Fund Staff Re-Examine the Case for Using Financial Incentives in Support of Debt Restructuring Operations

IMF News, March 16, 2021

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Canonical URL: Fund Staff Re-Examine the Case for Using Financial Incentives in Support of Debt Restructuring Operations

Press Release No. 21/70; March 16, 2021.
Publication notes a staff paper examining the economic case for Debt- and Debt-Service-Reduction Operations (DDSROs): cash payments (usually through market-based buybacks) or collateral offered as part of a debt restructuring offer.
The paper analyzes the relevance of the Fund’s 1990s policy on such operations to the present, post-COVID, context.
Under the Debt- and Debt-Service-Reduction (DDSR) policy, the Fund supported members’ DDSROs by earmarking a portion of Fund financing to assist such members in making debt buybacks and collateral purchases. This policy was discontinued in 2000, two years after its last use.

Fund staff does not see the need for reviving the DDSR policy at this juncture.
If a member wants to finance DDSROs in the context of a Fund supported program, it could do so using the general balance of payment support provided by the Fund, without requiring a dedicated policy for DDSROs.
The paper identifies circumstances in which including cash or collateral in a debt exchange offer and/or buying back debt in the secondary market could contribute to resolving a member’s balance of payments problems.
The circumstances under which Fund resources could be used to support DDSROs are narrow.
The Fund has not received any request for such support at this time.
While a systemic sovereign debt crisis is not in staff’s baseline scenario, it remains critical to thoroughly review the toolkit available to address a potential crisis.

Continue to rely on general balance of payment support within Fund-supported programs to finance DDSRO-like operations if members request such financing, rather than reinstating a dedicated DDSR policy.
Maintain analysis of when cash or collateral included in debt exchange offers and secondary-market buybacks can materially aid balance of payments adjustment, recognizing that qualifying circumstances are narrow.
Keep under review the Fund’s toolkit for sovereign debt crises, given that a systemic sovereign debt crisis is not in the baseline but remains a possible scenario.

Source: Fund staff press release, March 16, 2021.