Sovereign debt restructuring in frontier markets: progress, problems, and possibilities for reform

Dennis Essers of the National Bank of Belgium and Romanie Peters of Credendo ECA discuss three areas of reform to improve the speed and quality of sovereign debt restructuring processes: transparency, the anchoring of expectations, and creditor coordination [1]. They draw inspiration from a panel discussion during the Berne Union’s 2024 Spring Meeting in Oslo.

So far, 2024 has been a better year for frontier debt markets than 2023. Several frontier economies have returned to international bond markets, and bond yields have come down from their Autumn 2023 peaks. In March of this year, Zambia reached a final agreement with its international bondholders to restructure its three outstanding Eurobonds – more than three years after Zambia’s application to the G20 Common Framework. In June, Ghana agreed a memorandum of understanding on debt restructuring with its official bilateral creditors, which paves the way to actively engage with the bondholder group.^[2]

However, there is little reason to celebrate. About half of low-income countries are judged to be at high risk of external debt distress – or already in distress – according to the latest debt sustainability analyses (DSAs).^[3] In many of those countries debt service costs are back at levels not seen since the 1990s. Progress on the restructuring cases under the Common Framework is of course welcome but long overdue. History shows that delays in resolving debt crises are costly to both debtors and their creditors.

We see three key interrelated areas of reform to improve the speed and quality of sovereign debt restructuring processes. Below, we highlight which remedial actions are currently being taken for each area and recommend additional steps.

Increasing debt transparency

The reconciliation of incomplete and inaccurate debt records has significantly delayed restructuring negotiations. The World Bank’s Debt Reporting Heat Map shows that debt disclosure gaps remain widespread.^[4] To overcome this, debtor capacity – both human capital and IT systems – is slowly being built through technical assistance, and broader disclosure incentivised through conditionalities in IMF and World Bank lending. Ideally, debtor systems would allow for real-time input and validation by creditors.

While most official creditors have embedded the OECD Recommendation on Sustainable Lending Practices and Officially Supported Export Credits^[5] into their policies, other official and commercial creditors still have room to enhance the detail of their claims reporting, aligning with G20 and other guidelines. Confidentiality or secrecy clauses in new lending and in restructuring agreements should be avoided.

Another source of delay has been creditors’ differential access to key information that forms the basis of their debt restructuring negotiations with the debtor, including up-to-date DSAs and the underlying macroeconomic parameters. In response, the IMF has sharpened its staff guidelines on which information can be shared when and with whom in the context of a restructuring.^[6] Greater up-front transparency and sharing of information between official and commercial creditors regarding the proposed treatments of their claims would be helpful too.

Anchoring debtor and creditor expectations

Uncertainty about the timeline of the Common Framework process and the many technicalities involved has further complicated negotiations and has disincentivised debtors from applying for a debt treatment in the first place.^[7] Debtors and creditors – and creditors among themselves – have bickered on the perimeter of debt to be restructured, holding different views on, for example, the treatment of debt owed by state-owned enterprises, the need to include domestic debt, the role of multilateral creditors, and the precise cut-off date beyond which new debt would be excluded from the restructuring.

The inclusion of non-Paris Club creditors in negotiations on official debt treatment is indispensable, given the much larger share of countries’ debt portfolios they represent nowadays, but has greatly complicated matters. China in particular is home to a wide variety of creditor agencies with their own governance and internal procedures and has limited historical experience with deeper debt restructuring operations (beyond maturity extensions).^[8] As such, it is perhaps not surprising that China has questioned the “Paris Club way” of doing things.

To better anchor debtors’ and creditors’ expectations, the G20 has considered publishing a compendium detailing the basic steps of the Common Framework and an indicative timing. While no agreement has been reached so far, a consensus seems to be forming around the proposal to aim for shorter times between the key stages of future official debt restructurings, from the debtor’s request for an IMF programme to the finalisation of the terms of debt treatment. Since February 2023, the IMF, World Bank, and G20 Presidency have brought together a select group of official bilateral creditors, private creditor representatives, and debtor governments in the Global Sovereign Debt Roundtable to build greater common understanding among key stakeholders on technical issues such as the restructuring perimeter.^[9] The details of how this will be applied will still need to be negotiated on a case-by-case basis. Meanwhile, debt restructuring cases should be developed around high-quality, realistic DSAs. The upcoming review of the IMF and World Bank’s debt sustainability framework for low-income countries offers an opportunity for improvement.

Enhancing creditor coordination and burden-sharing

Additional factors hindering progress in recent debt restructurings include securing financing assurances from non-traditional creditors for IMF programme approval and achieving broader inter-creditor equity. A key sticking point regarding inter-creditor equity is the assessment of “comparability of treatment” (CoT). This principle ensures that private creditors or any non-participating creditors do not receive better terms on their claims compared to participating official bilateral creditors. Indeed, Zambia’s official creditor committee rejected two earlier proposals of Zambia’s bondholders because the proposed debt treatments were judged incompatible with CoT.^[10] Bondholders complained that it was unclear how much additional relief in net present value (NPV) terms was expected.

The IMF has recently introduced extra flexibility in its lending policies aimed at moving forward in cases where there is a large non-cooperative official bilateral creditor and at extracting financing assurances more rapidly.^[11] One obvious route to overcoming CoT issues is for official creditors to be more precise on the different metrics they consider in assessing CoT – NPV relief, nominal debt service relief, and extended duration of the treated claims – and how these metrics are weighed against each other. At present, the Paris Club Secretariat plays a pivotal and supportive role in this area.

A more ambitious proposal is to move towards an approach where negotiations with official and private creditors would take place in parallel, rather than sequentially, and where each creditor group’s decision to accept the debtor’s offer could be made contingent on the acceptance by other creditors of the offers made to them.^[12] Such a parallel approach would benefit from an enhanced, more inclusive format of consultations. These consultations could be facilitated by the Paris Club Secretariat, IMF or perhaps a new body. In this format, official creditors, bondholders, and other commercial creditors to a particular debtor country would convene at an early stage to iron out fundamental disagreements and discuss which debt treatments would be acceptable to each of them (within the constraints set by the DSA and CoT). Implementing these reforms could significantly enhance and accelerate sovereign debt restructuring processes, benefiting both debtors and creditors.

1. The views expressed should not be attributed to the National Bank of Belgium, the Eurosystem, the Paris Club, nor Credendo ECA. ↑
2. https://www.mofep.gov.gh/news-and-events/2024-06-12/ghanas-government-has-reached-a-memorandum-of-understanding-with-its-official-creditor-committee ↑
3. https://www.imf.org/external/pubs/ft/dsa/dsalist.pdf ↑
4. https://www.worldbank.org/en/topic/debt/brief/debt-transparency-report/2023 ↑
5. http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=tad/ecg(2018)4&doclanguage=en ↑
6. https://www.imf.org/-/media/Files/Publications/PP/2023/English/PPEA2023027.ashx ↑
7. https://www.suerf.org/publications/suerf-policy-notes-and-briefs/why-are-debtor-countries-hesitant-to-participate-in-debt-relief-initiatives ↑
8. https://www.econstor.eu/bitstream/10419/248167/1/sais-cari-wp39.pdf ↑
9. https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099456004252424924/idu1e19930f11b6ab14e801a24410f83a9bdd756 ↑
10. https://www.sovdebtoddities.com/p/zambia-third-times-a-charm ↑
11. https://www.imf.org/-/media/Files/Publications/PP/2024/English/PPEA2024017.ashx ↑
12. https://www.piie.com/publications/policy-briefs/2024/restructuring-sovereign-debt-need-coordinated-framework ↑