Exploring feasible deals through comparability of treatments and new loans
BY ISHAC DIWAN, BRENDAN HARNOYS-VANNIER and Martin Kessler
Several low-income and lower-middle income countries with access to concessional World Bank financing are now negotiating a debt restructuring program, which entails the sharing of losses by the different creditors. The goal of this note is to estimate the size of losses, at the current juncture of the debt crisis, and how they can be distributed among the different types of creditors.
We also consider how the MDB system can play a more prominent role in this context. There have been suggestions to put MDB’s preferred creditor status in question. In this paper, which focuses on the role of IDA, we propose instead to view its participation as providing new loans and estimate a possible envelope. We start by identifying countries that require debt restructuring and estimate the amount of debt reduction needed to bring them back to a sustainable path. In a second step, we distribute financial contributions across creditors. One contribution of this paper is to propose alternative approaches to Comparability of Treatment: not only as proportional reduction in present value claims, but by requesting a higher contribution from non-concessional lenders.
Focusing on the 73 IDA clients, our results show that, under a set of simple assumptions, 19 to 23 countries will need some kind of debt restructuring to bring back the present value of public debt to levels which can be considered as sustainable. Total face value of debt varies between $230 billion and $374 billion, and we estimate that the total reduction needed in present value stands between $31 and $76 billion. Those are large, but manageable numbers. The key question is thus: how to split those losses? While in terms of stocks, MDBs is the largest creditor sector, followed by the private sector and China, their loans are much more concessional. How can this be taken into account?
We then estimate the distribution of the burden of debt reduction, including IDA’s share, according to two different Comparability of treatment rules. Comparability of Treatment aims at ensuring that all participating creditors should be treated similarly. A traditional interpretation of this term seeks to apply haircuts among creditors on the basis of the distribution of their debt’s present value. While we accept this line of reasoning, we believe however that this is not sufficient, especially in the context of poorer countries where the range of grant elements among creditors is very large.
We thus develop a new fair rule for comparability of treatment, which we think is needed when countries obtained loans with a wide range of concessionality levels. The goal is to equalize the level of concessionality after debt restructuring, thus requesting larger losses from less concessional lenders.
In this scenario, what would be the appropriate financial contributions from IDA? We estimate that support to its clients with new flows would require and additional credit allocation of $1.5 billion / year over the next three years under a "fair burden sharing" scenario, a manageable effort, equivalent to 20% of the normal country allocation scenario.