debt restructuring in the caribbean - imf
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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
The Case for Restre Case o est
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
ructuring Sovereign Debtuctu g So e e g ebt
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
The Case for Restre Case o est
tt
ttt d
ggid
1 tg
Immediate impact of debt restructuring
ructuring Sovereign Debtuctu g So e e g ebt
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
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