Ill Official Debt Restructuring

This section describes the principal features of as a precondition for the initiation of debt renegotia- official multilateral debt restructurings that took place tions with a Fund member country, the conclusion of during 1983-84, particularly in comparison with agree- an upper credit tranche arrangement with the Fund. ments reached during the preceding eight-year period When creditors agree to meet again to consider future from 1975. It documents the sharp increase in the debt relief, the debtor is asked to have such a Fund- number of reschedulings and focuses on notable recent supported program in place for the subsequent re- developments, especially the trend toward an easing scheduling. in the repayment terms for some countries that have had successive reschedulings. It also addresses issues relating to multiyear debt restructurings by official Frequency of Rescheduling creditors with reference to the recent MYRA for Ecuador. The emergence of widespread payments difficulties Official multilateral debt restructurings deal with the in recent years was reflected in a record number of rescheduling of payments to service the debt owed to, countries seeking debt relief from official creditors and or guaranteed by, the governments or the official in a sharp increase in the number seeking successive agencies of the participating creditor countries. They reschedulings. In 1983 and 1984, 23 debtor countries are normally, though not exclusively, undertaken un- that are Fund members obtained 29 official debt re- der the aegis of the Paris Club, which brings together schedulings, up sharply from an average of some the debtor country and all official creditors that accept 4 reschedulings per annum during the preceding eight the principles and practices of the Club. Invitations years (see Table 4). The recent agreements involved 12 are sent to individual creditor countries by the Chair- countries that had not had a previous rescheduling in man of the Paris Club in consultation with the debtor the past ten years, including some net oil exporters country and on the basis of a breakdown by creditor and several middle-income countries. For the other of service on external debt that is supplied beforehand 11 debtor countries, their reschedulings in 1983-84 rep- by the debtor to the Paris Club Secretariat. Creditor resented at least a second rescheduling since 1975; for countries attending the meeting sign an Agreed Minute, four countries, their most recent reschedulings were unless the amounts owed to them that are covered by the third while for four others, their fourth to sixth. the rescheduling agreement are less than a prescribed The majority of rescheduling countries were African, amount (the "de minimis" level), in which case they although all major geographic areas were represented. attend as observers. Experience during the first half of 1985 points toward The Agreed Minute sets out the broad terms of a continuation of the trends just mentioned. rescheduling that the participants recommend to their Two important developments in official debt re- respective governments to be incorporated in the schedulings have taken place. First, official creditors subsequent bilateral agreements between the debtor have shown considerable flexibility in responding to and each creditor country. These bilateral agreements the rescheduling needs of a large and diverse group of form the legal basis for the debt rescheduling. Interest debtor countries. Efforts to assure adequate debt relief rates on the rescheduled debt are set in the bilateral while minimizing potential repercussions on the pattern agreement, and the date by which such agreements of trade finance have led to greater differentiation in are to be signed is specified in the Minute. the terms and conditions of rescheduling accorded to To achieve a durable improvement in the debtor's countries in varying circumstances. Thus, for three of payments position, official creditors have held the the more advanced developing countries, the coverage view that, concurrent with debt restructuring, the of reschedulings was narrower than usual and the grace debtor must take adjustment measures to restore its and maturity periods shorter. At the same time, for financial viability. For this purpose, creditors require, debtor countries facing acute debt-servicing difficulties

©International Monetary Fund. Not for Redistribution Ill • OFFICIAL DEBT RESTRUCTURING

Chart 6. Creditor Countries and Number of Official The participating creditor countries were mostly, but Debt Restructuring Agreements Signed, 1975-84 not exclusively, members of the OECD, and included others such as Israel, South Africa, and the United France United States Arab Emirates (Abu Dhabi) (Chart 6). A notable Germany, Fed. Rep. of .. recent development has been the participation of United Kingdom developing countries (such as Argentina and Mexico) Italy Belgium as creditors. The number of participating creditor Japan countries ranged from 5 to 20, but in the majority of Switzerland I cases the number of creditors was between 10 and 15. Netherlands KM Sweden —i— HHH Coverage and Terms Canada HH an Austria mmamm •H ••H Spain mmmmmm • Official debt reschedulings typically cover both prin- Norway •m Denmark cipal and interest payments on medium-term and long- Finland SET- term loans falling due during the consolidation period. South Africa Payments in arrears have also been rescheduled in Australia am Israel many cases. Creditors have adhered strictly to the Mexico i fundamental principle of not rescheduling service on New Zealand short-term debt, in order to soften the impact of Portugal I rescheduling on access to trade financing, which could United Arab Emirates.... Argentina i be curtailed if short-term debt were consolidated. In Trinidad and Tobago the past ten years only one country obtained, on a 0 10 20 30 40 50 60 very exceptional basis, a rescheduling of current ma- Number of agreements signed turities on short-term debt. However, short-term debt Source: Agreed Minutes of debt reschedulings. in arrears has been rescheduled on a case-by-case that have had repeated reschedulings, official creditors basis for a small number of countries, mainly those increasingly extended terms and conditions that could with repeated reschedulings. Official creditors have, be considered exceptional according to normal Paris in addition, established the principle that service on Club standards. debt that has been rescheduled once will not be A second discernible recent development has been rescheduled again, and until the last two years such a greater differentiation in rescheduling terms for reschedulings were in practice quite rare. Nonetheless, different types of obligations, such as between arrears symptomatic of the acute debt-servicing difficulties and current maturities, principal and interest, and debt 12 faced by several countries, service on previously that has or has not been previously rescheduled. In rescheduled debt was rescheduled on eight occasions particular, relatively harder terms and shorter repay- during 1983-84, primarily for countries that were ment periods have been applied to arrears, especially undertaking at least their third rescheduling. arrears on previously rescheduled debt. Since a broader The length of the consolidation period has continued coverage of debt under consolidation has become to be one year for the majority of reschedulings; for a increasingly difficult to avoid for debtor countries with few recent cases it was longer, up to 18 months, prolonged difficulties, differences in terms can help to coinciding with the period covered by a Fund arrange- strengthen rescheduling standards as exceptional ef- ment. However, for the 15 countries with more than forts by creditors are to be matched by special efforts one debt renegotiation during the last ten years, the of the debtor to regularize as soon as feasible certain cumulative consolidation periods under successive overdue obligations to which creditors attach priority. reschedulings ranged from two years to as long as five The amount of debt relief provided during 1983 and years (Chart 7). Creditors have generally responded 1984 was unparalleled. Four reschedulings were for to a request from the debtor country for a consolidation more than $1 billion and almost half of the cases period longer than 12-18 months by including in the involved $300 million or more; between 1975 and 1982, Agreed Minute a goodwill clause under which they only a minority of agreements (7 out of 28) rescheduled agree in principle to consider the restructuring of debt over $300 million. All but two of the recent resched- service due in a specified future period. The imple- ulings were undertaken within the framework of the mentation of the goodwill clause has been subject to Paris Club; the exceptions (Mexico and Yugoslavia) fulfillment by the debtor country of a number of took place in the framework of creditor group meetings. conditions. Most recent goodwill clauses have stipu- 12 Current maturities comprise all principal and interest falling lated four conditions: that the debtor agree with the due in the consolidation period (see Appendix II). Fund a new financial arrangement subject to upper

©International Monetary Fund. Not for Redistribution Coverage and Terms credit tranche conditionality; that it obtain comparable and six months before the beginning of the more recent debt relief from nonparticipating official creditors; that consolidation period. In the last seven months of 1984, it complete effective arrangements with banks and however, five countries obtained successive resched- other creditors meeting certain conditions; and that it ulings and in none of these cases was the cutoff date comply with the terms of previous Agreed Minutes. changed. In five of the ten earlier cases where the On occasion, official creditors have gone further and cutoff date was changed, there was a significant break granted longer consolidation periods subject to certain between the most recent and the previous consolidation conditions. Such "conditional further reschedulings," period. including a MYRA agreed for Ecuador in April 1985, The repayment schedule for amounts covered by are described in the next section. official reschedulings can be broken down into three Debt service on loans contracted after a specified parts. The first, a formally rescheduled portion (cov- date (the cutoff date) is excluded from the rescheduling ering a large percentage of the total due) carries a and, in order to facilitate the granting of new export medium-term maturity. The second, an unconsolidated credits and cover, creditors are reluctant to change or deferred portion, carries a relatively short maturity the cutoff date for subsequent reschedulings. Over the with a short or no grace period. The third portion is past two years the interval between the cutoff date the down payment to be paid during the consolidation and the beginning of the consolidation period tended period. Thus, the amount of the debt that is effectively to lengthen for those countries that had not had recent rescheduled (beyond the consolidation period) corre- reschedulings and in most cases was between three sponds to the total amount due less the down payment. and nine months. For countries that had had previous Using this breakdown, the evolution over the past reschedulings, official creditors agreed to a change in decade of terms granted by official creditors for re- the cutoff date on ten occasions during 1983 and early scheduled current maturities is shown in Tables 21- 1984 and the new cutoff date was set at between zero 23.

Chart 7. Consolidation Periods of Official Debt Restructuring Agreements, 1975-841 Chile Zaire2 a Leone Turkey Peru Togo Sudan Liberia Poland Madagascar Central African Republic Senegal Uganda Romania Malawi Costa Rica Zambia Mexico Ecuador Morocco Niger Brazil Ivory Coast Yugoslavia Jamaica Mozambique Philippines 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 Source: Agreed Minutes of debt reschedulings. 1 Numbers indicate the start of successive consolidation periods. In some cases the number of consolidation periods exceeds the number of rescheduling agreements, owing to conditional future consolidations becoming effective. Representation of dates is approximate. 2 For rescheduling agreements 2 and 3, consolidation period overlaps with previous consolidations.

©International Monetary Fund. Not for Redistribution Ill • OFFICIAL DEBT RESTRUCTURING

The repayment terms for rescheduled debt service agreements that covered previously rescheduled debt, have traditionally tended to vary according to the types the service on such debt was already in arrears and of debt service concerned. Typically, the easiest terms exceptionally stringent terms were provided; for the have been accorded to current maturities, with some other half, however, where the reschedulings involved 85 percent of total payments due being rescheduled current maturities on previously rescheduled debt, the over seven to nine years (including a three-year to terms were broadly similar to those on other current four-year grace period). More stringent terms have maturities. often been applied to arrears, particularly those on The differentiation in terms accorded as between short-term debt, with substantial repayments of arrears debtor countries has also sharpened over the last two frequently being required during the grace period for years. For countries with successive reschedulings, rescheduled current maturities. terms were often eased considerably. On average, Differences in terms across types of debt service about 90 percent of their current maturities were have widened in recent years. In a majority of cases, rescheduled on a medium-term basis (compared with there have been harder terms for arrears than in the about 80 percent for countries that had not had recent past, primarily for countries without successive re- reschedulings); including amounts deferred for shorter schedulings. Also, three agreements involved no re- periods, the effective rescheduling was 98 percent for scheduling of interest due during the consolidation those with successive reschedulings compared with 87 period, and in one case the rescheduling of arrears percent for the others. In certain instances, the cov- was confined to principal only. In about half the erage of the rescheduling was extended to include previously rescheduled debt and short-term debt in arrears. The flexibilityalread y being exercised in cases Chart 8. Average Repayment Schedule of Official of prolonged debt difficulties has resulted in the actual Multilateral Debt Restructurings, 1975-82 and debt-service burden being reduced to a very small 1983-84 fraction of scheduled obligations. In such cases there (In percent of total repayments) is, therefore, virtually no scope for further financing through official debt relief. 20 ClJRRENT MATURITIE These overall developments are evident in the re- s payment profiles. As in the past, the average repayment profile for current maturities was more stretched out 15 j u J 7 than that for arrears (Chart 8). However, the average A >erage 1975 profile for arrears was clearly more front-loaded in 1983-84 than in earlier years. Also, for those debtors 10 "I \ requiring successive reschedulings, average repayment / / profiles (particularly for arrears) were considerably > 5 __ ... \ \ flatter than for other countries (Chart 9). /A wage 1983 As noted earlier, while the Agreed Minute arising out of Paris Club meetings specifies the general terms 0 N of the debt restructuring, it is the bilateral agreements 0123456789 10 11 12 Years following consolidation period between the debtor and each creditor country that establish the legal basis for the restructuring. Efforts have been made recently to strengthen the implemen- tation of the Agreed Minute, both through closer communication among the parties concerned and through more formal means. In particular, the bilateral deadline (that is, the period for concluding bilateral agreements) has been extended from six to eight or nine months after the date of the Agreed Minute. Normally, official creditors will not meet to consider a request for a further rescheduling until the bilateral agreements from the previous rescheduling have been concluded. Also, the conditions set out in the Agreed Minute may 0 1 2 3 4 5 6 7 8 9 10 11 12 include a provision that the debtor country agree to Years following consolidation period establish a special account with a central bank of one Sources: Agreed Minutes of debt reschedulings; and Fund staff of the participating creditors and to pay into it monthly estimates. deposits. The total amount to be deposited approxi-

Chart 9. Average Repayment Schedule Under return to normal debtor-creditor relationships by debtor Official Multilateral Debt Restructurings for Countries countries that have made significant progress in their with Successive Reschedulings, 1983-84 domestic and external adjustment efforts. On June 9, 1984, after Mexico had initiated discus- (In percent of total repayments) sions with its bank creditors on a multiyear arrange- 20 ment, the heads of state of seven industrial nations Cl|RR$NT JM AtURjTIE^ issued at the conclusion of their meeting in London a communique which reconfirmed the need to respond 15 "flexibly case by case" to the debt problems of de- j Oti\er rescheduling veloping countries and stated that particular impor- I \couniries \ tance was attached, inter alia, to the following provi- 10 sion: "in cases where debtor countries are themselves making successful adjustment efforts to improve their position, encouraging more extended multiyear re- 5 scheduling of commercial debts and standing ready Countries^ ith Successive where appropriate to negotiate similarly in respect of reschedulings 0 debts to governments and government agencies." 0 1 2 3 4 5 6 7 8 9 10 11 12 For official creditors the granting of extended con- Years following consolidation period solidation periods, while at variance with recent trends, 25 did not per se pose important procedural difficulties, as the Paris Club has practices and precedents that er rescheduling ?s i \ could provide for such an approach. These allow, for i \ instance, for conditional further rescheduling, under which creditors agree at an initial meeting to provide fcouniries vkth successive rescheduling in one or more subsequent years auto- matically without a further meeting of creditors, provided certain conditions are met. An alternative approach is the goodwill clause, under which creditors agree in principle to meet to consider a further rescheduling, provided, inter alia, that a Fund arrangement is in place. Creditors introduced a variation of 0 123456 789 10 11 12 this approach in an agreement for Peru in 1983 in that Years following consolidation period the goodwill clause specified at the outset the grace Sources: Agreed Minutes of debt reschedulings; and Fund staff period and maturity to be applied to a subsequent estimates. rescheduling but left the percentage to be rescheduled and other conditions to be determined at a meeting mates the amounts estimated to be payable to all before the second year's rescheduling was to take participating creditors during the year. The debtor effect. Variations on this "improved goodwill clause" country draws on the account as bilateral agreements could also provide a vehicle for granting extended are signed and specified payments under these agree- consolidations within traditional Paris Club proce- ments become due. While the special account arrange- dures. ment has been implemented satisfactorily in some While official creditors had demonstrated their will- instances, in others the debtor country has not made ingness to consider somewhat longer consolidation the payments envisaged. Failure to adhere fully to the periods, they had adhered firmly to the principle that special account provision is considered a breach of an upper credit tranche arrangement with the Fund the goodwill clause. should be a prior condition for each year's rescheduling to be agreed or to take effect. A central question for official creditors in considering the possibility of grant- Multiyear Official Debt Restructuring ing a MYRA was, therefore, whether to depart from this principle and, if so, how to ensure that the As discussed in Section II, a number of countries rescheduling was associated with sound economic have recently reached agreements with their bank policies in the debtor country. Another crucial question advisory groups on rescheduling of maturities falling was how to ensure, both through the selection of due over a period of several years. The primary possible candidates for a MYRA and through the design objective of such MYRAs has been to facilitate a of the rescheduling agreement, that the multiyear

rescheduling did indeed facilitate a return to normal share of the debt service due over the next few years. debtor-creditor relationships. The banks have not required parallel official action as On April 24, 1985, Ecuador and its official creditors a precondition for the bank MYRAs for Mexico and reached agreement on the rescheduling of maturities Venezuela, and both of these countries have indicated falling due over the three-year period up to the end of that they do not intend to seek an official rescheduling. 1987. The agreement provided for the rescheduling of Official debt is more important for Ecuador, and banks principal only, with the percentage rescheduled de- in their discussions with that country indicated that a clining from 100 percent in 1985 to 85 percent in 1986 Paris Club rescheduling would be a condition for each and to 70 percent in 1987. In deciding to grant a MYRA year's tranche of the bank MYRA. Official creditors to Ecuador, official creditors attached importance to will want to decide, given the circumstances of each the fact that Ecuador's external position was expected case, whether action on their part would contribute to to be sufficiently strong to enable it to finance the a return to normal debtor-creditor relationships. There current account of its balance of payments without is no reason why banks and official creditors should concerted action by creditors, and hence without the provide extended consolidation periods to the same rescheduling of interest payments. In order to provide group of countries, or even for the responses of banks a transition to normal debtor-creditor relationships, and official creditors to be similar, in form or time official creditors considered it important that the per- frame. The fundamental issue is to determine the type centage rescheduled decline over time. of response that could be expected to contribute best The rescheduling arrangement for Ecuador took the to restoring normal access, to both banking credits form of a conditional further rescheduling. Prior to the and official export credits and guarantees, for countries Paris Club meeting at which the MYRA was agreed, that have established a record of adjustment. the Executive Board of the Fund had approved a Whether an official MYRA would contribute signif- stand-by arrangement for Ecuador for the 12 months icantly to restoring normal access to private unguar- through March 1986. The Ecuadoran authorities had, anteed credits would depend upon the size and service moreover, indicated to their creditors their intention profile of official debt—whether, in other words, official to seek a subsequent one-year stand-by arrangement debt service is large enough to generate substantial when the existing one expired, and the second tranche uncertainty about the debtor country's ability to ser- of the Paris Club rescheduling for Ecuador was made vice its debts without recourse to exceptional financing. conditional, inter alia, on Ecuador having an upper An official MYRA could facilitate more normal access credit tranche Fund arrangement expiring not sooner to official export credits and guarantees, provided that than March 1987. The third tranche of the rescheduling the cutoff date for loans on which debt service was to was, however, conditional either upon Ecuador having be rescheduled was firmly fixed at the outset. This a Fund arrangement effective through December 1987 would, however, be equally true if the cutoff date were or upon specified Fund surveillance procedures. Under fixed firmly at the outset of a series of annual re- the latter option, the third tranche of the rescheduling schedulings, although a MYRA might provide more will become effective provided, inter alia, that the confidence in this regard. While a MYRA could be participating creditors have reached a positive assess- viewed as a way of encouraging export credit agencies ment that Ecuador has set forth in the process of to reopen or expand export credits and cover, that consultation with the Fund, and is implementing, a issue could as well be addressed directly by the relevant comprehensive and satisfactory economic program, agencies. Indeed, most export credit agencies seem to including quantitative quarterly targets, covering the have some kind of limit on their exposure to individual period up to December 1987. countries, and an increase in exposure that is accept- Apart from the key criterion that such agreements able to the agency could be the result of a combination should be intended to facilitate a return to normal of rescheduling service on existing debt and providing market financing, the circumstances in which official a certain amount of new export credits; alternatively, creditors might grant further MYRAs have not been debt service payments could be made as scheduled, defined. In some of the cases for which multiyear bank permitting a larger amount of new export credits arrangements have been discussed, such as Mexico consistent with the same acceptable increase in ex- and Venezuela, banks account for a preponderant posure.