Global Sovereign Debt Roundtable Compendium of GSDR Common Understanding on Technical Issues Restructuring Timelines From April 2024 GSDR Cochairs Progress Report: “Alongside other workstreams, including the work at the G20, Paris Club, and experience-building through ongoing restructuring negotiations in the first place, the GSDR discussion has helped accelerate processes. Still, timelines remain beyond the typical time frame observed in the past, negatively impacting the debtor and its creditors. Where applicable, in particular for Common Framework cases, the timeline to form an official creditor committee (OCC) could be shortened, to take the best advantage of a format that ensures the fastest and most efficient sharing of information with all participants. This would also help communication and coordination with private creditors and accelerate their own restructuring processes. In future restructuring cases, all relevant stakeholders, including the IMF, the World Bank and official bilateral creditors, should work expeditiously with the debtor country to ensure that sufficient information is shared in a timely manner, in particular on DSAs and macroeconomic frameworks, while taking into account the specificities of each case and time for internal coordination and decision. Absent specific circumstances impeding a timely decision-making, and provided sufficient information is being shared early and potential concerns being discussed, the proposal for the next debt restructuring case should be set as a trial example to aim for program approval within 2-3 months of SLA. Such progress would strengthen timeliness and predictability, which is a clear, high aspiration of all GSDR members.” Information Sharing From October 2023 GSDR Cochairs Progress Report: “The IMF and the World Bank have published guidance to staff on information sharing in the context of sovereign debt restructurings. These notes provide guidance on what information can be shared, with whom, and through which channels, at the different stages of the restructuring. See IMF Paper No. 2023/027: Staff Guidance Note on Information Sharing in The Context of Sovereign Debt Restructurings (June 2023); and Bank Guidance: Staff Guidance Note on Information Sharing in the Context of Sovereign Debt Restructurings (English). Washington, D.C.: World Bank Group .” Restructuring Perimeter Short-Term Debt From October 2023 GSDR Cochairs Progress Report: “Discussions showed growing support to generally exclude short-term debt (debt with an original maturity of one year or less) from the restructuring perimeter. The exclusion of short-term debt is common practice under Paris Club treatments and an explicit feature of the Common Framework. It is important for restructuring countries as it helps maintain access to trade finance. In recent and ongoing restructuring cases, including outside the Common Framework, the practice has similarly excluded short-term debt from restructuring perimeters.” Domestic Debt From October 2023 GSDR Cochairs Progress Report: “Discussions underlined the complexities and trade-offs attached to domestic debt restructurings (DDRs), which are different from external debt restructurings (EDRs). Although a DDR may appear easier to accomplish as sovereigns raise debt under local law, giving them, in principle, stronger leverage on the terms and pace of the debt restructuring, domestic debt is generally held predominantly by domestic creditors whose losses can spread the initial sovereign debt distress to the broader economy and society through various channels. While there should not be a presumption ex ante that domestic debt should be included or excluded in the restructuring perimeter, as the analysis should be data-driven and country-specific, a range of underlying circumstances should be considered when assessing whether to include or exclude domestic debt and the impact on financial stability, growth, social cohesion and ultimately debt sustainability. They include, inter alia, the overall level of public debt, the share of domestic debt in total public debt, the country’s financial depth, the legal features and currency and creditor composition of the domestic debt, and the social and political implications of the potential restructuring strategy. These considerations present a different set of constraints than in external debt restructurings. The relative balance between different factors would differ case-by-case. A DDR might be necessary in some cases—including when public debt is assessed unsustainable and EDR would be insufficient to restore debt sustainability —, but inappropriate in others. The decision to include domestic debt in the restructuring perimeter and, if so, the extent of such a DDR, should be based on a scenario analysis that considers the costs and benefits of different combinations of DDR and EDR, anchored in the objective to restore debt sustainability while minimizing potential costs, including to financial stability, economic growth, social cohesion, etc. Pursuing a single metric of comparable treatment for both DDR and EDR seems unlikely to be appropriate—rather, scenario analyses, communication and transparency are essential. While DDR and EDR are often part of the same broader restructuring strategy, they have different characteristics and follow different constraints. However, it is critical for national authorities to explain to their creditors the approach to domestic debt restructuring (which could be the absence of any DDR) as well as the considerations attached to the potential scenarios analyzed as part of the cost-benefit analysis. Moreover, transparency and disclosure of the country’s domestic debt portfolio, regardless of whether DDR is pursued, gives comfort to external creditors and can help facilitate EDR.” Non-Resident From April 2024 GSDR Cochairs Progress Report: Holders of Domestic Debt “Discussions underlined emerging consensus on the need to treat NRHs on a case- (NRHs) by-case basis in the event of a restructuring. Some participants advocated for the inclusion of NRHs in the restructuring envelope if they are included in the DSA. Others underlined that, while NRHs are external creditors from the perspective of the DSA (since they receive payments flowing out of the country, being non-resident), NRHs hold debt instruments that are governed by domestic law. As such, NRHs are intrinsically linked to the decision of the authorities to include or exclude “domestic debt” from the restructuring perimeter, for which several trade-offs and country- specific scenario analyses need to be considered. Further discussion is needed to deepen the common understanding on this complex issue.” 2 SOE Debt From April 2024 GSDR Cochairs Progress Report: “There was limited progress towards a consensus on the treatment of SOE debt. Some participants continued to express their view that SOE debt should be excluded from the perimeter of DSAs and restructuring envelopes. Others maintained their view that SOEs are a relevant source of fiscal risk especially in LICs and therefore their inclusion in principle in the DSA perimeter in application of the current LIC DSF (with limited exceptions) is warranted. The discussion confirmed the existing flexibility, whereby creditors and the debtor country can agree on a restructuring perimeter that differs from the perimeter of the DSA, even though this approach has inevitable burden-sharing consequences for the participating creditors. The issue of SOE debt will continue to be discussed, including as part of the review of the LIC DSF. ” Restructuring Parameters Cutoff Dates From October 2023 GSDR Cochairs Progress Report: “Cutoff dates are key for the restructuring process but also an important parameter to protect new financing to the restructuring country, including emergency support. As such, having early clarity on the cutoff date is critical. That said, flexibility seems warranted to account for case-specific circumstances. In practice, in recent restructuring cases, cutoff dates have been decided case-by-case by creditors, generally not later than the date of the staff-level agreement (SLA) reached between the authorities and IMF staff on an IMF-supported program, which protects new financing provided after the SLA.” Comparability of From April 2024 GSDR Cochairs Progress Report: Treatment (CoT) between Official “Assessing and enforcing CoT between official bilateral and private creditors Bilateral and participating in an external debt restructuring remains a critical issue where further Private Creditors, clarification is warranted. and Consistency with Debt In the recent and ongoing restructuring cases under the Common Framework, official Restructuring bilateral creditors have been using an approach according to which CoT is: Targets and IMF • Assessed using the three criteria listed in the Common Framework: Program i. The changes in nominal debt service over the IMF program period; Parameters ii. Where applicable, the debt reduction in net present value terms (NPV), using a “New NPV / Old NPV” formula and the discount rate of the LIC DSAs (currently 5 percent); iii. The extension of the duration of the treated claims; and • enforced via mechanisms such as claw-back clauses and/or request to remain in arrears vis-à-vis private creditors until an agreement has been found that respects CoT. For restructurings outside the Common Framework, similar assessment and enforcement mechanisms have been used, with NPV calculations based sometimes on two or more discount rates to ensure some sensitivity analysis. GSDR discussions have reconfirmed that official bilateral creditors seem intent to maintain this approach in future cases. Strengthening the exchange of information and consultation process across creditor groups, as well as with the IMF and World Bank, would facilitate convergence and timely finalization of the restructuring. 3 In practice, GSDR discussion underlined support for: • Enhanced information sharing and coordination across creditor groups on CoT metrics, including expected NPV relief. When negotiating with its private creditors, the debtor country needs to know in detail how CoT will be assessed. Thus, official bilateral creditors should provide the debtor with clarity regarding the quantitative metrics that need to be respected for the CoT to be met, and the related room for maneuver that exists within these metrics. Relevant information should be shared with the other creditors to facilitate and accelerate the restructuring process. This could be done either through improved information sharing and coordination across creditor groups. • Timely verification of consistency with debt targets and IMF program parameters. It is critical that the different contributions to the restructuring ultimately meet what is needed overall. Timely information sharing on the restructuring strategy by the debtor country to IMF staff is key to confirm the consistency of the envisaged treatment with debt targets and program parameters, and should happen before any restructuring agreement is made public. Ultimately, close coordination and exchange of information among the debtor country, private creditors, official bilateral creditors, and the IMF, is essential. Official bilateral creditors should ensure timely communication of the key data upon which CoT will be assessed, while private creditors and the debtor should ensure that, before they finalize and announce an agreement in principle, a verification is completed by the debtor with the IMF staff on consistency with program parameters and with the official bilateral creditors on CoT. It is the only way to ensure both the consistency with debt targets and IMF-supported program parameters (without which the program or review of program cannot be presented to the IMF Executive Board), and CoT (without which the official bilateral creditors would not implement their restructuring, de facto making the restoration of debt sustainability impossible, and thus blocking the program or review of program). Importantly, the steps described above do not necessarily lead to a sequential process, with official bilateral creditors moving first and private creditors second. In particular, nothing precludes both groups to advance their negotiations in parallel. The GSDR discussion underlined that, should this be the preference of the debtor, such parallel negotiations should be supported as this would strengthen the chance for a swift and efficient resolution.” Other Aspects Debt Swaps and From April 2024 GSDR Cochairs Progress Report: Climate Resilient Debt Instruments “Discussions underlined widespread view that debt-for-nature/debt-for-development swaps can be a useful tool for liability management but are generally not appropriate for situations where debt restructuring is required. Overall cost-benefit analysis should be carefully undertaken. More work would be needed to standardize these instruments and make them more rapidly and cheaply scalable. Diverse views were expressed on the public support for these operations, often emphasizing the need for strong alignment of the development outcome of the swap and country priorities. Participants also noted the need to increase transparency of documentation and governance. 4 Climate Resilient Debt Clauses (CRDCs) were generally viewed as useful initiatives and scaling up their use was largely supported. The discussion covered a range of technical issues that could facilitate their adoption and implementation beyond the standard term sheet prepared by the International Capital Markets Association, with some official creditors sharing their successful experience in including such clauses in their loans. Expansion beyond the case of hurricane events, where data history is large and risks and probabilities are well documented, was identified as challenging, but ongoing work to define standard clauses for such other events was highlighted as promising. Transparency and clarity about the indicators triggering the clauses are critical.” Engagement with From April 2024 GSDR Cochairs Progress Report: Credit Rating Agencies (CRAs) “Meeting with CRAs helped participants comprehend how CRAs approach different on Issues debt operations that a country can consider. CRAs explained their criteria to classify Associated with Distressed Debt Exchanges (DDEs), which focuses on the reduction of value to Debt Operations holders with respect to contractual terms and on whether the exchange aims at avoiding default. Participants raised several questions, in particular on the rating implications of debt swaps and liquidity relief operations, including multilateral initiatives such as the G20 Debt Service Suspension Initiative (DSSI) in 2020-21. CRAs clarified that debt-for-nature/debt-for-development swaps would be treated like any debt exchange operation (which may or may not imply distress). Liquidity operations would be similarly assessed on a case-by-case basis, depending on whether or not the exchange would qualify as DDE. All participants stressed the importance of increasing transparency, information sharing and communication. GSDR participants showed great interest in better understanding CRAs methodologies and the consequences of potential debt management operations on ratings. CRAs noted that there is already extensive discussion with issuers, but would welcome even closer engagement.” SCDIs From October 2023 GSDR Cochairs Progress Report: “Discussions at policy meetings, but also the important case of Zambia, have led to a growing recognition that state contingent debt instruments (SCDIs) can help bridge the gap in certain restructuring negotiations where uncertainty is high, while they should not be the norm. When used, SCDIs should be well-defined and include precise triggers, caps and contingent scenarios, while ensuring consistency with IMF- supported program parameters and the DSA in all scenarios.” Debt Service From October 2023 GSDR Cochairs Progress Report: Suspension and Treatment of “On the issue of whether and how debt service could be suspended during the Arrears negotiation, in particular for Common Framework cases, some would support an automatic debt service suspension (DSS) on official bilateral claims from the point when an SLA has been reached for an IMF-supported program, which would provide debtors with liquidity relief at a time of major stress and incentivize creditors to expedite the process. Others expressed preference for creditors and creditor committees to provide DSS at the country’s request (upon reaching a n SLA), without automaticity. Some consideration may be also given to granting debtor countries a time-limited debt suspension. The proposal to provide a waiver on penalties on arrears accumulated during the negotiation, as opposed to arrears accumulated before, gained growing support. Generally, arrears accrue at contractual rates (with a potential penalty). However, the 5 treatment of arrears accumulated during the debt restructuring negotiation phase has varied. Many participants showed openness to provide a waiver on arrears penalties accumulated during the negotiation, subject to internal procedures and domestic approval where needed.” Support From October 2023 GSDR Cochairs Progress Report: Provided by MDBs “GSDR Principals reached in April 2023 a common understanding on the role of MDBs to support countries undertaking a debt restructuring through the provision of net positive flows of concessional finance and grants. Subsequent meetings helped explain how the International Development Association’s ( IDA), for example, provides not only net positive flows, but also ex-ante implicit debt relief through increased concessionality and grants to countries facing higher risks of debt distress. Members underlined the importance of MDBs’ financial support.” 6