“The Design of the SDRM—Further Considerations,” EBS/02/201, November 27, 2002.
This paper does not attempt to address conceptual considerations regarding the assessment of sustainability, or the incentives that surround the decision by a member to undertake a debt restructuring.
See “Sovereign Debt Restructuring and the Domestic Economy: Experience in Four Recent Cases,” SM/02/67, February 21, 2002.
where “d” is the public debt to GDP ratio, “p” is the primary fiscal balance to GDP ratio, “λ” is the growth rate of the economy, and “r” is the real interest rate paid on public debt. In general, a higher debt burden can be supported: (i) the higher the rate of economic growth; (ii) the lower the real interest rate; and (iii) the higher the primary fiscal balance.
One means of assessing them would be to look at the borrowing costs of other countries with broadly similar macro-economic characteristics (public and external debt post-restructuring, fiscal and external imbalances etc). In addition, the results of studies on market access by emerging markets can be used to gauge re-entry rates for the sovereign post-restructuring. See “Assessing the Determinants and Prospects for the Pace of Market Access by Countries Emerging from Crises,” EBS/01/157, September 6, 2001.
The costs of recapitalization associated with the banking crises in recent restructuring cases can be large—public debt levels have risen in some cases by 15 percent of GDP or more. See “A Framework for Managing Systemic Banking Crises” (forthcoming Board paper).
This section deals with a set of complex issues where the work of MAE has played a prominent role in advancing the staff’s thinking. References include: Financial Sector Crisis and Restructuring: Lessons from Asia, IMF Occasional Paper No. 188; Building Strong Banks Through Surveillance and Resolution, IMF 2002, and MAE’s forthcoming Board paper on “A Framework for Managing Systemic Banking Crises”.
See “Involving the Private Sector in the Resolution of Financial Crises—The Restructuring of International Sovereign Bonds—Further Considerations,” EBS/02/15, January 31, 2002.
A core of the banking sector could be gauged on the basis of considerations related to the branch network, the value of transactions processed through the payments system, the number of depositors, and the balance sheet conditions and prospects for the banks involved. In practice, this could involve difficult judgments given the high uncertainty on the conditions of banks associated with a sovereign debt crisis.
The implications of the fiscal costs of bank restructuring for debt dynamics and debt sustainability are of particular concern in financial markets where the volume of deposits and the size of the banking sector are large in relation to GDP.
See “Deposit Insurance: Actual and Good Practices,” IMF Occasional Paper No. 197, 2000.
In a highly dollarized economy, the central bank’s role as a lender of last resort is constrained by the size of international reserves relative to deposits in the banking system. A limited coverage may undermine the credibility of a strategy for liquidity support. External financing of the deposit guarantee may be necessary to restore the credibility needed to stem dollar bank runs.
Administrative bank measures may be a more effective means of stemming capital flight in cases where the enforceability of exchange restrictions is weak.
Redemption of bonds on the secondary market may take place at a (heavy) discount.
The mobility of transaction accounts’ within the banking system and the possibility of limited withdrawals should be considered to minimize payment system disruptions. Depositors may also be allowed to use restricted deposits as means of payment within the banking system. This option, while allowing payments, may create additional pressures on the system as depositors move restricted deposits to the strongest banks.
The adoption of administrative measures affecting creditor rights may give also rise to legal or constitutional challenges that can result in increased uncertainty.
Particularly where there is limited room to defend the exchange rate with interest rate increases, due to concerns about the adverse implications on fragile balance sheets, including, those of banks, where a maturity mismatch toward short-term liabilities is typical.
For an overview, see “Capital Controls: Country Experience with their Use and Liberalization,” IMF Occasional Paper No. 190.
This measure is not an exchange restriction under the Fund’s Articles, as it does not constitute a restriction on the making of payments and transfers for current international transactions. It could, however, limit the scope for residents to undertake capital transactions.
This paper does not discuss the broader issue relating to the vulnerability of domestic enterprises to litigation that may arise as a result of the default that occurred following the imposition of capital controls.
The concept of “restrictions” is not defined in the Articles, but the Fund’s guiding principle to determine a restriction is the involvement of a direct governmental limitation on the availability or use of exchange as such, Decision No. 1034-(60/27) June 1, 1960.
Ibid, see also Decision No. 955—(59/45), October 23, 1959.
It should be noted that Paris Club restructurings are not aimed a priori at achieving a sustainable debt profile but, rather, at providing a country with cash flow relief during the “consolidation period” (i.e. on claims falling due during the period of the Fund-supported program).
Sometimes a Paris Club agreement precedes an agreement with private creditors, e.g. in the case of Pakistan, and sometimes it does not, as in the case of Ecuador.
The SDRM would establish a framework for the restructuring of the claims of private creditors governed by external law, and—depending upon its coverage—possibly also the claims of official bilateral creditors. In addition, there are a number of features of the proposed mechanism that could help facilitate the coordination of the restructuring of debts that would be restructured outside the mechanism.
In these circumstances, an orderly and prompt restructuring can create value for both creditors and debtors.
See “Fund Policy on Lending into Arrears to Private Creditors—Further Consideration of the Good Faith Criterion,” (SM/02/248, July 31, 2002).
See “Access Policy in Capital Account Crises—Modifications to the Supplementary Reserve Facility and Follow-Up Issues Related to Exceptional Access Policy,” (EBS/03/20, January 14, 2003) and “Access Policy in Capital Account Crises,” (SM/02/246, July 30, 2002).
See “Need as a Condition for the Use of Fund Resources,” (SM/94/299) for a more detailed discussion of the legal and economic considerations surrounding the concept of “need”.
In some emerging markets, for instance, deposits to GDP stand in the range of 50-100 percent of GDP, well in excess of available IFI financing. By comparison, the average ratio of (annualized) Fund financing to GDP between 1993-2001 was 1.4 percent of GDP for arrangements within the access limits and 3.3 percent of GDP for exceptional access arrangements. The recent arrangement for Uruguay lies at the extreme end of the range with annualized access to GDP (as projected at the time of approval) at 10.5 percent of GDP.
Circumstances that might warrant exceptional access to Fund resources were discussed by the Board in the context of the paper on access policy in capital account crises, BUFF/02/159, September 20, 2002.