A Modern Template for the Restructuring of Poor Country Debts

Sixty per cent of low-income countries are in “debt distress” or at high risk of it. The current sovereign debt restructuring framework leads to unsustainable debts over the long term, a continuing repeat of the crisis/debt restructuring cycle, economic stagnation and poverty in low-income countries. This paper proposes that the International Financial Institutions (IFI) provide the funding needed for over-indebted low-income countries to achieve a more durable resolution of their debt problems following the Brady Plan precedent. Two proposed bond exchange structures provide a new template for sovereign debt restructuring. They simplify the Brady concept and increase the liquidity of the restructured instruments significantly. The entire stock of the government’s external bonds will be converted into an equal nominal amount of 25-40 year debt with a 3-3.5% interest rate. The result should reduce the net present value of the debt by more than 50% and place the debt on a sustainable path.Under the Cash Down-Payment Structure, investors receive a cash down-payment of the existing bond equal to 30-35% of the bond’s current market value plus a new standard long-term bond with no write-down of the principal amount. Under the Floor of Support Structure, investors receive a new long-term bond of equal nominal amount that has a liquid rising floor of support with an initial value of 60-70% of the existing bond’s current market value. The floor of support is based upon the investor’s ability to convert the new bond into a World Bank zero-coupon bond at any time. The AAA minimum value will rise to 100% of the nominal amount of the original bond at the maturity of the new bond. Under both Structures, the market value received by the investor is significantly higher than the current market value of the existing bonds. Based upon a US$ 10 billion external bond stock, total IFI financing is US$ 1 billion under the Cash Down-Payment Structure and US$ 2 billion under the Floor of Support Structure. The sharing of the financing requirement across a number of IFI will minimize the financial demands on lenders. IFI funds can be provided through a combination of new loans and repurposing of undrawn amounts under existing loans, again following the Brady precedent. The IFI loans should contain provisions that restrain excessive borrowing