Front Matter

Front Matter Page


April 9, 2015

Executive Summary

Background. In discussing the June 2014 paper, Executive Directors broadly supported staff’s proposal to introduce more flexibility into the Fund’s exceptional access framework to reduce unnecessary costs for the member, its creditors, and the overall system. Directors’ views varied on staff’s proposal to eliminate the systemic exemption introduced in 2010. Many Directors favored removing the exemption but some others preferred to retain it and requested staff to consult further with relevant stakeholders on possible approaches to managing contagion. This paper offers specific proposals on how the Fund’s policy framework could be changed, presents staff’s analysis on the specific issue of managing contagion, and addresses some implementation issues. No Board decision is proposed at this stage. The paper is consistent with the Executive Board’s May 2013 endorsement of a work program focused on strengthening market-based approaches to resolving sovereign debt crises.

Increasing flexibility. Staff proposes changes to the exceptional access framework for cases where, although the member’s debt is considered to be sustainable, this determination cannot be made with high probability (i.e., uncertain or “gray zone” cases). The proposed changes would allow the Fund to lend in such cases with a less definitive debt restructuring (i.e., reprofiling) than required under the current framework if it improves debt sustainability and sufficiently enhances safeguards for Fund resources. First, the reprofiling may give breathing space to a liquidity-constrained sovereign and allow for a less constraining adjustment path, thus supporting growth and improving debt sustainability. Second, it could help catalyze domestic support for the program. Third, the maintenance of non-senior creditor exposure would provide safeguards for the member and the Fund in the form of the option to implement a more definitive debt restructuring later if needed, such as, in the event downside risks materialized. A reprofiling would also normally reduce the level of access to Fund resources needed by the member. Fourth, relative to a bail-out, a reprofiling would support market re-access prospects: creditors are more likely to re-engage when a larger share of the debt is non-senior claims since it reduces the risk of subordination to official sector claims in the event of a subsequent debt restructuring. A reprofiling would not be required if, notwithstanding the gray zone or uncertain assessment of sustainability, the member retains market access, or creditor exposure is maintained in other ways (including through new financing).

Dealing with spillovers from a sovereign debt crisis. Staff analysis consists of two parts:

  • Understanding the nature and type of spillovers. The primary source of spillovers in a sovereign debt crisis episode is market concerns over the member’s solvency. Thus, a restructuring decision that is anticipated and seen as credibly addressing debt vulnerabilities may be less contagious than a bail-out that leaves the member’s debt problems unresolved and raises the default risk on the remaining private claims.

  • Managing spillovers from a reprofiling. Spillovers from a reprofiling would be—and have been in previous cases—much smaller than those arising from a debt reduction operation involving principal haircuts. Also, some spillovers, insofar as they reflect a realignment of risk pricing with fundamentals, would be desirable and should be allowed to play out. Thus, an optimal approach would combine a debt operation, where needed, with policy interventions aimed at resisting market fluctuations not rooted in fundamentals. In this context, staff’s analysis of past crises reveals several options to prevent and manage spillovers: ex-ante systemic measures (clear “rules” of the game, including the Fund’s own policy frameworks for exceptional access and debt sustainability assessments, bank resolution frameworks that minimize taxpayer subsidies, and regional financing/support arrangements); measures in the crisis country (careful calibration of the scope of sovereign debt included in the reprofiling operation, backstops for the financial system, including from central bank); and defensive measures outside the crisis country (the standard menu of policy tools for mitigating capital flow and financial market volatility in affected countries, backed by supra-national firewalls and safety nets, such as swap lines, Fund resources, and regional financing arrangements).

Removing the systemic exemption and addressing “tail events.” Staff recognizes that there may be rare cases where policymakers conclude that cross-border spillover risks are so severe that defensive measures would be inadequate and hence any restructuring of private claims must be avoided. Resorting to the systemic exemption and an ensuing bail-out, however, is not an effective remedy in such circumstances. It may fail to limit contagion, since it does not address the source of the problem, namely the underlying market concerns about debt vulnerabilities. The systemic exemption also reduces safeguards for Fund resources since, if a debt restructuring is eventually needed, a smaller pool of private sector claims would be available to absorb losses. More broadly, by severing the link between underlying debtor risk and yields, the exemption encourages moral hazard and over-borrowing ex-ante, and exacerbates market uncertainty in periods of sovereign stress, as traders bet on whether the exemption will be activated, rather than focusing on underlying sustainability fundamentals. In an extreme tail-risk event, an alternative would be for the Fund to make exceptional access available provided that other official bilateral creditors are willing to provide financing on terms sufficiently favorable to address sustainability concerns. Though it, too, would create moral hazard, this approach would be more effective than the systemic exemption in helping members address their problems (as Fund policy requires), mitigating contagion, and safeguarding Fund resources. The approach could be implemented flexibly and Fund lending could proceed on the basis of political commitments to backstop debt sustainability without necessarily requiring the specifics to be spelt out. Overall, given the proposed increased flexibility of the exceptional access policy, and the options to deal with spillovers and “tail events” within that framework, staff sees a compelling case for the removal of the systemic exemption.

Conclusion. The two proposals (i.e., increased flexibility and removal of systemic exemption) are a coherent package that, in staff’s view, should be adopted together.

Approved By Olivier Blanchard, Sean Hagan, Siddharth Tiwari and José Viñals

Prepared by a team of four departments led by Ali Abbas (SPR). The team comprised Wolfgang Bergthaler (LEG lead), Yan Liu, Nikita Aggarwal, Julianne Ams and Chanda DeLong (all LEG); Luc Everaert (MCM lead), Michael Papaioannou, Kay Chung, Anastasia Guscina, Sheheryar Malik and Gabriel Presciuttini (all MCM); Damiano Sandri (RES lead), Luc Laeven (formerly RES), Marcos Chamon and Alberto Martin (all RES); and Geneviève Verdier (now FAD, former SPR lead), Tamon Asonuma, Chris Dielmann, Heiko Hesse, Emmanuel Hife, Claudia Isern, Charlotte Lundgren, Alex Pienkowski, Nelson Sobrinho, Chad Steinberg, Suchanan Tambunlertchai, and Yi Xiong (all SPR). The work was supervised by Olivier Blanchard, Sean Hagan, Hugh Bredenkamp, Peter Dattels, and Reza Baqir.




  • A. The Existing Text

  • B. The Proposed Text


  • A. Understanding the Nature and Types of Spillovers

  • B. Managing Spillovers and Stability Risks

  • C. Addressing ‘Tail’ Events


  • A. Assessing Market Access

  • B. Securing Creditor Participation

  • C. Conditionality on the Implementation of a Restructuring



  • 1. Earlier Crisis Episodes with Official Sector Financing

  • 2. Assessing Market Access Loss


  • 1. Comparison of Current and Proposed Frameworks for Exceptional Access

  • 2. Sovereign CDS Spreads in Italy, Spain, Ireland, and Portugal (2010–12)

Front Matter Page


January 6, 2016

This paper supplements the Board paper “The Fund’s Lending Framework and Sovereign Debt—Further Considerations”, issued to the Board on April 13, 2015 (the “2015 Paper”). The first part discusses issues related to the “third criterion” on market access under the Fund’s Exceptional Access Policy (“EAP”) that were raised in the 2013 and 2014 papers on sovereign debt restructuring and the Fund’s lending framework (the “2013 Paper” and the “2014 Paper”).1 In light of this further analysis, staff is proposing a clarification to the third criterion. The second part includes a draft proposed decision to modify the EAP with respect to the “second criterion” on debt sustainability (in line with the text in paragraph 11 of the 2015 Paper); as well as the “third criterion” (in line with the discussion in this supplement).



  • A. Background and Motivation

  • B. Staff’s Analysis of the Issues Raised

  • C. Staff’s Proposal

  • Proposed Decision


  • Annex: Redline of Paragraphs 3(a), 3(b), 3(c) and 3(d) of Decision No. 14064-(08/18), February 22, 2008, as Amended


  • 1. Market re-access in selected recent EA cases

Front Matter Page


April 9, 2015

Approved By Olivier Blanchard, Sean Hagan, Siddharth Tiwari and José Viñals

Prepared by a team of four departments led by Charlotte Lundgren (SPR) and Geneviève Verdier (formerly SPR, now FAD). The team comprised Wolfgang Bergthaler, Nikita Aggarwal, Julianne Ams, and Chanda DeLong and Yan Liu (all LEG); Luc Everaert (formerly MCM, now APD), Michael Papaioannou, Kay Chung, Anastasia Guscina, Sheheryar Malik and Gabriel Presciuttini (all MCM); Luc Laeven (formerly RES), Damiano Sandri, Marcos Chamon and Alberto Martin (all RES); and Tamon Asonuma, Christopher Dielmann, Heiko Hesse, Emmanuel Hife, Claudia Isern, Alex Pienkowski, Nelson Sobrinho, Chad Steinberg, Suchanan Tambunlertchai, and Yi Xiong (all SPR).



  • Annex I. Channels of International Financial Contagion

  • A. A Taxonomy of the Channels of Financial Contagion

  • B. Financial Contagion and Sovereign Debt Restructuring

  • C. Country Experiences with Financial Contagion

  • D. Channels of Contagion

  • E. Policy Responses to Contagion

  • F. Lessons from the Case Studies

  • References

  • Annex II. Analytical Note on the Scope of Sovereign Debt for Reprofiling

  • A. Dimensions of the Scope of Debt

  • B. Stylized Facts on the Composition of Sovereign Debt

  • C. Evidence from Past Practice

  • D. Financial Stability Considerations

  • E. Changing Circumstances

  • F. Concluding Remarks

  • References

  • Annex III. Assessing Loss of Market Access

  • A. Defining and Measuring Market Access Loss

  • B. Evaluating the Signaling Power of LMA Indicators

  • References

  • Annex IV. Reprofiling and Program Conditionality

  • A. The Fund’s Legal and Policy Framework

  • B. Past Practice


  • AII1. Emerging and Advanced Economies Short-Term Sovereign Debt

  • AII2. Emerging and Low-income Countries

  • AII3. World Sovereign Debt

  • AII4. Foreign-law Governed Sovereign Bonds: Jurisdictions

  • AII5. Emerging Market Economies: Public Sector Debt in Foreign Currency or Linked to the Exchange Rate

  • AII6. Holders of Government Debt, end-2013

  • AII7. Foreign Holders of Sovereign Debt, 2004–13

  • AII8. Sovereign Credit Default Swap Spreads

  • AII9. OTC Derivatives. Gross Market Values

  • AIII1. Decision Rule on Loss of Market Access

  • AIII2. Argentina: Loss of Market Access

  • AIII3. Duration of LMA and Fiscal Fundamentals

  • AIII4. Portugal: Behavior of Market Indicators Around LMA

  • AIII5. Behavior of Sovereign Spreads Around LMA

  • AIII6. Behavior of Credit Ratings Around LMA

  • AIII7. Nonresident Holdings of Government Debt in Selected Countries

  • AIII8. Share of Local Currency Long-term Debt Prior to LMA in Selected Countries

  • AIII9. Yield Curves Behavior Prior to LMA in Selected Countries


  • AI1. Severity of Contagion Episodes and Size of Official Sector Financing and Private Sector Involvement

  • AII1. Duration from Initial Default to Exchange Date

  • AII2. Sovereign Debt Exchanges Since 1998

  • AIII1. Summary Statistics for the LMA Variable

  • AIV1. Restructuring requirements in past Fund arrangements

Front Matter Page

Press Release No. 16/XX


[January 28, 2016]

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