of response that could be expected to contribute best to restoring normal access, to both banking credits and official export credits and guarantees, for countries that have established a record of adjustment.
Whether an official MYRA would contribute significantly to restoring normal access to private unguaranteed credits would depend upon the size and service profile of official debt—whether, in other words, official debt service is large enough to generate substantial uncertainty about the debtor country’s ability to service its debts without recourse to exceptional financing. An official MYRA could facilitate more normal access to official export credits and guarantees, provided that the cutoff date for loans on which debt service was to be rescheduled was firmly fixed at the outset. This would, however, be equally true if the cutoff date were fixed firmly at the outset of a series of annual reschedulings, although a MYRA might provide more confidence in this regard. While a MYRA could be viewed as a way of encouraging export credit agencies to reopen or expand export credits and cover, that issue could as well be addressed directly by the relevant agencies. Indeed, most export credit agencies seem to have some kind of limit on their exposure to individual countries, and an increase in exposure that is acceptable to the agency could be the result of a combination of rescheduling service on existing debt and providing a certain amount of new export credits; alternatively, debt service payments could be made as scheduled, permitting a larger amount of new export credits consistent with the same acceptable increase in exposure.