Sovereign debt at a crossroads: Reflections and future considerations for restructuring

Rising debt burdens and tightening financing conditions are increasing pressure on low-income countries. Restructuring frameworks must now deliver greater coordination, clarity, and long-term sustainability.
Romanie Peters
Romanie Peters
Senior Company Lawyer, Legal and Claims Coordinator, CREDENDO
Philippe Guyonnet-Dupérat
Philippe Guyonnet-Dupérat
Secretary General, Paris Club
03/07/2025

At the recent Berne Union Medium and Long Term (MLT) meeting in May, the discussion on sovereign debt and claims opened up with a pointed question: Are we facing a moment that calls for a new Live Aid or Highly Indebted Poor Countries initiative (HIPC) 2.0? While the sentiment is understandable, given that global interest rates and debt dynamics have left developing countries more vulnerable than ten or fifteen years ago, the context today is fundamentally different from that of the mid-1990s.

Two key distinctions stand out. First, although debt risks are elevated, the vulnerabilities in low-income countries (LIC) are, on average, less severe than during the HIPC era. In terms of public and publicly guaranteed (PPG) debt to exports of a typical LIC, it currently stands at 137%, compared to 318% in 1994. Second, the financing landscape has evolved dramatically. The creditor base is now far more diverse due to the rise of new creditors – both official bilateral and private – and more complex debt instruments. These changes, on top of the cost of such an initiative (USD 120 billion for HIPC) make a broad-based initiative like HIPC significantly more challenging to implement today. A recent study[1] by the National Bank of Belgium supports this view, concluding that the current situation does not warrant a new HIPC-style initiative.

According to Berne Union data on MLT claims in 2024, the largest claims paid were sovereign-related, particularly involving Ghana, Zambia, Ethiopia, and Sri Lanka. While this concentration may raise concerns, it does not necessarily indicate a systemic crisis. Rather, these are the cases currently undergoing restructurings brought about by country-specific factors and vulnerabilities crystallising – for some, this reflects difficulties refinancing at higher rates, for others economic shocks. Notably, the data also reflects the involvement of a wide range of creditors—private insurers, ECAs, and plurilateral financial institutions—underscoring that no single creditor group can resolve a debt crisis alone.

This article offers a dual perspective: a review of the past year from the Paris Club Secretary General and insights from an Export Credit Agency (ECA) actively engaged in ongoing restructuring processes.

Progress under the Common Framework

Since the launch of the Common Framework, tangible progress has been made in restructuring cases both within (e.g., Ghana, Ethiopia) and outside (e.g., Sri Lanka) the framework. Processes are becoming timelier and more predictable. For example, the time between a debt treatment request and the IMF’s first review has decreased significantly—from nearly two years in Chad and Zambia to about one year in Ghana and eight months for Ethiopia.

Milestones in sovereign debt restructurings under the Common Framework and IMF programmes

Source: Paris Club Secretariat

The process has delivered debt treatments from a wide range of creditors, underpinned by the successful application of comparability of treatment between official bilateral and private creditors. This process was not easy at the outset, but stakeholders recognised the value of coordination. In practice, Zambia, Ghana, and Ethiopia have benefited from continuous support from the IMF at scale thanks in part to the progress made in their restructurings.

However, it is also clear that broader coordination across commercial creditors would be beneficial. Bondholders, by necessity, are more organised and able to engage quickly with borrowing countries, unlike commercial creditors whose relationship with the country can often slow the conclusion of treatments.

Moreover, there is room for improvement. The process needs to build on initial momentum and become faster, more responsible, and more transparent. Some other areas to focus on include greater information-sharing with debtors and private creditors and more clarity for different stakeholders on the steps of a debt treatment, with the G20’s “Lessons Learned and Ways Forward” note providing an important set of practical steps that can drive improvement (see: G20 Note).2

Observations from the ECA perspective

From the perspective of an ECA involved in all the aforementioned cases, several concerns merit attention in future restructuring efforts:

Value of early action

Debtor countries are generally better off avoiding restructuring altogether. Addressing high public debt levels proactively is crucial. Countries should be encouraged to implement ex-ante measures—such as fiscal adjustments—to manage debt sustainability and avoid default. Ex-post restructuring is always more painful than ex-ante.

It is also essential to distinguish between temporary liquidity pressures, such as refinancing issues linked to withdrawal of certain creditor classes, and long-term sustainability issues, as these require different responses. The IMF and World Bank are addressing this significant distinction through the three-pillar approach aimed at supporting growing financing and refinancing needs.

Clarifying the restructuring perimeter

Short-Term vs. Medium/Long-Term Debt

Historically, short-term (ST) debt has been excluded from sovereign restructuring under Paris Club treatments. This practice, targeted to give governments room to manoeuvre, remains relevant today, particularly under the Common Framework, as it helps maintain access to trade finance and the T-bill market. However, in recent cases the principle of excluding ST debt seems largely forgotten. It is vital for the success of sovereign debt restructuring to reaffirm the importance of the rule that ST debt be excluded and arrears on ST debt retain seniority status.

Treatment of State-Owned Enterprises (SOEs)

There is currently no clear consensus on how to treat SOEs in a sovereign restructuring. There is an understanding to include in the scope of the debt treatment all SOEs which are assessed in the IMF’s Debt Sustainability Analysis (DSA). A more flexible, case-by-case approach could, however, be considered. If there are solid grounds to justify the exclusion of the SOE from the scope of the debt treatment, the IMF’s DSA should provide the necessary flexibility to support such exclusions.

For example, if the SOE is financially sound and its debt is unlikely to be serviced from the State budget, it should be able to continue operating rather than being dragged into a debt restructuring with adverse effects. Any burden-sharing implications could be compensated by additional efforts from the remaining facilities in the scope of the debt treatment or bringing new financing to the table.

The role of cut-off dates

Cut-off dates are intended to protect new financing. However, shifting these dates mid-process—as seen in Ghana—creates uncertainty and discourages new financing. The cut-off date should be defined as objectively as possible.

The current stance is to set the cut-off date no later than the date of the staff-level agreement (SLA) reached between the country authorities and the IMF team. While this is a relatively ‘objective’ date, it is only meaningful if established early in the process. Most importantly, this date should be fixed early and remain unchanged throughout the process. If uncertainty exists around the cut-off date, it drastically reduces the incentive to provide new financing in the future.

Sovereign debt dynamics have shifted since the HIPC era and require more flexible and coordinated approaches. Preventing deeper crises will depend on strengthening the Common Framework, encouraging early action by debtor countries, and fostering inclusive engagement from creditors.



[1] Essers, D. and Cassimon, D. (2022). Towards HIPC 2.0? Lessons from past debt relief initiatives for addressing current debt problems. Journal of Globalization and Development, 13(2):187–231 and https://www.nbb.be/doc/ts/publ...

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