ECONOMYNEXT – A meeting of creditors and debtor countries along with the International Monetary Fund and World Bank has agreed to new rules and processes to address flaws in the current default framework.
A key problem is countries that are forced to re-structure domestic debt to meet a gross financing need ceiling, a hurdle that has to be passed to make debt ‘sustainable’ according to the International Monetary Fund assessment.
In Sri Lanka and elsewhere the re-structuring of domestic debt, the last resort defaulted countries have to maintain the state had led to soaring interest rates which worsens the ability of a country to emerge out of default.
“…[F]urther work will be undertaken on principles regarding cut-off dates, formal debt service suspension at the beginning of the process, treatment of arrears, and perimeter of debt to be restructured, including with regards to domestic debt,” a statement issued by co-chairs of a Global Sovereign Debt Roundtable in Washington said.
“This work will also help in clarifying potential timetables to accelerate debt restructurings.”
The roundtable was co-chaired by IMF Managing Director Kristalina Georgieva, World Bank Group President David Malpass and Indian Minister of Finance Nirmala Sitharaman.
Private creditors have also raised concerns over sharing of data and preparing economic projections.
Private creditor deals have got bogged down in Surinam and Zambia over disputes involving economic projections. There are some concerns that the same this will also happen to Sri Lanka.
“We agreed on the importance to urgently improve information sharing including on macroeconomic projections and debt sustainability assessments at an early stage of the process,” the statement said.
“The IMF and World Bank will rapidly issue staff guidance on information sharing at each stage of the restructuring process.
“To clarify key concepts to support predictability and fairness of debt restructuring processes, a workshop will be organized in the next weeks on how to assess and enforce comparability of treatment.”
The IMF, which was set up to help stabilize the external sector of collapsing soft-pegs after a wave of defaults market access pegged countries Latin America and Eastern Europe following a bad monetary policy 1970s after the US Fed collapsed of the Bretton Woods system and the gold standard.
Another wave of defaults are now facing pegged countries also in Africa and South Asia which have since got market access after exceptionally bad monetary policy in the wake of the Great Recession triggered by the US Fed.
Almost defaulting countries have followed flexible inflation targeting or similar regimes, involving an impossible trinity pegged regime backed by aggressive, inflationary open market operations to target a domestic anchor, peddled to third world countries without a doctrinal foundation is sound money.
The World Bank is giving more concessionary funds to the countries facing default.
The meeting had also discussed multi-lateral lender – who are exempt from debt re-structuring – giving more concessional finance.
“The meeting discussed the role of Multilateral Development Banks (MDBs) in these processes through the provision of net positive flows of concessional finance,” the statement said.
“The International Development Association’s (IDA) provision of positive net flows and the ex-ante implicit debt relief through increased concessionality and grants to countries facing higher risks of debt distress was welcomed.”
China had been pressing multilateral lenders to do more after countries defaulted.
The full statement is reproduced below:
Global Sovereign Debt Roundtable Co-Chairs Press Statement
April 12, 2023
Washington, DC: The Global Sovereign Debt Roundtable (GSDR) met today and discussed debt sustainability and debt restructuring challenges and ways to address them. At the end of the meeting, the International Monetary Fund Managing Director Kristalina Georgieva, World Bank Group President David Malpass and Indian Minister of Finance Nirmala Sitharaman, co-chairs of the GSDR, released the following statement.
The Global Sovereign Debt Roundtable (GSDR) met today and discussed debt sustainability and debt restructuring challenges and ways to address them. We are grateful to all the participants that included Paris Club and non-Paris Club creditors, debtor countries, and representatives of the private sector. The discussion focused on the actions that can be taken now to accelerate debt restructuring processes and make them more efficient, including under the G20 Common Framework.
We agreed on the importance to urgently improve information sharing including on macroeconomic projections and debt sustainability assessments at an early stage of the process.
The IMF and World Bank will rapidly issue staff guidance on information sharing at each stage of the restructuring process.
The meeting discussed the role of Multilateral Development Banks (MDBs) in these processes through the provision of net positive flows of concessional finance.
The International Development Association’s (IDA) provision of positive net flows and the ex-ante implicit debt relief through increased concessionality and grants to countries facing higher risks of debt distress was welcomed.
To clarify key concepts to support predictability and fairness of debt restructuring processes, a workshop will be organized in the next weeks on how to assess and enforce comparability of treatment.
Moreover, further work will be undertaken on principles regarding cut-off dates, formal debt service suspension at the beginning of the process, treatment of arrears, and perimeter of debt to be restructured, including with regards to domestic debt. This work will also help in clarifying potential timetables to accelerate debt restructurings.
The IMF, World Bank and the G20 Presidency will continue to work closely together and with other partners to further support the international response to current debt challenges.