Abstract
This paper presents a review of the principal issues emerging from an IMF Conference held in March 1983. The special drawing right has been conceived in the 1960s and has been formally provided in the first amendment to the Articles of Agreement of the IMF, which took effect in 1969. Upon the abandonment of the Bretton Woods system of fixed exchange rates and the coming of freedom for the IMF members to adopt the exchange arrangements of their choice, a lack of discipline has been felt in the international monetary system.
There is nothing mysterious about debt rescheduling: it amounts to a rearrangement or restructuring, generally involving a stretching out, of the original repayment schedule with respect to a particular debt or a set of debts. Rescheduling is one of the options available to a country that is having difficulties in “servicing” its external debt, that is, in making the repayments of principal and interest as they fall due.
A country may run into debt servicing difficulties for a number of reasons: (1) it may have pursued inadequate macroeconomic policies, leading to balance of payment problems and undermining its ability to service debt; (2) it may have borrowed excessively, that is, beyond its current capacity to service the debt; (3) it may have borrowed on unfavorable terms (for example, it may have accumulated too much short-term debt) or it may have built up an unfavorable maturity profile, with a “hump” in repayments falling due; (4) it may be affected adversely by events that it cannot control. For instance, a great deal of foreign borrowing in recent years has been on the basis of floating interest rates (usually linked to the interest rate in the London interbank market) and these rates may increase sharply for reasons that have nothing to do with conditions in the debtor country. Also for reasons beyond its control, the country may experience a temporary but substantial export shortfall reducing its foreign exchange earnings and its ability to service its debt. The export shortfall may be due to unfavorable climatic conditions or developments in the world market for the export commodities of the debtor country. Finally, for reasons that may be partly related to developments in a neighboring borrowing country, new bank lending may suddenly be reduced, creating difficulties for another borrower; and (5) the country may, for any other reason, find its ability to earn foreign exchange suddenly reduced.
This article was prepared by the editorial staff and draws on various Fund and Bank staff papers.
In actual practice, several factors may be present, even though one may predominate. Economists and bankers sometimes distinguish between two broad types of debt difficulty: that due to liquidity problems, defined as a temporary shortage of foreign exchange resources, and difficulties due to solvency problems, where the debt servicing obligations are beyond the longer-term economic capacity of the country in question. In practice, elements of both may be present, and a solution to a debt servicing problem must be considered, not in isolation but in the context of restoring balance of payments viability.
The choices
A country facing debt servicing difficulties has, broadly speaking, three choices. First, it may cease repayments on its debt and thus accumulate debt service arrears. Such an action, however, has serious drawbacks. It will undermine confidence in the country, making it difficult—if not impossible—for it to borrow in the future. More over, there is the further possibility (although rarely a reality) of the country being formally declared “in default,” in which case that country’s assets abroad (ships, aircrafts, and so on) may be “attached” or confiscated and sold to discharge the debt.
A second option may be for the country to try to service its debt at all costs. But to do so it may have to restrict its other foreign exchange expenditures, which generally means a reduction of imports, a difficult task in many developing countries where imports already consist of essentials. Thus, on economic as well as social grounds, this may not be a viable course.
Third, the country may seek a rescheduling which, as explained above, is a rearrangement of the repayment terms of the original loan. (It may also seek a refinancing which, technically, is different: it involves a new medium-term loan in the amount of the debt due, which is repaid with the proceeds of the loan.)
A rescheduling may cover the principal only or the principal and interest on repayments falling due in a particular period (generally one year). The rescheduled debt may include a “grace” period and a “stretched” repayment schedule. For instance, if repayments falling due in 1983 amount to $100 million and the country succeeds in arranging a rescheduling with a grace period of three years and a repayment period of five years, this means that the repayment falling due in 1983 will be made during the years 1986-1990. Rescheduling thus is not merely postponing a debt: it is spreading over a number of years payments that were due in one year. There is, of course, a cost involved, in that the debtor country must pay interest on the amount outstanding until the debt has been finally and fully repaid.
The rationale for a rescheduling is to provide time: in cases where the debt problem is due to a temporary foreign exchange shortfall, rescheduling gives time for the balance of payments to improve; in cases where the problem is more fundamental, rescheduling lightens the country’s burden and gives time for appropriate corrective measures to be taken in order to improve the balance of payments. In this latter case it is important to recognize that rescheduling is not a panacea and cannot work in isolation: it can only succeed if it is accompanied by steps to address the underlying economic problems.
In recent years, as an increasing number of countries faced balance of payments problems and debt servicing difficulties, there has been a sharp increase in the number of reschedulings. The multilateral rescheduling process has generally covered two types of debts: official debt, that is, loans provided or guaranteed by governments or official agencies, and commercial bank debt. Official debt reschedulings are generally handled through “creditor clubs,” the best known of which is the Paris Club. On occasion, official debt is also negotiated through aid consortia, under procedures similar to the creditor clubs. Commercial bank debt is renegotiated under more ad hoc arrangements, involving large and often changing groups of credit banks.
Multilateral debt renegotiations, 1974-83
As of end-May, 1983.
Estimates.
Multilateral debt renegotiations, 1974-83
| 1974 | 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 19831 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Argentina | C | © | |||||||||
| Bolivia | C | C | |||||||||
| Brazil | © | ||||||||||
| Central Afr. Rep. | P | ||||||||||
| Chile | P | P | © | ||||||||
| Costa Rica | P, © | ||||||||||
| Cuba | © | ||||||||||
| Ecuador | C | ||||||||||
| Gabon | P | ||||||||||
| Ghana | P | ||||||||||
| Guyana | C | C | |||||||||
| India | A | A | A | A | |||||||
| Jamaica | C | C | |||||||||
| Liberia | P | P | C | ||||||||
| Madagascar | P | P | © | ||||||||
| Malawi | P, C | ||||||||||
| Mexico | © | ||||||||||
| Nicaragua | C | C | C | ||||||||
| Pakistan | A | A | |||||||||
| Peru | C | P, C | C | ||||||||
| Poland | A | C | © | ||||||||
| Romania | P, C | P | |||||||||
| Senegal | P | P, C | © | ||||||||
| Sierra Leone | P | P | |||||||||
| Sudan | P | C | P | P | |||||||
| Togo | P | C | P | P, © | |||||||
| Turkey | A | A, C | A | C | |||||||
| Uganda | P | P | |||||||||
| Yugoslavia | © | ||||||||||
| Zaïre | P | P | P | C | P | ||||||
| Zambia | P | ||||||||||
| In millions of U.S. dollars | |||||||||||
| Total amount:2 | 1,530 | 375 | 1,600 | 240 | 1,800 | 6,200 | 3,750 | 2,540 | 10,000 | 37,000 | |
As of end-May, 1983.
Estimates.
Multilateral debt renegotiations, 1974-83
| 1974 | 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 19831 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Argentina | C | © | |||||||||
| Bolivia | C | C | |||||||||
| Brazil | © | ||||||||||
| Central Afr. Rep. | P | ||||||||||
| Chile | P | P | © | ||||||||
| Costa Rica | P, © | ||||||||||
| Cuba | © | ||||||||||
| Ecuador | C | ||||||||||
| Gabon | P | ||||||||||
| Ghana | P | ||||||||||
| Guyana | C | C | |||||||||
| India | A | A | A | A | |||||||
| Jamaica | C | C | |||||||||
| Liberia | P | P | C | ||||||||
| Madagascar | P | P | © | ||||||||
| Malawi | P, C | ||||||||||
| Mexico | © | ||||||||||
| Nicaragua | C | C | C | ||||||||
| Pakistan | A | A | |||||||||
| Peru | C | P, C | C | ||||||||
| Poland | A | C | © | ||||||||
| Romania | P, C | P | |||||||||
| Senegal | P | P, C | © | ||||||||
| Sierra Leone | P | P | |||||||||
| Sudan | P | C | P | P | |||||||
| Togo | P | C | P | P, © | |||||||
| Turkey | A | A, C | A | C | |||||||
| Uganda | P | P | |||||||||
| Yugoslavia | © | ||||||||||
| Zaïre | P | P | P | C | P | ||||||
| Zambia | P | ||||||||||
| In millions of U.S. dollars | |||||||||||
| Total amount:2 | 1,530 | 375 | 1,600 | 240 | 1,800 | 6,200 | 3,750 | 2,540 | 10,000 | 37,000 | |
As of end-May, 1983.
Estimates.
Paris Club operations
The Paris Club came into being in 1956 when a number of European countries met to renegotiate outstanding balances in their bilateral accounts with Argentina. Since then it has become the major forum for rescheduling official debt. By the end of 1982, at least 60 multilateral debt renegotiations had been held under its aegis, involving at least 20 countries (several more than once). The Club meets at the request of the country seeking to reschedule its external debt. It brings together as many of the official creditors as are willing to participate. Under an informal arrangement, the meetings are chaired by a senior official of the French Treasury, which also provides a small staff to act as the Club’s secretariat. Generally, Paris Club meetings are attended by observers from the Fund, the World Bank, OECD, and UNCTAD.
While no formal rules govern the operations of the Paris Club—each request for negotiation is assessed individually—certain basic features have emerged over the years. The creditor countries take a common approach to requests for the renegotiation, thus assuring consistency in treatment of similar types of debt. The Club has drawn a clear distinction, for instance, between debt renegotiations to alleviate debt servicing difficulties and relieve pressure on the balance of payments, and official development assistance.
At the meetings, the debtor country begins with a detailed report on its economic situation and an assessment of the amount and nature of debt relief that it regards as necessary. The Fund representative presents an assessment of the country’s economic—especially balance of payments— situation and prospects, including the status of the country’s relations with the Fund. The Bank representative then provides a longer-term analysis of the debtor’s economic prospects. After statements by UNCTAD and other participants, the creditors’ representatives reach an understanding on the general terms of a rescheduling of the country’s debt. These become the subject of negotiation between them and the debtor country.
The Paris Club meets normally for two days on a single rescheduling, and the results are embodied in a set of Agreed Minutes. These Minutes establish the general guidelines for the rescheduling in question and serve as the basis for subsequent bilateral agreements between each creditor and the debtor country (these agreements also cover the interest rate that will apply to the rescheduled debt). A renegotiation achieves legal status only when these bilateral agreements have been reached.
Agreements reached through Paris Club rescheduling deliberations normally:
• Only involve loans granted or guaranteed by official agencies of participating creditor countries;
• Exclude short-term debt or debts that have been rescheduled before (although there have been exceptions in special circumstances);
• Cover payments in arrears, if any, and those falling due in a specified 12-month period, and in some cases longer;
• Reschedule 85-90 per cent of the debt falling due in the specified period and allow for a grace period of up to five years, with repayments in a further period of up to five years; the nonrescheduled portion is generally to be repaid during the grace period;
• Request that the debtor should not accord more favored treatment to debt rescheduled outside the Paris Club and seek to renegotiate other debt on comparable terms;
• Require the debtor country (if it is a Fund member) to have in force a stabilization program with the Fund before rescheduling provisions become effective. Some agreements have extended this requirement to the entire period covered by the rescheduling agreement. Recently, agreements have also stipulated that further rescheduling would only be considered if the country has a program with the Fund in place.
Commercial bank debt
Commerical bank lending has become an important source of external finance for many developing countries. With the mounting balance of payments difficulties of countries in recent years, there has been a concomitant increase in the number and scope of restructuring and rescheduling arrangements involving commercial banks. At least 24 cases of debt restructuring were completed over 1978-82, involving 14 countries (again, as with official reschedulings, some more than once). Another 14 negotiations were in progress at the beginning of 1983.
Unlike the renegotiation of official debt, commercial banks do not have a framework comparable to the Paris Club, although there do exist certain modalities and procedures for negotiations between bankers and their debtor countries. Creditor banks have ad hoc arrangements for each rescheduling exercise, often involving anywhere up to 1,200 banks from different countries, with several “lead banks” (often the major lenders) guiding the negotiation process. One other difference between commercial bank and Paris Club agreements relates to implementation. Paris Club agreements are arrived at relatively quickly but are implemented over a period of time as the separate bilateral arrangements are signed. Commercial bank agreements sometimes take a long time to negotiate but may be implemented fairly rapidly once the basic conditions are met.
Since it is virtually impossible to get representatives of all creditor banks into the negotiations at one time, steering or negotiating committees, often representing national groups of creditor banks, are formed to negotiate with the debtor country. On its part, the debtor country may hire investment firms either to advise it during the negotiations or conduct the negotiations on its behalf. The actual negotiations can take place anywhere, and the process can be protracted. In the case of Costa Rica, for example, it took 20 months of sporadic activity to reach agreement.
Most commercial rescheduling arrangements cover medium-term liabilities of the public sector in the debtor countries not covered by official guarantees in the creditor banks’ home countries. In some cases, the negotiations also encompass long- term debt, either through rescheduling or by rolling over earlier obligations, although there has been no general agreement on the inclusion of interbank credits in a rescheduling arrangement. In other cases, the arrangements seek to restructure arrears on debt service obligations. There has been no uniform treatment of publicly issued securities and notes, including floating rate notes held by banks, in the restructuring of commercial bank debt. The diversity of treatment accorded to different types of commercial bank debt, as well as the form of the final debt restructuring arrangements, is an indicator of the complex nature of commercial bank debt and its rescheduling procedures.
There are two basic principles that underlie commercial bank reschedulings. First, the group of creditor banks agree to adopt a common approach. That is, if any of the banks in the creditors’ group breaks the terms of the agreement by attempting to seek bilateral restitution of its loans, then, by virtue of a “cross default clause,” other banks are not bound to conform to the common agreement reached with the debtor country. Second (with some exceptions), commercial banks’ payment of interest must continue, even while the principal debt is being restructured; in general, interest arrears must be cleared before the rescheduling agreement is signed.
The terms of commercial bank reschedulings vary considerably. Broadly, they include:
• Loans falling due over the next one-two years, with a shorter moratorium on arrears;
• 80 per cent (though in some cases less) of the debt due during the consolidation period, and in some cases the entire amount;
• Interest rates linked to the three- or six-month London interbank rate for the U.S. dollar or the U.S. prime rate (in the case of dollar denominated debt);
• A refinancing or rescheduling fee of varying amounts;
• And, since 1978, banks almost always require the debtor countries to have an adjustment program with the Fund before negotiations begin, or before the end of the consolidation period.
Role of the Bank and the Fund
Both institutions have a keen interest in external debt issues. Among the main purposes of the Fund are to assist countries with balance of payments problems and to promote orderly exchange arrangements. Debt problems stemming from balance of payments difficulties in member countries have a disruptive effect on the international financial system. The World Bank, for its part, is concerned with the long-term implications of external debt management for economic development—in aggregate and at the individual country level. An additional concern is with countries’ creditworthiness and the quality of the Bank’s portfolio. Their ability to repay the Bank’s loans in turn has an impact on the Bank’s ability to borrow.
Thus, even when there is no actual debt problem, both the Bank and the Fund have reason to follow closely the external debt situation of their member countries. During its regular annual consultations with its members, the Fund undertakes a general review of economic and financial conditions and prospects. In these discussions, which focus on balance of payments developments, the debt situation is analyzed. The Fund emphasizes the importance of avoiding debt problems through effective management and control, and its analysis covers the main aspects of the debt situation—level, rate of growth, debt service requirements, terms, and so on—in the context of the country’s economic circumstances and prospects. If the situation so warrants, the Fund may alert the member to a potential debt problem and discuss ways of dealing with it.
The Bank’s economic policy and project work also encompasses coverage and policy advice on debt and creditworthiness. Bank borrowers, before a loan is approved, are required to provide the Bank with detailed information on their medium- and long-term public and publicly guaranteed debt. Since 1970, they have also been encouraged to report aggregate private borrowing, which has come to constitute an increasing share of their longer-term debt. These statistics are incorporated in the Bank’s Debtor Reporting System, which has become a primary source of information on the longer-term debt of developing countries. Apart from providing assistance in the collection of such data, the Bank also offers advice on debt management in its regular exchange of views with its members on their economic circumstances and analyzes debt issues in its country economic and sector work.
Once a country that is a member of the Fund and the Bank has decided to seek a rescheduling of its debt (the process is described in the previous section) both institutions can play a key role in helping to achieve a satisfactory outcome. The first exercise is the collection and collation of data, and both the Fund and the Bank may provide considerable technical assistance in this process. In the same way, both institutions may assist a country seeking debt rescheduling with the analysis of its economic situation and prospects that will form the basis of its request for rescheduling. The two institutions also provide assistance during the actual rescheduling negotiations. As mentioned earlier, their officials participate as observers at Paris Club meetings and provide information and guidance on the economic situation and prospects of the debtor country as independent views mainly to inform the creditors.
Quite independently, a Fund-supported adjustment program with a country will typically contain a ceiling on the amount of external debt it can incur over a specified time within the program period (including a subceiling on shorter-term debt) or a limitation on the total stock of its debt, in order to prevent a deterioration of the country’s debt profile and to ensure that the program’s monetary provisions are not frustrated through foreign borrowing.
The Fund’s role in commercial bank reschedulings is analogous to the part it plays in the Paris Club—in that it provides information (within the bounds of confidentiality imposed on its relations with members) to debtors and creditors and gives creditors an independent assessment of a debtor’s position in the context of its adjustment to prevailing economic circumstances. But there are two important differences. Its participation is not automatic, nor is there necessarily any formal link between rescheduling and Fund-supported programs (though, as mentioned earlier, the debtor is generally urged to negotiate a Fund-supported program). In practice, the Fund is frequently asked to facilitate commercial reschedulings, and commercial creditors have always been influenced by the fact that a debtor has a Fund-supported program in place.
The Fund has played a very active role in a number of recent commercial bank reschedulings involving major debtors. It has adopted a more direct coordinating role than before in synchronizing the major commercial reschedulings arranged during the past year for some Latin American countries with the establishment of Fund-supported programs. These were situations in which a failure to act would have harmed not only the members’ own adjustment but possibly the functioning of the international monetary system as well. The Fund was able, in these cases, to establish an adjustment program promptly, based on explicit prior assurances of the availability of future financing from the creditors.
In a recent speech, the Managing Director of the Fund pointed out: “If the Fund had not sought to catalyze additional resources from banks and advocate large-scale rescheduling of repayments, the countries in question would have been faced with the need to adjust to far lower levels of financing. This would have entailed extremely high economic, social and human costs, not to mention the danger of destabilizing the financial system itself inherent in such a situation… . After the explosion of bank exposure in several countries since the late 1970s, it was important for banks to participate in new financing for 1983 and beyond, but in such a way as to gradually scale down their funding. Thus the banking operations recently organized for the three largest Latin American countries show a net increase in exposure of 7 to 8 per cent in 1983, compared with an average of about 30 per cent during 1978-81.”
Expanding their assistance
The Fund and the Bank have recently, and in cooperation with each other, taken a number of initiatives in the debt area. External debt policies of members have always been an important concern of the Fund in the context of its efforts to promote sound economic policies. To strengthen its surveillance in this area, and to aid in the assessment of individual debt situations, the Fund in its consultations is extending its work on external debt developments in member countries to include forward-looking analyses—both medium and short term—and reviews of the debt monitoring and decisionmaking procedures of members. In this context, the Fund has launched, in cooperation with the Bank, a new program to provide technical assistance to members to set up debt monitoring and control systems and to compile detailed loan statistics. It is also expanding its own work on debt data collection. About two years ago, in cooperation with the World Bank and the Bank for International Settlements, among others, the Fund developed a new system of reporting international banking statistics to improve the data available on countries’ recourse to international banks. In general, the Fund aims to publish more comprehensive information on external debt (including data on short-term debt) more promptly and more regularly.
The Bank, too, has increased the coverage and improved the quality and timeliness both of the data available in its World Debt Tables and of the debt analysis that supports the policy and economic work of its staff. Countries frequently come to the Bank, as well as to the Fund, for technical assistance in recording, monitoring, and processing their debt information, particularly in the more complex aspects of foreign borrowing, such as assessing financing options and the additional debt service obligations. In cooperation with the Fund, the Bank is expanding its technical assistance in these areas, in the context of improving members’ capacity to assess the viability of their investment programs. In a public statement on the debt problems of developing countries earlier this year, the President of the Bank pointed out: “Since the Third World debt problem will not finally be resolved without a recovery of Third World development, the Bank’s support for development—although its effects are not as immediate—is just as urgent and vital to the solution of the problem as is the Fund’s support for adjustment…. Strengthening our policy dialogue, speeding up disbursements, encouraging commercial investment, and upgrading the world’s knowledge about the developing countries— these are ways in which The World Bank is adapting to complement better the efforts of borrowing member countries and the commercial banks and, thus, to help restore stability and growth in the global economy.”