Abstract
The Fund's Lending Framework and Sovereign Debt-Further Considerations
Analysis of the ‘Market Access’ Criterion Under the Fund’s Exceptional Access Policy
A. Background and Motivation
1. The criterion for “market access” is the third of four criteria under the EAP and reads as follows: “(c) The member has prospects of gaining or regaining access to private capital markets within the timeframe when Fund resources are outstanding.”2
2. The intent of the criterion is to help achieve the two objectives of Fund financing as set forth in Article V, Section 3(a). These are: (i) “assisting members to solve their balance of payments problems” and (ii) providing “adequate safeguards for the temporary use of the general resources of the Fund.”
3. In the context of the 2013 and 2014 Papers, two issues were raised about the assessment of the third criterion. The first issue pertained to situations where official lenders offer commitments of support that extend into the post-program period, when the member would generally be expected to have regained market access. Specifically, the Fund’s experience with euro area programs prompted the following question: If official lenders provided or assured financing that was sufficient to repay the Fund, would there remain a need for a separate criterion on market access to be assessed at arrangement approval and subsequent reviews?
4. The second issue—pertaining to the timeframe in which market access needs to be established—was also raised in the context of open-ended commitments by official lenders (2014 Paper, paragraph 56), but applies more generally in the context of any Fund-supported program. On a literal reading, the third criterion could be interpreted as only requiring the member to regain market access by the time that the last repurchase is made, which would not assure that earlier repayments could be made. More generally, this could allow for market access to be delayed for an unreasonably long timeframe: in the case of an Extended Fund Facility (EFF), this could be 10 years after the approval of the arrangement.
5. This supplement offers further analysis of these two issues. Specifically, staff argues that the third criterion cannot be dispensed with when there are open-ended commitments of support from the official sector (the first issue); and proposes to clarify the ambiguity on timeframe (the second issue).
B. Staff’s Analysis of the Issues Raised
6. With regard to the first issue, staff recognizes that commitments of official support extending into the post-program period could help strengthen safeguards for Fund resources, an important motivation for having the third criterion. Insofar as such commitments are credible, they boost the member’s ability to meet its obligations to the Fund, and could thus mitigate risks to Fund resources.
7. However, such commitments would not address the first objective of Fund financing, which is to assist a member to resolve its balance of payments problem. This is because a member’s balance of payments problem can only be considered “resolved” if a member is able to finance its balance of payments deficit without the need for exceptional financing; i.e., where it has achieved “medium term external viability”.3 The ability to regain market access is central to this determination. Reliance on financing from other official creditors well into the post-program period would not be consistent with this standard. Importantly, what is germane for external viability is not the “need,” but the “ability” to tap private capital markets: while official commitments of support could reduce a member’s need to tap private capital markets, a member could not be considered to have achieved external viability until it has the ability to do so.
8. Because a member’s ability to access private capital markets is inherent to the resolution of a member’s balance of payments problem, staff’s view is that official financing commitments do not render the market access criterion moot. This is not to say that commitments of official support are irrelevant when assessing whether the market access criterion is met.4 There may be circumstances where the availability of official financing on favorable terms in the post-program period has the effect of moderating rollover needs or reducing “tail” risks, and this could make private capital markets more willing to lend, if they were called upon to do so. Conversely, if the member is expected to draw on substantial amounts of official sector support in the post-program period, this could deter private investors from lending to the sovereign, owing to fears that their claims would be subordinated to the mounting stock of senior official claims. These considerations would need to be weighed, case-by-case, alongside other factors—such as debt levels and growth prospects—that may affect market access and external viability.
9. With regard to the second issue (of timeframe), notwithstanding the ambiguity of the language, the Fund has generally required that the member regain market access within a timeframe that facilitates the repayment of all of its obligations—not just the last one that is due (Table 1 sets out the market re-access timeframes observed in a selection of recent exceptional access programs). Thus, in the case of the typical 3-year extended arrangement under the EFF, where repayments to the Fund commence around 4½ years after the first disbursement, the member would be expected to achieve market access (external viability) no later than the fifth year from the start of the program.5
Market re-access in selected recent EA cases 1/
The selected sample excludes precautionary arrangements (precautionary SBAs, FCLs, PLLs).
Information from SPR database “Fund Arrangements Since 1952”.
First international issuance in the post-program period, from Dealogic and/or staff reports.
Market re-access in selected recent EA cases 1/
| Country | Arrangement 2/ | Percent of quota 2/ | Date of re-access 3/ | Comments 3/ | ||
|---|---|---|---|---|---|---|
| Type | Start | End | ||||
| Sri Lanka | SBA | Jul 2009 | Jul 2012 | 400 | Oct 2010 | $500 million, 5-year bond, with a coupon of 7.4 percent |
| Ukraine | SBA | Jul 2010 | Dec 2012 | 729 | Sep 2010 | Dealogic reports issuances throughout 2010-12 |
| Ireland | EFF | Dec 2010 | Dec 2013 | 2322 | Jul 2012 | Return to the Tbill market. Dealogic reports a bond issuance in Jan 2012 |
| Portugal | EFF | May 2011 | May 2014 | 2306 | Jan 2013 | Re-opening of a 5-year bond at about 5 percent yield |
| Greece | EFF | Mar 2012 | Mar 2016 | 2159 | Apr 2014 | Access was not long-lasting |
| Jordan | SBA | Aug 2012 | Aug 2015 | 800 | Nov 2015 | Issuance of eurobond without guarantees |
The selected sample excludes precautionary arrangements (precautionary SBAs, FCLs, PLLs).
Information from SPR database “Fund Arrangements Since 1952”.
First international issuance in the post-program period, from Dealogic and/or staff reports.
Market re-access in selected recent EA cases 1/
| Country | Arrangement 2/ | Percent of quota 2/ | Date of re-access 3/ | Comments 3/ | ||
|---|---|---|---|---|---|---|
| Type | Start | End | ||||
| Sri Lanka | SBA | Jul 2009 | Jul 2012 | 400 | Oct 2010 | $500 million, 5-year bond, with a coupon of 7.4 percent |
| Ukraine | SBA | Jul 2010 | Dec 2012 | 729 | Sep 2010 | Dealogic reports issuances throughout 2010-12 |
| Ireland | EFF | Dec 2010 | Dec 2013 | 2322 | Jul 2012 | Return to the Tbill market. Dealogic reports a bond issuance in Jan 2012 |
| Portugal | EFF | May 2011 | May 2014 | 2306 | Jan 2013 | Re-opening of a 5-year bond at about 5 percent yield |
| Greece | EFF | Mar 2012 | Mar 2016 | 2159 | Apr 2014 | Access was not long-lasting |
| Jordan | SBA | Aug 2012 | Aug 2015 | 800 | Nov 2015 | Issuance of eurobond without guarantees |
The selected sample excludes precautionary arrangements (precautionary SBAs, FCLs, PLLs).
Information from SPR database “Fund Arrangements Since 1952”.
First international issuance in the post-program period, from Dealogic and/or staff reports.
C. Staff’s Proposal
10. In view of the analysis presented, staff proposes to retain the third criterion on market access under the EAP for cases involving open-ended commitments of official support.
11. To remove any unintended ambiguity in the language with regard to the “timeframe” within which market access should be gained/regained, staff proposes a clarification to the third criterion under the EAP as set out in the draft proposed decision below and in redline in the Annex below.
Proposed Decision
Based on the analysis set out in the main paper6 and this supplement, staff proposes to modify the second and third criteria under the EAP. Accordingly, the following decision, which may be adopted by a majority of votes cast, is proposed for adoption by the Executive Board:
Paragraphs 3(b) and (c) of Decision No. 14064-(08/18), February 22, 2008, as amended, shall be amended to read as follows:
“(b) A rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term. Where the member’s debt is assessed to be unsustainable ex ante, exceptional access will only be made available where the financing being provided from sources other than the Fund restores debt sustainability with a high probability. Where the member’s debt is considered sustainable but not with a high probability, exceptional access would be justified if financing provided from sources other than the Fund, although it may not restore sustainability with high probability, improves debt sustainability and sufficiently enhances the safeguards for Fund resources. For purposes of this criterion, financing provided from sources other than the Fund may include, inter alia, financing obtained through any intended debt restructuring. This criterion applies only to public (domestic and external) debt. However, the analysis of such public debt sustainability will incorporate any relevant contingent liabilities, including those potentially arising from private external indebtedness. (c) The member has prospects of gaining or regaining access to private capital markets within a timeframe and on a scale that would enable the member to meet its obligations falling due to the Fund.”
Annex: Redline of Paragraphs 3(a), 3(b), 3(c) and 3(d) of Decision No. 14064-(08/18), February 22, 2008, as Amended:
“(a) The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current account or the capital account, resulting in a need for Fund financing that cannot be met within the normal limits;
(b) A rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term. Where the member’s debt is assessed to be unsustainable ex ante, exceptional access will only be made available where the financing being provided from sources other than the Fund restores debt sustainability with a high probability. Where the member’s debt is considered sustainable but not with a high probability, exceptional access would be justified if financing provided from sources other than the Fund, although it may not restore sustainability with high probability, improves debt sustainability and sufficiently enhances the safeguards for Fund resources. For purposes of this criterion, financing provided from sources other than the Fund may include, inter alia, financing obtained through any intended debt restructuring. This criterion applies only to public (domestic and external) debt. However, the analysis of such public debt sustainability will incorporate any relevant contingent liabilities, including those potentially arising from private external indebtedness.
(c) The member has prospects of gaining or regaining access to private capital markets within a timeframe and on a scale that would enable the member to meet its obligations falling due to the Fund.
(d) The policy program of the member provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.”
Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework and The Fund’s Lending Framework and Sovereign Debt—Preliminary Considerations, respectively.
Decision No. 14064-(08/18), February 2, 2008, as amended.
Guidelines on Conditionality, Decision No. 12864–(02/102), September 25, 2002, as amended.
Official support here connotes direct policy lending to a member by the official sector. It excludes project lending, monetary policy support mechanisms (including in the context of currency unions), and other credible signals from policy makers aimed at anchoring market expectations (e.g., Mario Draghi’s “whatever it takes” pledge, in the context of the euro area crisis), which may nonetheless be important for supporting market access prospects.
Market access may need to be restored sooner if there are Fund obligations coming due at the beginning of the post-program period because of purchases made under an earlier arrangement.
Further to the modifications in the main paper, staff proposes a clarification to the last sentence of the second criterion to align the concepts of government and public debt.