How To Create A Better Debt Management Framework

The Debt Burden: How To Create A Better Debt Management Framework Presented by: Prof. Rodrigo Olivares-Caminal & Prof. Paola Subacchi Date: 29 March 2021 Outline - - - The current state of play • Debt accumulation • Mitigating initiatives Crisis prevention vs crisis resolution • Ex-ante debt management • Ex-post debt restructuring How an ex-ante debt management framework should look like The Debt Burden: Government Debt As % Of GDP - Significant increase in debt vulnerabilities due to Covid-19 crisis The Debt Burden: Issued In Foreign Currency (As % Of Total Debt) - Focus on Latin America - Dependence on external borrowing - However, Brazil has a high share of local- currency debt Crisis-Response Mode - IMF: RFI, RCF, SBA, CCRT • 250bn US$ made available for lending facilities and debt service relief • 107ml US$ so far in assistance (85 countries) - G20: Debt Service Suspension Initiative (DSSI) - G20: Common Framework for Debt Treatments DSSI: Partial And Temporary To be successful: - All stakeholders need to take part • Private sector • Multilateral lenders - Full possible transparency on data and other debt information - Commitments to responsible debt management The Common Framework: Zambia and Angola - - In November 2020 Zambia defaulted on a • 42.5 million US$ coupon repayment • Pre-existing conditions worsened by Covid-19 crisis • Debt restructuring under CF At the end of 2020 Angola renegotiated its debt with China • Relief of around 6.2bn US$ of its public debt • Release of up to 1bn US$ by IMF Crisis-Prevention Vs Crisis-Resolution - - Ex-post debt restructuring is onerous • Short/medium-term costs of emergency measures • Long-term credibility loss on credit history and default premia • Legal costs and litigation costs Complexity due to shift in creditor composition Debt Exposure To China, Select Countries, 2014-2019 - Between 2014 and 2019, Djibouti, Republic of Congo and Angola significantly increased their debt exposure to China - Djibouti: from 7.7% to 34.6% of GDP Government Financing - State: • Security • Education • Health • Justice - Budgetary Deficit - These services are costly > $ is needed to provide them effectively and w/o interruption - Options • Taxation  Unlimited taxing powers  Limited to its economic base > may not be enough for long-term capitalintensive initiatives  Direct or over economic activity in its territory  A deleterious effect > if less productive than use of private sector • Debt Financing (no equity)  OSI v PSI  Loan market v capital markets  Intergenerational problem  Endogenous v. exogenous risks  Sustainability > is debt-to-GDP a real proxy?  Ecuador 27% v. Nicaragua 236%  Real need v. political bias Sovereign Debtor - OSD • Multilateral Debt (IMF, WB Gr. & RDBs)  Conditionality  Art. IV annual reviews  Country missions • Bilateral Debt (Official Creditors)  Information Sharing  Comparability treatment of IMF Program • New Financing/Policy Analysis  Cannot be restructured >> Moral Hazard  Exceptions: o HIPC o Roll-overs • Coordination/Negotiation  Restructured @ the Paris Club (PC members + adhoc)  Determined on the basis of per-capita and debt ratios  Requires bilateral agreements (after PC agreement - PSD • Commercial Bank Debt • Private Sector Debt (Eurobonds)  Contractual terms o Plain Vanilla ➢ Negative Pledge ➢ Pari Passu Clause ➢ Cross Default ➢ Waiver of Immunity ➢ Submission to jurisdiction ➢ Guarantee/Collateral o Funky Stuff ➢ MFCC/RUFO ➢ PPAL. Reinstatement ➢ Hurricane clause ➢ Financial Covenants ➢ Trust/Sharing ➢ Pre-payment Arrangements • Coordination/Negotiation  London Club  Ad-hoc basis • Consultation/Offering  Voluntary Exchange Offers  Sweeteners  CACS  Kickers  Exit Consent - Phase I • - Phase II • - Contracting of the original state- guaranteed loans Issuance of the LPNs to investors Phase II • Legal extinction of the Ema tum loan & LPNS due to Eurobond issuance THE WAY FORWARD - Solvency • NO  Taxes  Privatizations  Rodrigo  Impossible  Expropriation  Dispose of assets - Liquidity • YES  Temporary / short- term triggered by shocks? - Restructuring Common Framework? • - - - Medium to long- term /rooted on structural problems? Rule of Law • To fight opportunism • To fight corruption Transparency • Accountability • Proper Recording • Budgeting Due Process • Law and Econ. analysis • Contribution to development • Future prospects