debt restructuring in the caribbean - imf

R t SRecent Sover

Outcomes ,

CEcEc

S

i D bt R t t i i threign Debt Restructuring in the Caribbean

Lessons and Emerging Issues

Ian DurantCountry Economistonomics Departmentonomics Department

September 5, 2012

Structure o

• The Debt Situation in the Caribbean

• The Case for Restructuring Soverei

• Global Debt Restructuring Outcome

• Context, Key Features and OutcomContext, Key Features and OutcomRestructuring in the Caribbean

• Lessons of Experience• Lessons of Experience

• Some Emerging Issues in Debt Res

• Conclusions

of the Presentation

n

gn Debt

es

es of Recent Sovereign Debtes of Recent Sovereign Debt

structuring

The Debt Situae ebt S tuaation in the Caribbeanat o t e Ca bbea

The Debt Situae ebt S tua

• Domestic debt accouDomestic debt accou60% of total debt

• Commercial banks aholders of domestic

• In AB, BZ, DM, GD, , , , ,average almost 70%

• Multilateral debt reprexternal debt

ation in the Caribbeanat o t e Ca bbea

unts for approximatelyunts for approximately

and other FIs are main debtSV, GY external debt ,

%resents one-third of

The Case for Restre Case o est

• Liquidity or solvenLiquidity or solven• High indebtednes

developmentdevelopment– Discourages inves

E i t• Economic agents which reduces pro

– Debt-service needDebt service needdevelopment expe

ructuring Sovereign Debtuctu g So e e g ebt

ncy problemsncy problemss can constrain

stmentti i t fi l ti ht ianticipate fiscal tightening,

ojected returnsds crowd outds crowd out enditures


Dynamics of government’s debt accumulat i t

1 )( tttt iDRPEDDconstraint

t

ttt g

gid

1

Where:D = debtPE = primary expenditure; I = average effective interest rates

tg

gO = other debt-creating flows F = financial assets


ation is governed by the budget

11 tttt FFOD

ttt opbd 1

d =debt/GDPi = average effective interest ratepb = primary balance/GDP

i l GDP thg = nominal GDP growth =a one-period change


tt

ttt d

ggid

1 tg

Immediate impact of debt restructuring


tt opb 1

Subsequent –period impact of

d bt t t idebt restructuring

Global SovereiRestructuringRestructuring

• Delays in reaching agreement (AvDelays in reaching agreement (Av

• Creditor losses (average 38% of o( g

• Debt relief – the typical country exdebt-to-GDP (Benjamin and Wrigh

• Restructuring costs 0 5% 3 5%• Restructuring costs – 0.5% - 3.5%depending on the complexity

• Post-restructuring capital market a

ign Commercial Debt OutcomesOutcomes

erage 7 4 years)erage 7.4 years)

utstanding value)g )

its debt default worse off in terms of ht (2009))

of the value of the restructured debt of the value of the restructured debt,

access

Recent Sovereign C ibbCaribbean

– Dominica (2004)

– Grenada (2005)

– Belize (2006)

– Jamaica (2010)

– Antigua and Barbuda (2010)

– St. Kitts and Nevis (2011)

Debt Restructured in the

Dominica DDominica D

CONTEXT

Weak economic performance and slow reform

•and slow reform implementation affect IMF program (2002)

•

Build-up of arrears and financing gapsfinancing gaps

Debt/GDP ratio = 95% (end-•

Debt/GDP ratio 95% (end2003) •

Debt RestructuringDebt Restructuring

FEATURES

Offer launched - April 6, 2004

3 options for commercial creditors:10-year 30% discount bondy20-year 20% discount bond30 year par bond

Bilateral creditors participatedCDB provided NPV relief

Dominica Debt

OUTCO

70% participation of eligible debt

Last bilateral holdout settled in 2006July 2012

50-55% reduction in NPV terms on

Debt/GDP fell 4.6 pps (immediately)(rebased GDP)(rebased GDP)

Restructuring cont’d

OMES

6; large commercial debt settled in

commercial debt

) and almost 30 pps to 67.3% (2011)

Grenada DG e ada

CONTEXT (2004)

Public debt = 95% of GDP • Lau

Damage by Hurricane Ivan = 200% of GDP

• Cov

Exports fell 24.8%

• No 45%Real GDP declined 3% 45%

• 20-ystar

ebt Restructuringebt est uctu g

KEY FEATURES

unched in September 2005

vered ½ of total public debt external debt = US$190 mndomestic debt = US$86 mndomestic debt = US$86 mn

principal write-down; but NPV reduction = %%

year instrument with a step-up interest rate, rting at 1% for the first 3 years

Grenada Debt

OUTC

• High participation rate (91% of eligible cla• Entire process took approximately one yeap pp y y• Credit rating improved, but still below pre-• Front-loaded liquidity relief:

83% reduction in debt service (2005 08– 83% reduction in debt service (2005-08– 73% reduction in debt service (2009-12

• NPV reduction around 34%• Public debt = 103.3% of GDP (2011)

t Restructuring cont’d

COMES

aims)arhurricane rating

8)8)2)

Belize Dee e e

CONTEXT

Debt-to-GDP ratio = 92% •

External debt = 90% of total debt

D bt i 45 7% f

•

Debt service = 45.7% of revenue; 16.7% of exports

Effective interest rate on external debt = 11.25%

bt Restructuring bt est uctu g

KEY FEATURES

Exchange offer (December 2006) on externacommercial debt exclusivelyy

New bond replace eligible commercial debt:

22-year maturity Semi-annual principal payments

b i i 10 b f t itbeginning 10 years before maturity Step-up interest rate structure (4.25% to

8.5%)

Belize Debt R

OUTCO• 97% participation of eligible debt

• Process completed in six months

• Significant liquidity relief• Significant liquidity relief debt service = 24.6% of revenue

• 21% reduction in NPV terms

• Debt-to-GDP not significantly affect

Restructuring Cont’d

OMES

e and 10% of exports

ted

Jamaica DeJa a ca e

CONTEXT

• Debt/GDP ratio = 140% (2009/10)

• Interest payments = 62% of revenue and grants

• Average effective interest rate on domestdebt (17.9%) and external debt (7.4%)

• Capital expenditure had borne the brunt offiscal consolidation

ebt Restructuring ebt est uctu g

KEY FEATURES

• Debt exchange launched Jan. 2010

• Limited to domestic debt

• No principal haircutsic

No principal haircuts

• Interest rate reduction and extended maturities

f maturities

• Instruments reduced (345 to 24)

Jamaica Debt Ja a ca ebt

Outco• All debt holders participated

• Process took 1 month

• 20% reduction in NPV terms

• Interest payments fell 20 pps to 40% of rev

• Reduced average effective interest rate onstructure

• Debt-to-GDP ratio below 100% by 2015/16

Restructuring Cont’dest uctu g Co t d

omes

venue (2010/11)

n debt, and lower domestic interest rate

6

Antigua & Barbut gua & a buCONTEXT

• Public debt = 111% of GDP (2009) • Proc% ( )

• Average nominal interest rate = 7 9%

• No p7.9%

• Arrears = 50% of debt stock• Debt

swap

• Real GDP decline = 10.3% • Upfr

• Primary balance =-7.7% • Nego

• MatuMaturates

uda Debt Restructuringuda ebt est uctu gKEY FEATURES

cess started 2010

principal haircuts

t consolidation/rate reduction/asset p/extended maturities

ont payments/assets swaps to local suppliers

otiated settlements with local banks

urities lengthened from 5 to 20 years; interesturities lengthened from 5 to 20 years; interest s reduced from 13% to 8%

Antigua & Barbuda D

Outco• Process started in 2009 and • Debt/GDP fell to 94% (2011)Debt/GDP fell to 94% (2011)

• Debt/GDP expected to fall toDebt/GDP expected to fall to

• Arrears = 13% of total debt• Arrears = 13% of total debt

• Debt dynamics have improve• Debt dynamics have improve

Debt Restructuring Cont’d

omesis ongoing

90% (end-2012)90% (end 2012)

eded

St. Kitts & NevSt tts & e

CONTEXT

Debt/GDP = 155% (2011) 35 pp increase

(2008-10)

•

•

Domestic debt = 70% of total debt

Interest payments averaged 19.5% of totalInterest payments averaged 19.5% of total revenue (2007-11)

Primary balances

2.8% (post 2005) •

•

is Debt Restructuring s ebt est uctu g

KEY FEATURES

Launched February 2012

External commercial debt exchange:

50% discount bond with 20-year maturity & step-down interest rate starting at 6%, then falling to 3%; orfalling to 3%; or

Par bond with 45-year maturity; 15 years grace; & interest rate = 1.5%

Domestic debt to be exchanged for land, a stake in a SPV etc

Paris Club relief; discussions with non-Paris Club

St. Kitts & Nev

OUTCOUTC• Process started in Ju

ongoingg g• Anticipated reduction

100%• Discount bond = 61• par bond = 73% NPVpa bo d 3%• Relief from Paris Clu

vis Debt Restructuring

COMESCOMESune 2011 and is

n in debt/GDP – 90 –

% NPV reductionV reductioneduct oub and Non-Paris Club

Debt restructuring iO tOutcomes

• Time span is relatTime span is relataverage

• Principal haircuts• Principal haircuts • NPV reductions ra

70%70%• Restructuring has

far enough

n the Caribbean - Regional

tively short ontively short on

are infrequentare infrequentange from 20% to

s generally not gone

Lessonsesso s

• Debt difficult to manage beyong y• Debt restructuring should be p

program supported by key sta

tt

id

• Restructuring should take cog

resource capacity plus make a

td

1

shock• Debt profile limits restructuring

s of Experiences o pe e ce

nd 90% of GDPpart of a comprehensive reform akeholders

ttttt opbdg

1

nizance of medium-term allowance for a reasonable

tttt

opbdg

1

g options

Lessons of

• Step-up interest rate instrumep pbetter medium-term prospects

• Consultation with creditors is tt

t ggid

1

but can be at expense of relie• Domestic debt is easier to set• Non-Paris Club credits are mo

Experience Cont’d

ents that assume significantly g ys can be risky

key to high participation rates, ttt

t

t opbd

1

y g p p ,efttle than external debtore difficult to settle

Emerging Issuese g g ssues

• Financial sector vulnerabilities

• Reputational risk and access

• Creditor coordination

• De facto sovereign ownership of de

• The use of guarantees and state co

• Litigation and vulture funds

s in Debt Restructurings ebt est uctu g

ebt

ontingent debt

CoCo

Debt restructuring is a last resort. Minimum

– Fiscal consolidation will not lead to deb

– Vulnerabilities are significant

Debt restructuring requires sound analysisDebt restructuring requires sound analysis

Debt restructuring should be part of a comp

nclusionsc us o s

m conditions for restructuring

t sustainability

& conservative outlook& conservative outlook

prehensive debt sustainability program

debt restructuring in the caribbean - imf

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