Dealing with Debt Working Group
Dealing with the new wave of debt overhangs
An International Economic Association initiative, with the support of the Finance for Development Lab, co-led by Reza Baqir (HKS), Ishac Diwan (FDL), and Dani Rodrik (IEA and HKS)
Badly hurt by a series of negative shocks, many developing countries (DCs) are at risk of falling into prolonged periods of debt overhang characterized by low growth and periodic debt crises. Already, Lebanon, Zambia, Ethiopia, Lebanon, and Chad are in a state of default. Many more countries have lost access to the capital markets and risk joining the list in the coming years.
The current global financial architecture responds to such crises through the formation of complex “deals” which include the debtor country – it must promise to “adjust”; the International Finance Institutions (IFIs) – they provide new funding and negotiate and enforce policy conditionality; and other official and commercial external creditors – who provide new financing and / or accept some amount of debt and debt service reduction. Domestic stakeholders such as banks, bondholders, depositors, and labor unions also matter. The bargaining process can be lengthy, involving domestic and global gaming, with each party trying to push the costs of adjustment onto others.
The current environment makes it harder to reach such deals. Public debts are owed to a heterogeneous group of lenders including international bondholders, large official bilateral creditors, multilateral development banks, and domestic creditors. Besides complicating coordination, this raises the possibility of bad self-fulfilling equilibria with sudden stops and/or banking crises. At the same time, growth prospects for DCs are currently uncertain, hurt not just by global stagflation, but also by deeper trends including robotization and of climate change. There is a serious risk that debt negotiations will get stuck for long periods, leading to a dramatic roll-back of the gains of the past two decades in growth convergence of poverty reduction.
This initiative proposes to explore how to improve this process by both evaluating in real time “deals” as they get struck, and by discussing some of the ongoing global initiatives that can affect these deals, such as efforts to improve the G20 initiated Common Framework for debt negotiations, scale up green finance, and improve the performance of IFIs.
A particular area of focus will be the country adjustment plans. Debt deals for countries suffering from a debt overhang are an opportunity to embark on a new growth path. In most cases, austerity will have to be part of the adjustment. But the promise of future growth makes it easier to implement domestically costly adjustments measures. It also makes it easier to reach agreement with creditors. Growth opportunities will however have to be financed, and this requires new loan commitments as well as the creation of sufficient
headroom during debt reduction to allow for future new financing.
These themes will be the focus of several webinars involving specialists and practitioners from around the world. Our first webinar will discuss a framework to evaluate debt deals. Subsequent panels will discuss adjustment programs, starting with Zambia, and moving on to the cases of Sri Lanka, Tunisia, Egypt, Lebanon, or Ghana – when deals are reached under the aegis of the IMF.
Panel: Learning from recent Debt Deals/Proposing useful Innovations
Tuesday October 31, 2023
9:00 AM ET | 2:00 PM Paris
Chair:
Dani Rodrik, Harvard University & International Economic Association (IEA)
Speakers:
Vera Songwe (Chair, Liquidity and Sustainability Facility, Brookings Institute). A tour d’horizon of innovations in debt restructuring to return to growth.
Ugo Panizza (Graduate Institute of International and Development Studies, Geneva). Value Recovery Instruments – how can they help the debtor?
Chandru Chandrasekhar (UMass Amherst, and Jawaharlal Nehru University). Domestic debt restructuring to address external debt stress.
Ishac Diwan (Finance for Development Lab): A fair Comparability of Treatment rule applied to all creditors.
Discussants:
Hanan Morsy (United Nations Economic Commission for Africa)
Martin Guzman (Columbia Business School)
The sovereign debt distress landscape is evolving both through “practice”, the actual resolutions of individual cases, and through architectural changes. Only a few debt-restructuring deals have been completed in recent months (Chad, Suriname), while several are making partial progress (Zambia, Ghana, Sri Lanka), and a few remain stuck (Lebanon). Yet, several innovations are starting to appear.
The recent Zambia bilateral debt deal has attempted to deal with China’s objections over burden sharing by MDBs. As in the case of Chad, it has also introduced a contingent repayment schedule that rises if rapid progress is achieved in regaining creditworthiness. In Ghana and Sri Lanka, domestic debt has been brought into the debt restructuring perimeter, but not in Zambia.
What do we learn from those innovations? Are they likely to influence future deals? Do current negotiations suggest that other innovations are needed?
Our central interest is to explore how debt deals can manage to help debtor countries not only stabilize their economy, but also to secure a path to recovery and sustainable growth, in the context of programs supported by the IMF and other MDBs. From this perspective, to what extent do recent innovations help? Which ones should stick, and which ones should we be more careful about? Which other innovations should we seek?
Panel: Discussing Debt Restructuring-cum Economic Adjustment Deals in Zambia and Sri-Lanka
Friday March 17, 2023
9:00 AM ET | 2:00 PM Paris | 3:00 PM Lusaka | 6:30 PM Colombo
Chair
Dani Rodrik, Harvard University & International Economic Association (IEA)
Speakers
Deborah Brautigam, Johns Hopkins University
Sharmini Coorey, Sri Lanka Presidential Advisory Group
Jayati Gosh, University of Massachusetts Amherst
Grieve Chelwa, The New School
Zambia is on the cusp of restructuring its external debt and has signed off on an IMF program, while in Sri Lanka, negotiations are ongoing. The goal of this session is to evaluate these arrangements from the debtor’s perspective. The focus will be on the shape of the debt restructuring deals, as well as the adjustment programs they support. By doing so, the discussion should bring together some of the hot issues in the field of development finance that tend to be treated separately: the nature of adjustment programs, IFIs’ loans to finance reforms, the possibility of a new growth path, and the type of debt workout needed to support such arrangements.
We are interested in three aspects:
– Adjustment program: does the package foster a new growth path? Is the program horizon long enough? is conditionality adapted to this goal?
– Debt restructuring: is the haircut proposed fair to all parties? Are the growth assumptions in the DSA realistic? Are there financing assurances by IFIs to finance this in the future? What are other sources of finance, domestic and external?
– Process: What has slowed down the negotiation process? What are the lessons for improving the Common Framework rules? How to involve China more centrally?
Background pieces:
A framework to evaluate economic adjustment- cum-debt restructuring packages by Reza Baqir, Ishac Diwan, Dani Rodrik
ZAMBIA
An analysis of the Zambia deal
SRI LANKA
Panel: A Framework to Evaluate Adjustment-cum-debt Restructuring Deals
February 1, 2023, 10:00 am ET
Moderator:
Jeromin Zettlemeyer (Breugel)
Speakers:
Reza Baqir (Harvard)
Ishac Diwan (Paris School of Economics and Finance For Development Lab)
Dani Rodrik (Harvard)
Discussants:
Simon Cueva (Universidad Internacional del Ecuador)
Shanta Devarajan (Georgetown University)
Celestin Monga (Harvard)
Carmen Reinhart (Harvard)
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