Les pièges des instruments de récupération de valeur (VRI) dans les restructurations de dette souveraine

Starting with an exploration of the history of VRIs, from their inception in the 1989 Brady exchanges to their involvement in recent debt restructurings, this paper provides a comprehensive overview of the theoretical appeal and practical obstacles of contingent sovereign bonds.

The author, Ugo Panizza, Professor at the Geneva Graduate Institute, starts by a quip, attributed to, inter alia, Albert Einstein, Richard Feynman, or Yogi Berra, but probably first used by the businessman Benjamin Brewster in 1882: "In theory, theory and practice are the same. In practice, they are not.” This quote applies particularly aptly to VRIs, which seem like the perfect hedging tool in theory, but repeatedly fail in practice. Panizza then explores why this is the case, and discusses whether we should abandon VRIs as part of debt negotiations, or work on improving them.

The core theoretical insight demonstrated through simple comparisons in the paper, is that VRIs are normally implemented as asymmetric instruments. That is, investors receive an upside if the country does better than expected, but there is no downside if the country fares worse than expected. This structure can be fair if and only if the base scenario is at a substantial discount compared to a restructuring without a VRI.

The practical problem, of course, is to determine what the "substantial discount" would be compared to an alternative world where this VRI would not have been offered.

Through detailed analysis of real-world cases in Argentina, Suriname, and Zambia, the note suggests that it is unlikely that the VRI was the counterpart for a restructuring with a deeper discount with respect to what was required by the baseline scenario.

What should policymakers do to improve the risk-sharing performance of VRIs? Panizza concludes with two proposals.

• First, a restructuring sovereign should offer two types of bonds: a plain vanilla bond and a bond with VRI, and then agree to the bond with a VRI only if investors are willing to accept a substantial discount on the non-VRI component of the bond-cum-VRI compared to the plain vanilla bond. This strategy allows for a safer and more controlled exploration of VRIs' potential benefits while mitigating the risks associated with their implementation.
• Second, he suggests that operational guidelines could be developed to ensure the fairness of VRIs, applicable to all creditors, and not only bondholders. This would be relevant when comparability becomes a major issue.

Intended as a foundational resource, this policy note caters to policymakers, financial experts, and scholars seeking to navigate the complexities of state-contingent debt instruments in the context of sovereign debt management and restructuring.