2023 Global Interdependence Center Sovereign Debt Conference: Challenges in Improving Common Framework for Low-Income Countries’ Sovereign Debt Restructuring 

Prominent policymakers, private creditors and members of the International Monetary Fund and Moody’s gathered at an in-person event hosted by the Global Interdependence Center in Philadelphia on Feb. 23 to discuss the impact of the current rate environment and inflation on sovereign debt restructurings in low-income countries and the challenges these countries face in restructuring their debt.

“We are not in a sovereign debt crisis, but the wrong realization of global risk events could push the global economy into such a scenario,” said Mark Flanagan, deputy director of the IMF strategy, policy and review department.

Flanagan added that debt and interest payments in emerging markets are projected to be at pre-pandemic levels for 2023 but that primary balances are higher, which increases sovereign risk especially for noncommodity exporters.

According to Flanagan, as sovereign risk is higher post-pandemic, it is crucial for new creditors to develop their domestic restructuring processes and align them with the Common Framework. However, to date most of the interactions among creditors have been ad hoc, making it difficult for the international community to reach a consensus on technical issues regarding restructuring.

Rafael Molina, managing partner at Newstate Partners, said he believes that since every debt crisis is different, it is difficult to apply a framework to every single country.

“Private sector creditors need to answer to their own investor constituencies. They expect to understand the financial rationale for debt relief. The Common Framework has yet to address the issue of asymmetry of information to the satisfaction of private sector creditors.”

Molina added that countries should involve the IMF as soon as there are signs of distress to accelerate the approval of a program that can help the sovereign understand their creditors and why they cannot service the debt.

“From the perspective of private sector creditors, there’s a sense that the debtor decides on a program and then goes to the creditor to ask for financing gaps. As a creditor, you have to decide if that’s fair. If there isn’t an engagement early on, that’s more difficult to decide,” said Federico Sequeda, head of country research and portfolio manager at Morgan Stanley.

Another challenge in debt restructuring implementation is the lack of communication among the various classes of creditors.

“Some bilateral creditors like China don’t want to agree on debt restructuring terms until they know what commercial creditors are going to do. The way to solve this is communication. Both parties should talk to each other,” said Liam Localio, managing director at Farallon Capital Management.

Although the international community is taking steps to improve debt restructuring processes, it will take time to develop a broad initiative that can truly address all these challenges.

“We need a structuring debt mechanism, but there’s a zero percent chance of that happening in our lifetimes,” said Mark Flanagan, deputy director of the IMF.

-- Maria Abreu