Policy Brief 13, October 2012

Statutory Sovereign Debt Workout Mechanisms: Why and How?.

Because of the absence of a multilaterally agreed legal system for debt workouts, the practice tends to be ad hoc and disorderly, generally favouring creditors. Often the IMF is involved in coordinating and resolving debt servicing difficulties, be it due to solvency or liquidity problems, based on an adjustment programme agreed with the debtor country.

The Fund generally seeks a voluntary agreement with creditors, but its position is asymmetrical – while it has a significant leverage vis-à-vis sovereign debtors it cannot impose appropriate terms and conditions on creditors.

Such ad hoc restructuring has rarely secured sustainability where there were problems of solvency. In cases where debt servicing difficulties were due to liquidity shortages, it provided relief through maturity rollover at penalty rates, but this often came very late in the crisis and failed to prevent the damage in terms of substantial costs in lost jobs and incomes.

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