Restructuring Sovereign Debt: The Need for a Coordinated Framework

When a sovereign's debt is unsustainable, all stakeholders--the sovereign, its official creditors, and most private creditors--share an interest in a restructuring that quickly restores sustainability. Notwithstanding this general alignment of interests, the current restructuring process is subject to delay and unpredictability. Concerns regarding intercreditor equity have been exacerbated by the "sequential" nature of the restructuring process, where official creditors are generally expected to commit to debt relief terms before private creditors. To speed up the restructuring process, this Policy Brief proposes that the restructuring of official claims and private claims proceed in a parallel yet coordinated manner. To address intercreditor equity concerns, a new contingency mechanism would be available to allow simultaneous decision making: Before one creditor group decides to accept an offer, these creditors would know what everyone else is being offered. Such a mechanism would not be mandatory--there may be circumstances where one group is prepared to move before the others. Such a "Coordinated Framework" will require greater information sharing, consistent with the types of transparency reforms that have been advanced by the International Monetary Fund.