Thematic Workshop: Addressing the Sovereign Debt Crisis

This note captures the key takeaways from the thematic workshop with 20 diverse experts – see the annex for the full list. It is not meant to be a comprehensive record of the conversation, nor does it seek to capture consensus views.

1. Debt is needed for development

• Consider how a future-facing framework can be established for more effective debt management for a different world that includes a greater diversity of actors and considers the role of IFIs in mobilizing private finance, ability of countries to deal with shocks, increasing domestic debt, and who has preferred creditor status (PCS).
• Recognize global mechanisms that are not working well: Common Framework (lacking traction), lackluster implementation of three-pillar approach, high cost of capital, short-term maturities, uncertainty around PCS.
• Establish a vision for debt in which the rules of the game are not tilted against low- and middle-income countries. Work on the cost of lending, credit ratings methodologies, and risk assessment frameworks so that African economies are assessed on actual default risk, rather than perceived risks informed by legacy biases.
• Explore future financing models: Determine whether the IMF and World Bank have the right facilities for a higher-for-longer interest-rate environment, whether those facilities are of sufficient scale given countries’ financing and refinancing needs, and whether they have the appropriate program design. Also assess whether private investors can work alongside the IFIs and regional development banks before countries reach crisis point, rather than only being brought into the discussion once restructuring becomes unavoidable. Could foundations and philanthropic capital be incorporated more systematically into debt-for-health, climate or other impact structures?
• Make sure IFI financing catalyzes rather than substitutes for commercial capital.
• Note the caution that debt relief is not a development finance strategy.

2. Strengthen accountability and capacity to prevent debt crises

• Preventing future crises requires better debt management and decision-making on both the debtor and creditor sides, including stronger systems to assess borrowing decisions and manage restructuring.
• Strengthen domestic institutions, including parliamentary oversight of debt management and possibly IMF programs and improve internal governance and capacity to make sound decisions on debt and manage debt effectively.
• Democratize the Debt Sustainability Analysis (DSA) process through greater transparency and participation, and assess not only the size of borrowing but its quality and use.
• Strengthen tax administration, transaction-level reporting, and data-sharing among creditors and debtors to improve debt management and identify problems earlier.
• Strengthen domestic resource mobilization as a complement to borrowing; financing gaps should not default to debt where stronger domestic resource mobilization such as tax revenues can help.

3. Build a more inclusive and effective restructuring architecture

• The Paris Club principle of bringing creditors together remains useful as the creditor landscape becomes more diverse, however the Paris Club itself is losing relevance as it is not inclusive of key players.
• Integrate China, Gulf states, India, Türkiye, and other newer creditors into the restructuring architecture. Consider where that best happens, including building off the Global Sovereign Debt Roundtable that has helped build trust.
• Integrate private/commercial creditors more fully into the restructuring architecture.
• Accelerate debt solutions through parallel rather than sequential negotiations with sovereign and private creditors.
• Strengthen the Common Framework to deliver faster, more comprehensive debt solutions and broaden its reach beyond its current scope, including middle-income countries.

4. Strengthen coordination among creditors and clarify Preferred Creditor Status

• Debt distress is increasingly an inter-creditor problem, as creditors seek to protect their claims and establish seniority.
• Revenue encumbrances, additional claims, PCS, official enhancements, and external purchases of domestic debt should be examined for how they affect inter-creditor dynamics.
• Establish simple criteria financial institutions must meet to qualify as preferred creditors and who should establish those rules.
• Review which multilateral and regional institutions qualify as preferred creditors and make sure that PCS arrangements support, rather than undermine, sustainable debt solutions and do not crowd out private lending. The higher the percentage of debt a country holds, the less likely a private creditor will lend into this context.
• Any PCS framework should account for the fact that few institutions are willing to lend to distressed countries, including those lending at market rather than concessional rates.

5. Restructure earlier and bigger, and use innovative tools to manage future risks

• Conduct an ex-post analysis of the outcomes of recent debt restructuring processes to assess the impact of processes on debt burdens and whether debt relief was actually delivered.
• Restructure earlier and at sufficient scale to avoid “too little, too late” outcomes. Countries facing temporary liquidity pressures may need larger and faster support to prevent financing problems from becoming defaults. The IMF may need to be more aggressive.
• In the aftermath of restructuring, assume lower debt-carrying capacity for at least five years following the restructuring programme.
• Address excessive domestic debt where necessary, while recognizing that its treatment may differ from external debt.
• Expand the use of innovative tools, including transparency clauses, pause clauses, governance-linked bonds, and debt-for-development swaps.
• Discourage tools that can work against countries, including total return swaps and collateralized lending.
• Build on emerging market practices, including model transparency and pause clauses developed by engaged bondholders, while bringing loan holders up to similar standards.
• Consider debt sustainability alongside growth, development, and political realities, recognizing that adjustment measures can carry significant political costs.

Where further attention is needed

• Preferred Creditor Status: Who should define the rules, and what criteria should apply?
• Restructuring architecture: How can commercial creditors and newer lenders be brought into a more institutionalized process – should the Paris Club continue or is there scope for a new sovereign debt restructuring mechanism? How should the Common Framework evolve?
• Middle-income countries: What mechanism should address debt vulnerabilities in and beyond the Common Framework?
• Liquidity support: What mechanism could provide rapid financing to countries facing temporary liquidity pressures before they need restructuring or reach default?
• Debt Sustainability Analysis: How can the DSA process be democratized and better account for the quality and value of borrowing?
• Inter-creditor and domestic debt: How can the system reduce the scramble for seniority and clarify when and how domestic debt should be treated?

List of Participants

1. Masood Ahmed
2. Azucena Arbeleche
3. Denera Atanguegnima
4. Daniel Bradlow
5. Deborah Brautigam
6. Grieve Chelwa
7. Shanta Devarajan
8. Ishac Diwan
9. Hanief Ebrahim
10. Sarah El Khishin
11. Anna Gelpern
12. Trevor Manuel
13. Mahmoud Mohieldin
14. Samy Muaddi
15. Abdoulaye Ndiaye
16. Stephen Paduano
17. Lupin Rahman
18. Abebe Aemro Selassie
19. Jay Shambaugh
20. Vera Songwe