“Restructuring Sovereign Debt: Lessons From The Past, Reforms For The Future”
SUMMARY OF WEBINAR DISCUSSIONS
In the new reality shaped by COVID-19, inflation, and high interest rates, an effective and relatively efficient debt restructuring process is crucial. Recent appeals from former African leaders for debt relief highlight the urgency: the progress of debt restructuring frameworks is too slow to meet the challenge.
Five years after the Common Framework was established, and with debt treatments nearing completion in Zambia, Ghana, and Sri Lanka, or making progress in critical stages like in Ethiopia, the Finance for Development Lab convened five practitioners and observers of the process to discuss the challenges that have been addressed as well as those that remained.
DIsclaimer: on March 24, 2025, FDL organized a seminar featuring five distinguished speakers. We are very grateful for their time and participation. This is our attempt to summarize the main messages. All the insights are theirs, and any misunderstandings or misstatements of their views are ours, as well as any factual errors that may be present in this document. Please check the recording at this link for the full event.
How to restructure public debt when dealing with multiple stakeholders?
The complexity of the creditor landscape was widely recognized as a key factor in the sluggish and ultimately ineffective debt restructuring process.
Benjamin Lemoine provided a historical perspective, highlighting the legal balance of power between private creditors and public debtors that emerged from the transition from bank loans to bonds. He noted that the shift from viewing insolvency as a political or geopolitical negotiation to a juridical (and presumably depoliticized) process has been destabilizing for borrowing countries. The end of the lost decade and the rise of the secondary market for emerging countries also enabled litigation strategies that further fragmented the landscape. Recent sovereign debt restructuring experiments, especially after COVID, have accentuated the formal subordination of private processes to official and inter-state outcomes. The failure to pass laws enforcing this approach complicates alignment.
On the official side, the Paris Club is an informal institution whose rules are precisely designed to achieve consensus. While its members represent a shrinking share of bilateral creditors, the Club has maintained its convening power, according to Philippe Guyonnet-Dupérat. The Common Framework includes non-members such as China, India, Turkey, and Saudi Arabia, which has made the process more effective. The main objective remains the same: filling the financing gap in a fair and consensual manner. At the center of this process is the IMF Debt Sustainability Analysis (DSA). The Comparability of Treatment (CoT) then prevents official creditors from subsidizing others.
Nevertheless, the evolution of lending practices has also challenged those rules. The clear delineation between ODA and non-ODA lending has become blurred, and collateralized lending or SOE involvement complicates restructurings
In addition, notes Thomas Moatti, new official bilateral lenders prefer to negotiate separately from multilateral frameworks, which provides flexibility and reduces external scrutiny. New bilateral creditors also behave more like commercial lenders, seeking to maximize recovery value. On the private side, the London Club has disappeared: debtors now must negotiate with dozens of non-bonded commercial lenders, sometimes representing small claims but generating considerable work and costly delays. Rating remains in default despite the fact that 90% to 95% of commercial claims have been treated.
How to overcome the lack of trust?
The growing complexity of the environment can be traced to positive developments—sovereign borrowers have increasingly diverse financing options—but it also has major downsides, including more acute coordination problems and a low-trust environment. Borrowers have every incentive to “tell everyone they’re the favorite child,” said Anna Gelpern. Up front, they promise some degree of protection, which is reassuring (such as seniority, collateral, and governing law), but this can fall apart and complicate the restructuring process. Thomas Moatti concurred and pointed out the risks: new clauses that emerge post-restructuring, such as reinstatement or “Most Favoured Creditor” clauses, further complicate the landscape, where standards are not clearly defined necessary.
One proposal to mitigate these limitations would be to have simultaneous negotiations between official and private creditors. This approach would prevent sequential negotiations, where the outcome from one group may be contested by the other, thereby slowing down and frustrating the overall process. However, private creditors should not have the power to veto the official sector’s agreement, as it could jeopardize the entire process. Furthermore, information sharing between the two groups would be enhanced, which is not currently the case.
In this environment, the umpire is even more contested. Indeed, IMF DSAs tend to be challenged by creditors, not always for good reasons. This incentivizes creditors to wait out program reviews for better conditions. Better disclosure of the IMF’s assumptions could also improve the process. State Contingent Debt Instruments (SCDIs), which can better reflect governments’ ability to pay in various scenarios, are perceived as a second-best solution to this problem but create additional risks and should be symmetric whenever possible. In Ghana, the general consensus over the IMF projections made SCDIs unnecessary and avoided additional complications.
The effectiveness of the IMF as an umpire is also central ex ante: Sean Hagan referred to the recent IEO report, which points out that the exceptional access policy, which raises the level of scrutiny for large programs, does not actually lessen over-optimism. This tends to align incentives towards delaying restructuring, even when it is necessary.
Which information is directed to whom when?
The value of transparency was emphasized by many, but which information should be disclosed, and to whom? A first step would be to gain more clarity on the process itself: for example, France has been advocating for the publication of guidelines on a typical restructuring timeline, from the IMF Staff Level Agreement to Board Approval and the Memorandum of Understanding between official creditors and the debtor country. Some have suggested going further and publishing the terms of the OCC agreement, though this remains challenging for some countries.
Going further, how can transparency help in the process?
Anna Gelpern put forward an ambitious stance on transparency. It serves both as a value and a tool: thorough information sharing provides a common factual foundation for negotiations. “Transparency,” “disclosure,” “financial reporting,” and “information sharing” represent distinct concepts with varying implications. Certain types of transparency may be limited to data aggregates shared with contract parties, while at the opposite end, full-text contract publication renders the terms of public debt visible. When evaluating the type and extent of transparency that is suitable, it is crucial to bear in mind that numbers rarely tell the whole story – as is often the case for contingent liabilities, revenue pledges, and complex financial structures. The challenge then lies in making those lengthy documents accessible and understandable for the intended audience
While there are legitimate reasons to protect certain information, it is crucial to shift the focus towards presuming transparency instead of confidentiality. Ex ante, bilateral official creditors should be able to publish the general terms and conditions used in their standard contracts, following the example set by multilateral lenders and bilateral lenders like JICA. This practice assists borrowers with limited resources and provides reassurance: when they borrow, all they need to check is transaction-specific terms and any deviations from the boilerplate.
Clarifying the hierarchy of claims and the inclusion of domestic debt
A gap identified in the architecture is the lack of broad-based understanding of the reasons some institutions are consistently granted Preferred Creditor Status in sovereign debt restructurings. Since PCS is a function of practice rather than law, awarded by official creditors who exclude certain institutions from restructurings, no formal definition exists. This allows some plurilateral institutions to claim this status or leverage their position, even when their terms are not comparable to concessional support. Publicly revisiting the core principles behind some lenders’ exclusion from comprehensive collective restructuring can help establish a new consensus on PCS and further legitimize the restructuring process.
Domestic debt will increasingly come into question during restructuring, as its share of government liabilities becomes significant. However, one must remain cautious: targeting a country’s source of “safe assets” can lead to long-term negative consequences. Ghana serves as a key example of a costly domestic restructuring that ultimately accelerated the external agreement, as both official and private creditors viewed this choice as a demonstration of commitment. At the same time, existing treatment criteria cannot be applied to domestic debt, where political considerations will always dominate.