Objectives of Multilateral Approach
The approach taken by most countries experiencing severe difficulties in servicing their external debt has been to request creditors to restructure debt service payments falling due or in arrears. Typically, the external debt accumulated by a country had been incurred against a relatively large number and a wide range of creditors, such as private suppliers, commercial banks, governments (either directly or indirectly, through export insurance schemes or other forms of official guarantee), and multilateral development institutions. As debt service problems experienced by countries generally did not relate to specific loans by individual creditors but were symptomatic of more general balance of payments problems, the requests for debt rescheduling were normally directed to most creditors having significant claims on the country.
A multilateral approach to debt restructuring permitted the negotiations to proceed according to practices and policies that—at least for official debt—were well established. This was advantageous to the parties concerned because it helped to ensure that broadly comparable treatment was accorded to all creditors within a particular multilateral framework, as well as to different debtor countries over time. The cooperative approach provided assurance that a debtor would not negotiate its debt on widely divergent terms with its various creditors, an eventuality that the latter would not have found acceptable. In the absence of a multilateral framework embodying this principle of uniformity of treatment, it would have been possible for the foreign exchange saved by the debtor as a result of a bilateral rescheduling with one creditor to have been used to meet payments due to another.
Conducting debt renegotiations on a multilateral rather than on a bilateral basis also avoided some of the logistical problems inherent in the debtor negotiating with each creditor separately, and allowed the restructuring process to be conducted in a timely manner. The convenience associated with a multilateral approach was evident in a number of recent restructurings of commercial bank debt that have involved the participation of several hundred different creditors.
Furthermore, the multilateral approach provided a mechanism by which the creditors could be assured that an adequate adjustment effort was being undertaken by the debtor country to restore the viability of its external economic position. As far as the debtor countries were concerned, the advantage of this approach was that it helped ensure that the debt relief provided would be integrated with their adjustment effort and other forms of external financing. In this respect, the linkage that evolved between multilateral debt restructurings and Fund-supported economic adjustment programs was of importance. Debt servicing difficulties were often a manifestation of broader and more deep-rooted balance of payments problems reflecting, in part, the adoption of inappropriate external and domestic economic policies. Success in attaining a sustained improvement in the debtor’s balance of payments position usually necessitated the adoption of new policy initiatives by the country concerned. For this reason, official and commercial bank creditors generally required that a financial program supported by the conditional use of the Fund’s resources be in place at or before the time that the debt renegotiations were concluded. Other multilateral forums, notably aid consortia and commercial bank groupings, also provided a framework in which coordinated flows of new finance to the debtor country could be arranged at a time when such support was often crucial to the success of its adjustment efforts.
Official Debt Restructurings
Official multilateral debt renegotiations dealt with the rescheduling of payments on debt owed to, or guaranteed by, the government or the official agencies of the participating creditor countries. They were normally, although by no means exclusively, undertaken under the aegis of the Paris Club. The rescheduling exercise brought together the debtor country and all official creditors who were willing to participate, although in practice the participating creditors have generally been confined to members of the Organization for Economic Cooperation and Development (OECD) with significant claims against the debtor country. Generally, both principal and interest payments on medium- and long-term loans falling due during a given period, including those already in arrears, were rescheduled, though not on terms that might be regarded as concessionary. As a matter of principle, the Paris Club was extremely reluctant to reschedule payments on short-term debt with an initial maturity of one year or less, as this might have disrupted normal trade financing and jeopardized continued guarantee cover offered by official export credit insurance agencies. Similarly, as a matter of principle, previously rescheduled debt normally was excluded from the restructuring. In no instance has debt service on loans from multilateral development institutions been subject to rescheduling in the Paris Club.
To achieve a durable improvement in the debtor country’s balance of payments consistent with the resumption of debt service payments, the official creditors have held the view that, concurrent with debt rescheduling, the debtor must take measures to restore its financial viability. For this purpose, each debtor country that was a Fund member was required, as a precondition for the initiation of debt renegotiations, to conclude a financial arrangement with the Fund subject to upper credit tranche conditionality. In addition, when creditors agreed to consider additional debt relief in the period after the consolidation period, the country was asked to have a Fund-supported program in place at the time the discussion of such relief took place.
The consolidation period (i.e., the period in which the payments to be restructured fall due) normally was 12 months. However, certain countries obtained debt relief on successive occasions and the period of debt relief thus became de facto medium term.
The terms for the repayment of rescheduled debt typically were structured as follows. Repayment of the total amount (principal and interest) falling due during the consolidation period was divided into three parts. The first, a formally rescheduled portion covering, on average, 80 percent to 90 percent of the total, usually carried a maturity of seven to nine years, including a grace period of three to four years. The second represented an unconsolidated, but postponed, portion, the maturity of which was relatively short (about one to two years), with a short or even no grace period. The third segment comprised a downpayment that had to be paid during the consolidation period on the original due dates. The amount effectively rescheduled (i.e., the total amount due less the downpayment) usually covered 90–100 percent of total payments. As regards rescheduled arrears, the terms of repayment have normally been more stringent and the proportion rescheduled was less than that for payments falling due: very often, repayments of arrears were required during the grace period for repayments of rescheduled principal payments.
The terms agreed upon in the multilateral rescheduling meeting were embodied in a set of Agreed Minutes. These Minutes provided the guidelines for the details of the debt relief that subsequently was arranged on a bilateral basis between the debtor and each creditor country. The interest rate to be paid on the consolidated debt also was determined on a bilateral basis. The restructuring only attained legal status after these bilateral agreements were concluded.
As noted above, an important aspect of the multilateral approach to debt rescheduling was that it ensured that the rescheduling terms were broadly uniform across different categories of creditors. This principle of comparable treatment for all creditors and for all types of debt was a feature common to the recent multilateral debt renegotiations. In the case of the Paris Club, for example, and in order to secure comparable treatment of public and private external creditors, the renegotiation agreements stipulated that the debtor country would seek to obtain from nonparticipating creditors, including banks and suppliers, debt relief on terms comparable with those granted by the Paris Club itself. In addition, the debtor countries undertook to accord to each of the participating creditor countries a treatment not less favorable than that which may be accorded to any other creditor country. Accordingly, many of the recent Paris Club reschedulings have been accompanied by a parallel commercial bank debt restructuring and, in a few instances, a consolidation of debt owed to commercial nonbank creditors.
The economic impact of debt relief in the consolidation period can be measured in a number of ways. Relative to export earnings and current account imbalances, the scale of official debt relief extended during the period under review was quite substantial. In about two fifths of the debt restructurings surveyed, debt relief represented in excess of 20 percent of exports of goods and services. Measured against the current account deficit of the countries concerned, the relief provided was equivalent to more than 40 percent of the deficit in about two fifths of the cases. In terms of debt service payments, the impact of debt restructuring was also significant, particularly when the agreement covered payments in arrears. For example, in about two fifths of the debt restructurings, the amount of relief was equivalent to over 100 percent of total debt service payments (after debt relief) due to official creditors, multilateral creditors, and private creditors.
Often, however, the true impact of debt relief cannot be fully assessed in these terms. In many instances, the debtor countries would have been unable to meet maturing commitments had the reschedulings not taken place. Consequently, the regularization of debt service payments facilitated by the restructuring permitted debtor countries to avoid a further deterioration in their international credit standing and their ability to borrow in the future.
Commercial Bank Debt Restructurings
Earlier Experience
The Occasional Paper entitled External Indebtedness of Developing Countries focused on the experience of the six countries that undertook debt restructurings with banks from 1975 to 1978. It found that in all these countries bank lending had expanded very rapidly over a relatively short period and then had declined sharply, with net bank lending becoming negative at some point prior to the restructuring. That paper also indicated that bank lending flows generally had been large relative both to the borrowing country’s economy and nonbank sources of external financing, and that lending frequently had been procyclical relative to movements in export receipts that had usually originated from fluctuations in export prices. Frequently, these variations in bank lending were associated with serious problems of economic management. External bank loans often financed unsustainable increases in public sector expenditure and were linked to expansionary domestic policies. When bank lending was directly associated with development projects, the productivity of the projects was often low, or the payback period long, relative to the service of the corresponding debt, given the overall demand management and pricing policies pursued.
Regarding the terms of bank debt restructuring, it was noted that while banks had been prepared to reschedule principal payments in arrears, as well as those falling due for various future periods, interest payments had been expected to be made on a current basis, and that arrears in respect of interest payments had to be cleared as a precondition for signing most arrangements. It had become apparent also that banks had generally preferred a comprehensive “multilateral” restructuring of bank debt rather than the provision of additional credits to countries subject to payments difficulties. Very rarely had there been explicit understanding on the provision of new bank financing—or even maintenance of existing exposure—in these arrangements. Generally, as a result of the restructuring, debt service payments were reduced during the first year after agreement, but in all these earlier cases there still had been a reduction in banks’ exposure during the immediate postagreement period.
Recent Experience
As mentioned earlier, some of the debt restructurings examined in this paper are still under negotiation, while most of the others were completed only recently, and important issues are still evolving. Nevertheless, some major trends can be observed. In comparing the findings of the present study with those of the previous paper, one notes, perhaps most importantly, the different economic environment in which the recent bank debt restructurings took place. As discussed in Section II above, the sharp increase in the number of countries that have approached the banks for relief reflected in part the prolonged and severe deterioration of the global economic conditions that placed demand management, investment, and external debt policies of borrowing countries under extreme pressure.
By early October 1983, five of the ten largest borrowers among the developing countries had either completed or were engaged in formal multilateral debt restructurings with commercial banks.8 Total bank debt of these five countries amounted to US$188 billion at the end of 1982 (Table 6).9 With the sharp increase in the number of debt renegotiations, the process itself appears to have become more standardized and in some regards more efficient over time. Where countries have had successive reschedulings, negotiations often have been expedited by the statistical work already completed, the precedents set previously, and the prior existence of bank steering groups.
Countries Reviewed, Ranked by Debt to Banks at End of December 19821
(In millions of U.S. dollars)
Included in this table are Fund member countries that are currently in the process of formal multilateral debt restructuring (i.e., rescheduling or refinancing) with commercial banks or have completed such a process since 1978. Liberia also completed such a renegotiation in 1982; however, it is not included in this table because of its status as an offshore financial center.
Countries Reviewed, Ranked by Debt to Banks at End of December 19821
(In millions of U.S. dollars)
| 1. | Mexico | 62,888 |
| 2. | Brazil | 60,453 |
| 3. | Venezuela | 27,474 |
| 4. | Argentina | 25,681 |
| 5. | Chile | 11,610 |
| 6. | Yugoslavia | 9,821 |
| 7. | Nigeria | 8,527 |
| 8. | Peru | 5,353 |
| 9. | Ecuador | 4,488 |
| 10. | Romania | 4,243 |
| 11. | Turkey | 3,971 |
| 12. | Morocco | 3,882 |
| 13. | Uruguay | 1,531 |
| 14. | Costa Rica | 1,261 |
| 15. | Sudan | 1,119 |
| 16. | Bolivia | 940 |
| 17. | Zaire | 873 |
| 18. | Dominican Republic | 866 |
| 19. | Nicaragua | 814 |
| 20. | Zambia | 590 |
| 21. | Jamaica | 521 |
| 22. | Honduras | 469 |
| 23. | Senegal | 410 |
| 24. | Madagascar | 299 |
| 25. | Togo | 253 |
| 26. | Malawi | 202 |
| 27. | Guyana | 129 |
Included in this table are Fund member countries that are currently in the process of formal multilateral debt restructuring (i.e., rescheduling or refinancing) with commercial banks or have completed such a process since 1978. Liberia also completed such a renegotiation in 1982; however, it is not included in this table because of its status as an offshore financial center.
Countries Reviewed, Ranked by Debt to Banks at End of December 19821
(In millions of U.S. dollars)
| 1. | Mexico | 62,888 |
| 2. | Brazil | 60,453 |
| 3. | Venezuela | 27,474 |
| 4. | Argentina | 25,681 |
| 5. | Chile | 11,610 |
| 6. | Yugoslavia | 9,821 |
| 7. | Nigeria | 8,527 |
| 8. | Peru | 5,353 |
| 9. | Ecuador | 4,488 |
| 10. | Romania | 4,243 |
| 11. | Turkey | 3,971 |
| 12. | Morocco | 3,882 |
| 13. | Uruguay | 1,531 |
| 14. | Costa Rica | 1,261 |
| 15. | Sudan | 1,119 |
| 16. | Bolivia | 940 |
| 17. | Zaire | 873 |
| 18. | Dominican Republic | 866 |
| 19. | Nicaragua | 814 |
| 20. | Zambia | 590 |
| 21. | Jamaica | 521 |
| 22. | Honduras | 469 |
| 23. | Senegal | 410 |
| 24. | Madagascar | 299 |
| 25. | Togo | 253 |
| 26. | Malawi | 202 |
| 27. | Guyana | 129 |
Included in this table are Fund member countries that are currently in the process of formal multilateral debt restructuring (i.e., rescheduling or refinancing) with commercial banks or have completed such a process since 1978. Liberia also completed such a renegotiation in 1982; however, it is not included in this table because of its status as an offshore financial center.
Another important contrast to previous experience was the suddenness with which debt servicing difficulties of some countries in a region affected banks’ perceptions of the creditworthiness of other countries in the area. This phenomenon was observed first in Eastern Europe and then, on an even larger scale, in Latin America. In a few countries, the perception of regional risks, together with a heightened awareness of cross-border lending risks in general, might have contributed to the need of some countries to approach the banks for debt relief, although their economic management had been judged by the market up to that moment to be relatively sound.
Regarding the terms of restructuring of bank debt, banks remained unwilling to reschedule payments at less than market-related interest rates. However, owing to the magnitude of the external payments disequilibrium in a number of recent cases, debt restructuring on market terms appeared feasible only if the banks were willing to provide additional financing or at least assure maintenance of their existing “exposure.” The banks firmly decided to restructure debt on commercial terms, while recognizing that this might require continued growth of their exposure to some countries. Thus, the banks have been willing to agree to proposed understandings on maintaining (or restoring) short-term exposure together with commitments to provide net new medium-term financing in association with some restructuring arrangements.
Generally speaking, agreements in recent bank debt restructurings have applied to principal payments falling due within approximately 12 months from the onset of negotiations, although there were consolidation periods of up to two years and three years in exceptional cases. In a number of instances, arrears on principal payments were also rescheduled, but this has been less of an issue in some of the more recent large-scale restructurings to the extent that debtors had approached banks on a timely basis. Interest payments in arrears were rescheduled only in exceptional cases, and none of the concluded agreements included a restructuring of future interest payments.
In all but two of the completed agreements examined, at least 80 percent of the principal payments falling due was restructured and, in over half, the total amount was rescheduled. The restructuring loans for principal payments falling due typically carried seven–eight years’ maturity and two–three years’ grace, but there were some exceptions and, in some instances, new maturities ranged to over ten years. On occasion, the maturity of restructuring loans for short-term debt was shorter than that applicable to medium-term debt. In those exceptional instances where arrears were rescheduled, the terms were similar to those applied to rescheduled short-term debt falling due. Regarding the interest charged on consolidated debt, in the majority of restructuring agreements concluded during the period 1978 through early October 1983, the spread over the London Interbank Offered Rate (LIBOR) or the U.S. prime rate ranged from 1¾ percent to 2¼ percent. To the extent that restructuring agreements have incorporated new lending commitments, these often involved spreads, grace periods, and final maturities quite similar to the rescheduling agreements per se. Increasingly, published information has become available regarding the fees and charges involved in the restructurings, and in 1983 fees appear to have ranged from 1 percent to 1½ percent of the amounts restructured.
Finally, an important new element in assisting the debtor country during the debt renegotiation period has been the provision of bridging finance pending agreement on new medium-term finance. In some cases this has been provided by commercial banks and governments. The Bank for International Settlements (BIS) also has played a significant role in the provision of bridging finance, including, importantly, to non-BIS member countries.
Since, in quantitative terms, many of the important initiatives in commercial bank debt restructuring have come within the last year or even the past few months, generalizations would be premature at this stage. Nevertheless, an examination of the salient issues that have arisen can help in understanding some of the difficulties that have emerged in trying to resolve their external debt problems and the implications of these for countries’ adjustment efforts.
Selected Issues
One of the most significant issues is the timing of a country’s approach to commercial banks. In general, it cannot be in the best interest of any of the parties involved to enter lightly into negotiations for a restructuring of commercial bank debt or otherwise seek relief from contractual obligations. However, where such an approach became inevitable, experience has shown that delays in initiating and concluding discussions frequently exacerbated the debt servicing difficulties. Creditor confidence has tended to decline and creditors (including commercial banks) have slowed new lending and have withdrawn short-term financial credits, interbank deposits, and trade credits. This acted to jeopardize the quality of assets of lenders who did not or could not reduce their exposure. It also made the formulation of a viable balance of payments program more difficult. In light of these considerations, it is not surprising that, in general, the more dependent a country was on market borrowing for external finance, the more rapidly it initiated negotiations because of a perceived or actual change in market sentiment.
Without a timely and coherent resolution of an emerging debt problem, banks’ attempts to reduce their exposure may pose difficult questions about the distribution of the restructuring “burden” and may lead to significant delays in reaching agreement. Banks have often placed great emphasis on maintaining “market discipline,” i.e., preventing an uneven reduction in exposure by a large number of different lenders during the period when restructuring arrangements were being negotiated. In several very recent instances, commercial banks were willing to accept—or even to welcome—a “standstill” (on occasion unilaterally imposed by the country) on the repayment of principal on most categories of loans in order to maintain the total exposure of all institutions and to prevent a further aggravation of balance of payments pressures. However, both during the standstill period and subsequently, the maintenance of short-term exposure has proved difficult to enforce in practice.
Complex and important issues of intercreditor equity have also arisen in the context of determining the coverage of restructuring agreements themselves. Of particular significance has been the treatment of short-term debt and interbank deposits, as well as the treatment of bank credits relative to nonbank commercial debt, including nonguaranteed export credits, floating rate notes, bonds, and officially guaranteed debt. The restructurings of debt to nonbank private creditors, primarily unguaranteed suppliers’ credits, were important and difficult aspects of the Turkish and Romanian reschedulings.10 In some major recent cases, the proposed agreements include undertakings not to reduce short-term credits and interbank deposits. Where arrears had been permitted to accumulate, particularly on interest payments, bank debt restructuring agreements were often much more difficult to complete. With few exceptions, the banks have resisted the rescheduling of interest in arrears and have generally insisted on the elimination of such arrears as a precondition for a debt restructuring. This attitude reflects, inter alia, constraints imposed by bank supervisory authorities on the classification of assets, as well as by questions of profitability and the banks’ own funding activities. In certain countries, significant problems have arisen because of the initial drain on the debtor’s external resources associated with the clearing up of arrears when the agreement was signed. In some instances, the banks have agreed to help overcome this problem by committing new funds along with the restructuring agreement. In others, banks have been willing to reschedule short-term debt in arrears.
Sustaining commercial lending flows to countries undertaking economic adjustment programs through the commitment of new banking funds has become of great importance in some of the major bank debt restructurings undertaken in 1982 and 1983. Although any predetermined amount of net financing can be achieved by various combinations of new lending commitments together with appropriate rescheduling terms on outstanding obligations, banks have been extremely reluctant, lest the earning capacity of their existing assets be eroded, to reschedule on less than “market” terms. The market perception that it would be counterproductive for a country to seek “nonmarket” terms on rescheduled amounts has been based on a concern that the country’s access to normal credit facilities could be seriously impeded for a significant period after the rescheduling process has been completed. At the same time, there is growing recognition that rescheduling terms need to be consistent with debtor countries’ adjustment potential and should not undermine their ability to restore normal payments relations in the future.
Large new ex ante lending commitments have formed an integral part of the restructuring process in some major debtor countries, and in others (for example, Yugoslavia) an attempt has been made to avoid a formal rescheduling by negotiating an increase in the banks’ exposure through significant new lending commitments. For some countries, the weight of scheduled interest payments has proved to be so burdensome that any rescheduling of principal payments on commercial terms has required a commitment of new funds if interest were to be paid as scheduled.
The role of the Fund vis-à-vis the resolution of bank debt payments difficulties and its relations with commercial banks continue to evolve in response to the changing circumstances of member countries. This evolution also reflects the relative flexibility of procedures for bank debt restructuring. As for restructurings of official credits, private bank creditors generally have required countries experiencing payments difficulties to negotiate upper credit tranche arrangements with the Fund prior to the conclusion of their negotiations. This has almost always been done, with the Nicaraguan reschedulings being the major exception. Negotiations with the banks and the Fund often took place simultaneously and in some of the major cases their successful conclusions were closely interrelated.
Rescheduling agreements generally contain provisions outlining the conditions under which creditors have the right to declare rescheduled loans due and repayable on demand. These provisions, which cover a variety of circumstances, often include nonfulfillment of “equal treatment” clauses with respect to other creditors. Recent agreements have also provided for the possibility of accelerated repayment should the debtor become ineligible to draw under an arrangement with the Fund.
In the difficulties facing the larger debtors, the Fund management and staff have played an important role in coordinating the international response to these events. The evolving role of Fund officials has taken several forms. On some occasions, the Fund has been instrumental in assisting negotiations between the parties when it became evident that a feasible stabilization program would require some kind of debt rearrangement. In some recent cases, it was necessary to establish a close link between official and commercial bank debt restructuring arrangements and Fund-supported programs by seeking confirmation of financing assumptions from official creditors and commercial banks. These were instances where, in the absence of such assurances on debt restructurings and new intergovernmental and bank lending, it would not have been possible to recommend approval of a member’s request for the use of the Fund’s resources because of the existence of an otherwise unfinanced balance of payments gap.
As already mentioned, adding to the banks’ assessment of the risk of cross-border lending in general has been the perception of regional risk. Both in Eastern Europe and later in Latin America, certain countries found their access to capital markets restricted, partly because the debt problems in neighboring countries had changed bankers’ assessment of their creditworthiness. In some such cases, the Fund, at the request of the debtor authorities, has been a conduit of information between the countries and their creditors, in an effort to help ensure that market sentiments be guided by more comprehensive and reliable economic information.
Finally, it can be noted that the restructuring terms applied to official and bank debt have become increasingly harmonized in recent years, even though official creditors in general have not always drawn a sharp distinction between rescheduling interest payments in arrears and principal in arrears. In some instances, when the debt to governmental creditors was relatively large, the debtor country made simultaneous approaches to official and commercial lenders.