Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

Appendix I. Additional Figures

Figure A1.
Figure A1.

Grenada’s Selected Economic Indicators, 2000–17 1/

Citation: IMF Working Papers 2017, 171; 10.5089/9781484311035.001.A999

Sources: Grenadian authorities and staff estimates and projections1/ Dotted lines represent the two private debt restructuring episodes in 2004–06 and 2013–15, respectively; shaded areas indicate projections.
Figure A2.
Figure A2.

Grenada’s Illustrative Debt Trajectories under Different Growth and Interest Rate Assumptions

(normalized at 2005/2015 = 100 percent)

Citation: IMF Working Papers 2017, 171; 10.5089/9781484311035.001.A999

Sources: Authors’ calculations based on Grenadian statistics
Figure A3.
Figure A3.

Primary Balance and Public Debt Developments around Debt Restructurings in the Caribbean

Citation: IMF Working Papers 2017, 171; 10.5089/9781484311035.001.A999

Sources: IMF World Economic Outlook and Asonuma and Trebesch (2016)
Figure A4.
Figure A4.

Grenada’s Debt Trajectory — Program Projections versus Actual Outcomes

Economic Growth (in percent)

Citation: IMF Working Papers 2017, 171; 10.5089/9781484311035.001.A999

Sources: Grenadian authorities and authors’ calculations
Figure A5.
Figure A5.

Grenada’s Redemption Profile Pre- and Post-Debt Restructuring

(in millions of East Caribbean dollars)

Citation: IMF Working Papers 2017, 171; 10.5089/9781484311035.001.A999

Sources: Authors’ calculations based on Grenadian statistics

Appendix II. Details of Grenada’s Hurricane Clause

article image
Sources: Grenadian authorities and Paris Club data

Appendix III. Comparison of Debt Restructurings in the Caribbean

Several Caribbean countries have experienced sovereign debt restructurings over the past 10 years. This section reviews debt restructuring episodes in the region: Antigua and Barbuda in 2008–12, Belize in 2006–07 and 2012–13, Dominica in 2004, Dominican Republic in 2004–05, Jamaica in 2010 and 2013, and St. Kitts and Nevis in 2012–13 (see Table A1 for details of debt restructurings). We then compare Grenada’s two debt restructurings in 2004–06 and 2013–15 with the general restructuring pattern in the region.

Table A1.

Details of Debt Restructurings in the Caribbean

article image
Sources: Asonuma and others (2017a, 2017b), Asonuma and Trebesch (2016), Cruces and Trebesch (2013), Das and others (2012), various IMF staff reports, and authorities’ websites.

Classification of domestic and external debt is based on jurisdiction, except for Grenada (2004–05) that is based on creditors’ residence.

Classification of preemptive or post-default restructuring is based on Asonuma and Trebesch (2016).

According to Asonuma and Trebesch (2016), the start of a restructuring process is whenever (i) the government misses the first payment to private external creditors beyond the grace period (default month) or (ii) whenever a key member of government publicly announces a debt restructuring. The end of a restructring is defined (i) as the month in which either an official signing ceremony took place (in the case of bank debt restructurings), or (ii) as the month in which the debt was ultimately exchanged in the market (in the case of bond restructurings). Duration of a restructuring is defined as the number of months from the start to the end of the restructuring.

Total eligible debt to be restructured in the debt operation.

Figures do not include past due interest.

NPV haircuts for Dominica and Dominican Republic are from Cruces and Trebesch (2013); NPV haircuts for Belize 2006–07 and 2012–13 are from Asonuma and others (2017b); NPV haircuts for Saint Kitts and Nevis and Jamaica 2013 are from Asonuma and others (2017a); NPV haircuts for remaining cases are the authors’ calculations.

Indicates whether a private restructuring accompanies at least one official debt (Paris Club) restructuring over the period from 1 year prior to the start of the restructuring to 1 year after the end of the restructuring.

Indicates whether a private restructuring accompanies an IMF-supported program over the period from the start of the restructuring to the end of the restructuring.

Missed coupon payments were added to the face value of the new bond (approximately 7 percent of the original principal), resulting in a net face-value haircut of about 3 percent.

The exchange was a par for par exchange, except for fixed rate notes (20 percent face-value reduction targeted to state-owned enterprises).

Indicates settlement with holdout creditors.

Fiscal policy slippages and output losses related to external shocks, including hurricanes, are two dominant drivers of debt accumulation to “unsustainable levels.”1 The lack of effective monetary policy under a fixed exchange rate regime in most of these countries has frequently led to a countercyclical fiscal policy response that led to a rapid accumulation of debt. Grenada’s two debt restructurings are a representative case in the region.

Most debt restructurings in the Caribbean are implemented in a preemptive, collaborative manner and are generally completed over a short duration. Three restructurings went against the trend, as negotiations started after missed debt service payments (default): Antigua and Barbuda in 2008–12, Dominican Republic’s restructuring on external bank loans in 2004–05, and Grenada’s 2013–15 restructuring. Similarly, Antigua and Barbuda’s 2008–12 and Grenada’s 2013–15 restructurings involved protracted negotiations that lasted over 2.5 years. This was because of litigation over disputed claims in the US court system (Antigua and Barbuda) and due to the need for a deep principal reduction to restore debt sustainability (Grenada).

The majority of countries, with the exception of Belize, Dominica, and Jamaica, have had both private and official sector debt restructurings in sequence, alongside an IMF-supported program. Only the episodes in Belize in 2006–07 and 2012–13, Dominica in 2003–04, and Jamaica in 2010 and 2013 were stand-alone private debt restructurings without official external debt restructurings. Against the pattern in the region, the restructurings in Belize in 2006–07 and 2012–13 and in Grenada in 2004–06 were completed outside an IMF-supported program.

A third of these restructurings included sizable face-value reductions (resulting in higher NPV haircuts), while others do not. Antigua and Barbuda’s restructuring in 2008–12, Dominica’s in 2003–04, Grenada’s in 2013–15, and St. Kitts and Nevis’s in 2011–12 included face-value reductions resulting in NPV haircuts above 50 percent. In contrast, the remaining cases were associated with treatments of maturity extension and coupon rate reduction.

Debt sustainability concerns remained unresolved for most debt restructurings (Figure A3 in Appendix I), while most countries had difficulty regaining market access. Despite settlements with private external creditors, and subsequently with official debt restructurings, public debt has remained elevated even after the completion of exchange in most cases. Associated with this, countries have remained excluded from the international capital market for protracted periods. In this respect, the Dominican Republic’s restructuring in 2004–05 was exceptional in that the country regained market access after only five to 10 months.

Grenada’s 2013–15 restructuring incorporated some original, innovative features. These innovations included: (1) a two-step nominal haircut in the commercial bond deal, with half of the 50 percent haircut executed at the time of the exchange (2015) and the remainder contingent on successful completion of the IMF-supported program in 2017. The first nominal haircut can be reversed in the event Grenada does not complete the IMF-supported program; (2) a hurricane clause, introduced first in the Ex-Im Bank restructuring and also in the commercial bond deal and Paris Club agreements, to provide the debtor with temporary debt service relief in the event of qualifying natural disasters; and (3) to make the deal more attractive to promote participation, the commercial bond agreement included a clause to “claw back” some of the proceeds (up to a certain threshold) from the CBI program—an upside potential for NPV recovery. The first and third innovations were first introduced in the St. Kitts and Nevis restructuring, while Grenada was the first to introduce the second tool in its 2013–15 deal.

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*

Tamon Asonuma is an economist in the Research Department, Mike Xin Li is an economist in the Western Hemisphere Department, Saji Thomas is a senior economist in the Fiscal Affairs Department. Michael G. Papaioannou and Eriko Togo are deputy division chief and a senior financial expert, respectively, in the Monetary and Capital Markets Department. The authors would like to thank Trevor Alleyne, Julianne Ams, Tom Best, Xavier Debrun, Mark Joseph Flanagan, Daniel Hardy, Klaus P. Hellwig, Nicole L. Laframboise, Natasha Marquez-Sylvester, and Rafael Molina for helpful comments and suggestions. We would also like to thank Christie Chea, Eneshi Irene Kapijimpanga, Chifundo Moya for helpful editorial suggestions.

1

IMF (2013) defines solvency concerns as those such that a debtor country is no longer able to meet the present value of its debt obligations without indefinitely accumulating debt, and liquidity concerns as those such that the debtor country’s liquidity assets and available financing are insufficient to meet or roll over its maturing obligations.

2

Asonuma (2016) also shows that higher NPV haircuts (smaller recovery rates) at renegotiation are associated with larger (smaller) increases in yield spreads, reflecting trade-offs of the sovereign debtors and the creditors.

3

This may also be due to the acceptance of sovereign debtors’ and independent advisers’ proactive engagement with creditors.

4

Belize (2006–07 and 2012–13), the Dominican Republic (2004–05), Grenada (2004–06), Jamaica (2010, 2013), and St. Kitts and Nevis (2011–12).

5

Belize (2006–07), the Dominican Republic (2004–05), and Jamaica (2010).

6

Okwuokei and Van Selm (2017) provide an overview of selective recent restructurings in the region.

7

See Reinhart and Rogoff (2009), Sturzenegger and Zettelmeyer (2006), Finger and Mecagni (2007), Diaz-Cassou and others (2008), Panizza and others (2009), Das and others (2012), Duggar (2013), Erce (2013), Cruces and Trebesch (2013), Asonuma and Trebesch (2016), and survey by Tomz and Wright (2013).

8

In a similar approach, Diaz-Cassou and others (2008), Finger and Mecagni (2007), and Erce (2013) review recent sovereign debt restructurings and IMF-supported programs in the late-1990s and 2000s.

9

Eichengreen and others (2003) explain that countries with “original sin” must pay an additional risk premium when they borrow and increase their solvency risks, since the financial market acknowledges that their inability to repay is a source of financial fragility.

10

Grenada’s 2004–06 debt restructuring refers to the private debt restructuring completed in November 2005 and official debt restructuring completed in May 2006.

11

Asonuma and Trebesch (2016) define Grenada’s 2004–06 private debt restructuring as “weakly preemptive,” as some payments were missed, but only temporarily and after the start of formal or informal negotiations with creditor representatives (no unilateral default).

12

These two bonds were tendered in 2004–05 private debt restructurings.

14

In the case of Grenada, classifications of domestic and external debt at the time of debt exchange in November 2005 are on a residence basis (Grenada Ministry of Finance, 2005).

15

Cleary Gottlieb Steen and Hamilton LLP acted as the legal advisors, and Bear Sterns & Co. Inc. was hired as the financial advisor (Grenada Ministry of Finance, 2005, p. 95).

16

Grenada Ministry of Finance (2005, p. 2).

17

Multilateral claims are considered senior to other claims and are excluded from the exchange.

18

The creation of the creditor committee differs from those formed in the 1980s and 1990s in certain aspects: establishing certain criteria for formation of committee and its procedural rules and incorporating elements that enhanced dialogue and participation among creditors in past restructurings cases (Buchheit, 2009; Li and others, 2010).

19

See Jahan (2013) for further details.

20

The debt exchange operation was initially scheduled to close on October 7, 2005, and later extended to October 14, 2005.

21

Domestic US$-denominated claims comprised one bond, whereas EC$-denominated claims comprised nine bonds, six commercial loans, and one guaranteed claim.

22

External US$-denominated claims comprised five bonds, two commercial loans, and four guaranteed claims, whereas EC$-denominated claims comprised two bonds.

23

NPV haircut is defined as (1 - Present value of new debt/Present value of old debt), as in Sturzenegger and Zettelmeyer (2006, 2008). Present value of new debt and old debt is computed with the same discount rate. Following Sturzenegger and Zettelmeyer (2006, 2008), we use the exit yield at the completion of exchange. On the contrary, market haircut is defined as (1 - Present value of new debt/Face value of old debt).

24

Asonuma and others (2017a) find haircuts on shorter-term debt tend to be larger than those on longer-term debt in Grenada 2004–05 private debt restructuring.

25

See Asonuma and others (2017b) for the Belize debt restructurings in 2006–07 and 2012–13, and Das and others (2012) and Jahan (2013) for the Dominican Republic and St. Kitts and Nevis restructurings.

26

About half of the nonparticipating eligible external claims pertained to a single creditor with whom the authorities had established contact and who they continued to offer a settlement on the same terms as the participants in the exchange had received. The other half pertained to about 5 percent of holders of a US$100 million international bond issued in 2002. In this case, the identity of the nonparticipating creditors was unknown and the authorities were making efforts to find and engage these creditors.

27

In the case of Dominica, the authorities instructed the ECCB to open a special escrow account for debt payments. While the Dominican 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 Dominican authorities treated the outstanding principal amounts as if they had been converted into the bond envisaged under the exchange offer and, as payments fell due, made payments into the escrow accounts under the restructured terms.

28

See Buchheit and Karpinski (2006).

29

Paris Club (2006).

30

IMF (2015). The 2 percent coupon rate on ODA loans is based on a simple average of concessional terms provided by Paris Club creditors to a sample of HIPC debt restructuring episodes. The coupon rate on non-ODA loans is assumed to be market based and is calculated as the six-month average of the Commercial Interest Reference rates (CIRR) as published by the OECD.

31

Classic terms are the standard terms applied to a debtor country coming to the Paris Club. Credits (whether ODA or non-ODA) are rescheduled at the appropriate market rate, with a repayment profile negotiated on a case-by-case basis.

32

Taiwan Province of China is a non-Paris Club creditor. Grenada severed its diplomatic relations with Taiwan Province of China, the largest bilateral creditor at the time of the restructuring in December 2004, and established diplomatic relations with the People’s Republic of China.

33

Cash payments at the closing of the transaction were equal to the unpaid interest on tendered claims accrued up to the closing date.

34

The projected debt service schedule was similar to that of Argentina’s 2005 global debt restructuring: small debt service over the short term and a substantial increase in debt payments over the medium and long terms due to amortization and step-up coupon structures.

35

Debt trajectory is reported in Figure A4 in Appendix I.

36

Neither Moody’s nor Fitch assigns ratings to Grenada.

37

Grenada’s 2013–15 debt restructuring refers to the private debt restructuring completed in November 2015 and official debt restructuring completed in November 2015.

38

There are no official statistics for private sector external debt. IMF staff estimates are based on balance of payments statistics for the banking and non-bank private sectors.

39

This bond was approved by Parliament in 2010.

40

Clearly Gottlieb Steen & Hamilton LLP was appointed to act as the legal advisor and White Oak Advisory as the financial advisor.

42

Grenada Ministry of Finance (2015).

43

Restructuring agreements were signed on several other domestic debt instruments (including with banks and on T-bills), including NPV haircuts similar to those of the commercial bonds deal.

44

Paris Club (2015).

45

IMF (2015). The 2 percent coupon rate on ODA loans is based on a simple average of concessional terms provided by Paris Club creditors to a sample of HIPC debt restructuring episodes. The coupon rate on non-ODA loans is assumed to be market based and is calculated as the six-month average of the Commercial Interest Reference rates (CIRR) as published by the OECD.

46

As of July 2017, the Grenadian authorities were still in restructuring discussions with their non-Paris Club bilateral creditors.

47

The CANEC DMAS Project is a Canadian International Development Agency (CIDA) funded debt management project, which commenced operations at the Eastern Caribbean Central Bank (ECCB) in 2009.

48

See IMF (2014b) Annex II for details.

49

Grenada was classified as “debt distress” by IMF DSA (IMF, 2016) due to the non-completion of all debt restructuring steps and the clearance of arrears to all official creditors.

50

Appendix III compares Grenada’s experience with other debt restructuring episodes in the Caribbean.

51

It could be noted that while ‘NPV loss’ calculations provide an indication of investor losses, they do not necessarily offer a good summary of the solvency relief acquired by a sovereign. Hence a given NPV haircut could be achieved with substantial cash flow/liquidity relief but little solvency relief, as in the first restructuring, or with major solvency relief but less impact on immediate cash flows (the second restructuring). If faced with a choice, political economy considerations may encourage a sovereign facing substantial near-term financing needs (as in Grenada 2004–06) to opt for liquidity relief, when a more prudent analysis would recognize that a solvency operation is required. In this context, the ‘back loaded’ nature of fiscal adjustment following the 2004–06 restructuring was considered problematic. However, the paper does not look whether a ‘frontloaded’ adjustment would have been feasible in the immediate aftermath of Hurricane Ivan.

52

To facilitate the analysis, comparison is made only for the EC$ and US$ 2025 bonds and the 2030 bonds.

53

In this exercise, the starting point for the first restructuring is 2005 and that for the second restructuring is 2015. The debt ratio created is a hypothetical index with a starting point of 1. It extracts from the primary balance, additional interest and principal repayments arising from other existing and new debt. The actual DSA is discussed in the next section.

54

The refinancing rate makes little difference to the debt ratio for the 2005 debt restructuring because, by construction, the cash flows in the earlier period are limited.

55

IMF Lending into Arrears Policy.

56

See IMF (2013) for more general lessons and IMF (2014c, 2015c, 2015d) for concrete proposals. Moreover, see also Brookings-CIEPR (2013) and Erce (2013) for further policy discussions.

57

The relevant policies that come into play include: non-toleration of arrears to official creditors, lending into arrears to private creditors, financing assurances, and public debt limits in IMF-supported programs.

58

The IMF DSA could be used as a means of producing and examining such scenarios.

1

IMF (2013) also emphasizes an additional factor, that is, the fear of contagion may generate delay in the authorities’ policy action to debt sustainability.

Sovereign Debt Restructurings in Grenada: Causes, Processes, Outcomes, and Lessons Learned
Author: Mr. Tamon Asonuma, Xin Li, Mr. Michael G. Papaioannou, and Mr. Saji Thomas
  • View in gallery

    Grenada’s Selected Economic Indicators, 2000–17 1/

  • View in gallery

    Grenada’s Illustrative Debt Trajectories under Different Growth and Interest Rate Assumptions

    (normalized at 2005/2015 = 100 percent)

  • View in gallery

    Primary Balance and Public Debt Developments around Debt Restructurings in the Caribbean

  • View in gallery

    Grenada’s Debt Trajectory — Program Projections versus Actual Outcomes

    Economic Growth (in percent)

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    Grenada’s Redemption Profile Pre- and Post-Debt Restructuring

    (in millions of East Caribbean dollars)