Time is Ripe for Innovation in the World of Sovereign Debt Restructuring

By Peter Breuer and Charles Cohen عربي, 中文, Español, Français, 日本語, Português, Русский  When corporations have too much debt and need to restructure it, creditors often end up exchanging bonds or loans for stocks. They trade the guaranteed payout of a fixed-income investment for an equity position whose return depends on the company’s future results. In other words, investors accept to share risk. Could a similar mechanism be applied when a sovereign nation has to restructure its debt, tying payouts to its future economic performance? New IMF staff research looks at possible innovative sovereign debt instruments that could do both: help creditors and debtors reach agreement on how to restructure debt by sharing some upside potential, and make a country’s debt portfolio more resilient to future shocks. The pandemic might be the force that catalyzes long overdue innovation in sovereign debt instruments that could facilitate restructurings and even help avoid them in the future. COVID-19’s huge economic shock finds about half of low-income countries and several emerging markets already in or at high risk of a debt crisis. And sovereign debt levels are expected to rise, by about 17 percent of GDP in advanced economies; 12 percent in emerging markets; and 8 percent in low-income countries, … Continue reading Time is Ripe for Innovation in the World of Sovereign Debt Restructuring