Chapter II.

E
Debt and debt sustainability
1. Introduction
(HIPCs) by the support of the international com-
Borrowing, both by governments and private enti- munity. Yet some developing countries are currently
ties, is an important tool for financing investment in debt distress, and several countries have external
critical to achieving sustainable development, as well debt exposures that leave them vulnerable to debt
as for covering short-term imbalances between rev- difficulties from external shocks, such as falls in
enues and expenditures. Government borrowing can commodity prices or natural disasters. In addition,
also allow fiscal policy to play a countercyclical role some low-income countries (LICs) are now access-
over economic cycles. However, high debt burdens ing international capital markets, introducing new
can impede growth and sustainable development. financing opportunities along with new risks, such
Debt has to be well managed in both public and as exposure to volatile international capital flows. At
private spheres. the same time, domestic debt issuance has increased
Developing countries made considerable pro- in many developing countries (see chapter II.B), cre-
gress in reducing their external debt in the early ating new opportunities for financing while reduc-
part of the century (see figure 5), assisted especially ing currency mismatches for domestic borrowers.
in the case of the heavily indebted poor countries Nonetheless, domestic debt overhang can be costly

Figure 5
External debt of developing countries, 2000 – 2014
(Percentage of GDP)
70

Low-income countries

60 Lower-middle-income
countries
Upper-middle-income
50 countries
All low- and middle-
40 income countries

30

20

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: United Nations, World Economic Situation and Prospect, 2016, based on data of the International Monetary Fund.
Note: Debt includes US dollar value of external public and publicly guaranteed and private non-guaranteed long-term debt, use of
IMF credit, short-term debt and arrears.
104 Addis Ababa Action Agenda — Monitoring commitments and actions

and, like other forms of debt, needs to be managed. ƒƒ Commit to support the maintenance of debt
Private debt in emerging market countries has also sustainability in those countries that have
grown substantially since the financial crisis, posing received debt relief and achieved sustainable
systemic risks related to currency and maturity mis- debt levels (94)
matches. Indeed, there is a risk that some liabilities ƒƒ Invite the IMF and World Bank to strengthen
could get shifted to the public balance sheet in the the analytical tools for assessing debt sustain-
event of large-scale defaults. ability in an open and inclusive process with the
Managing sovereign debt and addressing debt United Nations and other stakeholders (95)
crises when they do occur has been on the agenda of
Financing for Development (FfD) since the Monter- To evaluate countries’ debt sustainability, it is
rey Consensus, and is addressed in section II.E of the necessary to monitor debt trends along with emerg-
Addis Agenda and in this chapter in the Task Force ing domestic and external vulnerabilities and sys-
report. Mitigating the danger of private debt build- temic risks that threaten debt sustainability. The
ups is also addressed in the discussion of financial SDG means of implementation indicator 17.4.1
regulation in chapter II.F on systemic issues, while (debt service as a proportion of exports of goods and ser-
promoting long-term finance and the development vices) can be used as an input for this. However, this
of local capital markets is discussed in chapter II.B needs to be supplemented by additional data. Indeed,
on the private sector. as noted in the 2015 Millenium Development Goal
(MDG) Gap Task Force Report “statistical indica-
2. Debt crisis prevention tors sometimes fall prey to anomalies that require
The Addis Agenda recognizes the need to assist explanation so as not to mislead. … External debt
developing countries in attaining long-term debt servicing as a share of export revenues presents some
sustainability, including through fostering appro- telling examples. For instance, a spike was recorded
priate debt financing, debt relief, debt restructuring in the debt-servicing ratio of low-income countries
and supporting sound debt management, as appro- in 2006. This reflected a standard practice in bal-
priate. Strengthening the monitoring and prudent ance-of-payments accounting in which debt that was
management of assets and liabilities is an important being written down following debt relief was shown
element of comprehensive national financing strate- in the accounts as a principal repayment outflow off-
gies and is critical to reducing vulnerabilities. The set by a grant inflow. … This did not mean, however,
Addis Agenda emphasizes that debtors and creditors that the debt was being paid down per se.” 1
have to work together to prevent unsustainable debt The Task Force will thus look at a basket of
situations. While it notes that maintaining sustain- indicators and data, which can include but are not
able debt levels is the responsibility of the borrowing limited to: total external debt in percent of gross
countries, it also acknowledges that lenders have a domestic product (GDP) and by creditor as a share
responsibility to lend in a way that does not under- of total (multilateral, bilateral and commercial);
mine a country’s debt sustainability. total public debt, total private debt, private exter-
2.1. Maintaining debt sustainability nal debt and total external debt in percent of GDP;
the share of short-term debt in total external debt,
and improving debt sustainability
by original maturity; gross fiscal financing needs,
assessments in percent of GDP (i.e., the sum of the fiscal defi-
In the Addis Agenda, countries agree to support cit and the principal of public debt falling due);
efforts to maintain debt sustainability, as well as to and external financing requirements, in percent of
strengthen analytical tools for assessment. Specifi- GDP to capture both the current account deficit
cally, Member States: and principal repayments of external debt falling
due. The International Monetary Fund (IMF) also

1 http://www.un.org/en/development/desa/policy/mdg_gap/mdg_gap2015/2015GAP_FULLREPORT_EN.pdf,
page 4.
 Debt and debt sustainability 105

publishes risk ratings for external debt distress (for The DSA for market-access countries is used
LICs, see below), foreign reserve adequacy metrics, to assess debt vulnerabilities for countries that have
and other vulnerability indicators discussed in durable access to external market financing. In rec-
chapter II.F on systemic issues. The importance of ognition that vulnerabilities to debt sustainability in
any individual indicator depends on country cir- these countries were not adequately identified in the
cumstances. In addition, debt sustainability analy- years leading up to the 2008-09 financial crisis, the
ses that stress test debt sustainability under a range IMF revised the DSA in 2011 and implemented it in
of different macroeconomic and financial shocks 2013. The reform introduced greater consideration of
and alternative scenarios provide a more thorough the reality of baseline macroeconomic assumptions
assessment of risks. and uncertainty around those assumptions in the
In this regard, the IMF has developed and assessment of debt sustainability, liquidity risks cap-
periodically reviews and revises a debt sustainabil- tured by gross financing needs, and vulnerabilities
ity analysis (DSA) for market access countries, and associated with the debt profile.
the IMF and World Bank Group have together The United Nations Conference on Trade and
developed a methodology, which is also periodically Development (UNCTAD) Global Policy Model
reviewed and revised, for assessing LICs’ debt sus- provides a macroeconomic analytical framework,
tainability. The IMF and World Bank Group (the with an integrated macro-financial model for the
latter in the case of the LICs Debt Sustainability world economy, which can provide additional sce-
Framework, DSF) also conduct outreach with stake- narios for analysis of debt sustainability.
holders to facilitate better understanding of these The IMF and World Bank Group staff plan a
frameworks, as well as provide training to country review of their joint LIC DSF in 2016/2017, to be
authorities using these frameworks. conducted in consultation with key relevant stake-
The LIC DSF incorporates a standardized, holders, including civil society. Another factor that
forward-looking analysis of debt and debt service could be reviewed is the World Bank Group’s Coun-
dynamics under a baseline and alternative scenarios, try Policy and Institutional Assessment (CPIA),
and in the face of plausible shocks. The analysis which is used in setting the thresholds for LICs. The
produces a risk rating for external debt distress (low, Addis Agenda invited the IMF and the World Bank
moderate, high or already in debt distress) for each Group to make those reviews open, inclusive and
country by seeing whether the projected evolution involve the United Nations and other stakeholders.
under standard scenarios or shocks of a set of debt The Task Force can report on these experiences. It
burden indicators (debt stock or debt service rela- thus could, along with the broader FfD follow-up
tive to measures of repayment capacity) crosses one process, be a conduit to bring additional voices and
or more of the empirically estimated thresholds for perspectives into the discussion.
those indicators. Some countries conduct their own
2.2. Improving public debt management
debt sustainability assessments, which can be drawn
on by the Task Force where they exist. Many Governments seek to further strengthen their
Support in maintenance of debt sustainability capacity to appropriately manage public debt and
in LICs needs to strike a balance between maintain- ensure borrowing in the interest of maintaining
ing sustainable debt levels and the need to meet the sustainable debt levels. The Monterrey Consensus
sustainable development goals (SDGs) and enhance recognized that technical assistance for external debt
growth through critical investments, such as in management and debt tracking can play an impor-
infrastructure. Institutional frameworks also need tant role and should be strengthened. Similarly, in
to accommodate the availability of a wider range of the Addis Agenda, Governments:
external financing opportunities for LICs, as well as
limits on concessional financing. Work to prevent ƒƒ Welcome efforts to strengthen analytical tools for
the re-occurrence of debt distress should also seek to … prudent public debt management (95)
capture risks from contingent liabilities and natural ƒƒ Encourage international institutions to con-
disasters. tinue to provide assistance to debtor countries
106 Addis Ababa Action Agenda — Monitoring commitments and actions

to enhance debt management capacity, manage as well as debt data recording, operations, reporting
risks, and analyse trade-offs between different and statistics. The report will include a description
sources of financing, as well as to help to cush- of the different technical assistance activities of the
ion against external shocks and ensure steady relevant international organizations, for example
and stable access to public financing (95) it could include the number of training missions,
including by the World Bank, IMF, UNCTAD,
Several different tools are available to assist regional institutions, the Commonwealth Secretar-
countries in assessing and improving their debt iat, United Nations Department of Economic and
management functions, many of which are being Social Affairs (DESA), and other sources. It should
improved in response to changing needs. They be possible to track overall technical assistance in
include diagnostic tools such as the DSF (see above), debt management using the number of countries
the Debt Management and Performance Assess- that are receiving debt management capacity support
ment (DeMPA), the Medium Term Debt Strategy and the financial resources allocated to this purpose
tool and recording and reporting systems such as by donors and other stakeholders.
the Commonwealth Secretariat CS_DRMS and
2.3. Towards responsible sovereign
UNCTAD’s Debt Management and Financial
borrowing and lending
Analysis System (DMFAS). The fast-paced evolu-
tion of financial markets and developing countries’ The Monterrey Consensus stated that “debtors and
use of increasingly diverse financing instruments creditors must share the responsibility for prevent-
and borrowing sources warrant continuous efforts ing and resolving unsustainable debt situations.” As
to strengthen their debt management capacity. By noted above, the Addis Agenda reaffirms that both
the same token, the tools themselves will need to be sovereign borrowers and lenders must be responsible.
kept under review and adapted, while the need for In this regard, in the Addis Agenda, Governments:
new tools may also be recognized over time.
ƒƒ Reiterate that debtors and creditors must work
Moreover, in the broadest sense, debt manage-
together to prevent unsustainable debt situ-
ment should be seen as part and parcel of public
ations (97)
financial management. The Public Expenditure and
ƒƒ Commit to work towards a global consensus on
Financial Assessment (PEFA) framework measures
guidelines for debtor and creditor responsibili-
performance of a country’s public financial manage-
ties in borrowing by and lending to sovereigns,
ment system using quantitative indicators, as dis-
building on existing initiatives (97)
cussed in chapter II.A on domestic public resources.
Assessments on indicator 13 of the PEFA look at There has been considerable emphasis in recent
several dimensions of debt management including years on the importance of both borrowers and lend-
recording and reporting of debt and guarantees, ers taking responsibility for their actions, and for
approval of debt and guarantees, and debt man- their role in ensuring debt sustainability. There have
agement strategy. Country Policy and Institutional been several initiatives on this. The Addis Agenda
Assessment (CPIA) scores, DeMPA assessments, takes note of the UNCTAD Principles on Respon-
and reports from technical assistance providers such sible Sovereign Lending and Borrowing, recognizes
as UNCTAD’s DMFAS Programme can also be the applicable requirements of the IMF debt limits
complementary. IMF work on its Fiscal Transpar- policy and the World Bank Group’s non-concessional
ency Code (see chapter II.A is also germane. The borrowing policy, and also notes that the OECD
Task Force will be able to report on progress in all Development Assistance Committee has introduced
these areas. new safeguards in its statistical system to enhance
Reporting on the efforts of international the debt sustainability of recipient countries.
organisations will provide an overview of the techni- The UNCTAD Principles specify a set of 15
cal assistance and capacity building provided. It will principles and best practices for lenders as well as
cover assistance in debt management, including diag- borrowers, created after a consultative process. The
nosis, debt strategy and debt sustainability analysis, principles do not create new legal rights or obliga-
 Debt and debt sustainability 107

tions for endorsing parties, but provide a normative and Malaria since 2007. 2 An example of a debt-for-
approach to defining relevant guidelines and their nature swap is the one agreed between Seychelles,
implications for borrower and lender behaviours. three Member States of the Paris Club (Belgium,
UNCTAD’s DMFAS will start collecting data on France and Italy) and the Nature Conservancy in
the use and implementation of some of these Princi- 2015. 3 Such swaps do not necessarily create addi-
ples, across its coverage of developing countries from tional fiscal space, as the swap requires that the gov-
2017. UNCTAD also is currently providing capac- ernment spend on the promoted social or environ-
ity-building assistance to five LDCs on implement- mental project at least some of the funds that would
ing the Principles to identify gaps in the regulatory have been used for debt servicing. Nevertheless, the
and institutional frameworks in these countries and additional public resources can be a highly valuable
suggest suitable policy reform options. use of public monies and can support sustainable
The Task Force can report on implementa- development and implementation of the SDGs.
tion and development of the initiatives in this area, State-contingent financial instruments are
including those mentioned above, building on the designed to provide automatic, market-based, pro-
regular in-house reviews by the relevant international tection against pre-defined shocks. This can insure
organizations. Indeed, understanding the impact of sovereigns against adverse shocks, often by reduc-
these initiatives, including how they impact behav- ing debt service requirements during difficult eco-
iour, can provide important case studies to help nomic times. Such instruments would also reduce
shape the work towards a consensus on new guide- the likelihood of debt restructurings and the need
lines. The Task Force will report on steps toward a for pro-cyclical fiscal policy. Some of these instru-
global consensus on such guidelines for lenders and ments could even attenuate overspending during
borrowers, and can also help to support this effort. a boom by limiting a sovereigns’ ability to spend
windfall income in good times. Examples of such
2.4. Innovative instruments for managing
instruments include GDP-linked securities, where
debt burdens principal and interest payments are linked to eco-
Outside Islamic finance, debt repayment obligations nomic growth rates, and catastrophe or pandemic
are fixed other than through a debt restructuring. bonds, where some form of debt relief is provided in
Two kinds of innovations have broken with this the event of a pre-defined disaster. A third example
model. One is a swap of a public debt obligation for would be ‘sovereign CoCos’ (contingent convertible
specified additional public social or environmental bonds), which envisage a maturity extension under
expenditure. The other is ‘state-contingent finan- pre-defined triggers. Future monitoring reports can
cial instruments’, which include contractual provi- summarize analytical work by experts on these pro-
sions altering the debtor’s obligations contingent posals, and report on country experiments with new
on pre-defined events or data outturns. Thus, the instruments. The Task Force will also report more
Addis Agenda: broadly on public sector finance, including new
instruments, in other areas of this report (includ-
ƒƒ Encourages the study of new financial instru-
ing chapter I on cross cutting issues, chapter II.A on
ments for developing countries …noting experi-
domestic public finance, and chapter II.C on inter-
ences of debt-to-health and debt-to-nature
national cooperation.)
swaps (102)
2.5. Improving debt data and reporting
Among the first type of innovation, debt-to-
health swaps have been launched under the UN- Comprehensive debt statistics are crucial for both
backed Global Fund to Fight AIDS, Tuberculosis debt crisis prevention and resolution. The Addis

2 See http://www.theglobalfund.org/documents/replenishment/2007b/Replenishment_2007BerlinD2H_FAQ_en/.
3 A special Seychelles trust will purchase $30 million of Seychelles debt obligations at a discount and devote the
scheduled debt servicing payments to marine conservation and climate adaptation (see http://www.nature.org/
ourinitiatives/regions/africa/wherewework/seychelles.xml).
108 Addis Ababa Action Agenda — Monitoring commitments and actions

Agenda recalls the need to strengthen information- (the BIS, Commonwealth Secretariat, European
sharing and transparency in debt sustainability Central Bank, Eurostat, IMF, OECD, Paris Club,
assessments. Specifically, the Addis Agenda: UNCTAD and the World Bank Group).
Presently, there is no centralised database of
ƒƒ Encourages Governments to improve transpar-
instances of sovereign debt crises and restructuring,
ency in debt management, and strengthen
although there have been a number of efforts to bring
information-sharing to ensure that debt sustain-
together historical data sets on debt restructuring. 4
ability assessments are based on comprehensive,
A comprehensive database could help draw lessons
objective and reliable data (97)
from past debt restructurings to improve approaches
ƒƒ Invites relevant institutions to consider the
in the future. Information on litigation and holdouts
creation of a central data registry including
by creditors in a restructuring would also aid analy-
information on debt restructurings (96)
sis of good faith by creditors in debt restructurings
The World Bank Group, IMF, the Organiza- and enable identification of weaknesses in the archi-
tion for Economic Cooperation and Development tecture for sovereign debt restructuring. The Task
(OECD), the Bank for International Settlements Force will report on the development of any such
(BIS) and UNCTAD have worked with governments databases, including by international organizations.
and central banks to help produce standardized data
on different components of external debt. Technical 3. Debt crisis resolution
assistance to developing countries to improve their The Addis Agenda makes clear that in addition to
recording and managing of government debt data preventing debt crises, debtors and creditors must
has long been provided by the World Bank, UNC- work together to resolve unsustainable debt situ-
TAD and the Commonwealth Secretariat, as well as ations when they do occur. While it recognises
by private entities. that important improvements have been made in
For the benefit of international economic enhancing the process for cooperative restructuring
monitoring, the World Bank collects, standardizes of sovereign obligations, it also recognizes that there
and makes publicly available external debt data of is scope to improve the arrangements for coordina-
its developing country members through its Debtor tion between public and private sectors and between
Reporting System. The OECD collects data from its debtors and creditors, to minimize moral hazard
members for standardized reporting from the public and to facilitate fair burden-sharing and an orderly,
creditor side in its Creditor Reporting System. The timely, efficient and fair restructuring that respects
BIS collects data on bank and non-bank financial the principles of shared responsibility. It notes that
institution assets (e.g., loans) vis-à-vis banks and a workout from a sovereign debt crisis should aim
non-banks in other countries, as well as data on to restore public debt sustainability, while preserv-
liabilities (e.g., deposits) and their sources in other ing access to financing resources under favourable
countries. Bloomberg also publishes data on public conditions, and acknowledges that successful debt
bond issuance, as well as secondary market prices, as restructurings enhance the ability of countries to
do private banks, such as J.P. Morgan. There is, how- achieve sustainable development and the SDGs.
ever, no database on bond owners, who are generally
institutional investors, in part because ownership 3.1. Actions by official creditors
frequently changes hands on the secondary market.
In addition, while improving, data on domestic bond Since the Monterrey Consensus, Member States of
markets is generally not robust (see chapter II.B). To the United Nations have welcomed initiatives to
further develop the methodology for collecting debt reduce debt overhangs when countries are under
statistics and to strengthen debt management capac- debt distress, especially as regards LDCs, whose
ity of governments through training, nine institu- main creditors are in the public sector. In this regard,
tions formed the Task Force on Finance Statistics in the Addis Agenda, Governments:

4 http://www.bankofcanada.ca/wp-content/uploads/2014/02/tr101.pdf
 Debt and debt sustainability 109

ƒƒ Recognize the need to assist developing coun-

In addition, the international community
tries in attaining long-term debt sustainability
has certain international support measures to assist
through coordinated policies aimed at fostering
vulnerable countries in handling unexpected emer-
debt financing, debt relief, debt restructuring
gencies, such as natural disasters. There are various
and sound debt management (94, MoI 17.4)
instances in which debt relief or special financing to
ƒƒ Commit to support the remaining HIPC-
assist in staying current on debt servicing was offered
eligible countries that are working to complete
to countries hurt by such shocks. For example, begin-
the HIPC process (94); Commit to explore, on
ning in 1998, the Paris Club has taken joint action
a case-by-case basis, initiatives to support non-
to unilaterally offer to defer scheduled repayments in
HIPC countries with sound economic policies to
cases of natural disasters, internal political conflicts
enable them to address the issue of debt sustain-
or “rocketing” international food and fuel prices. 5
ability (94)
Also, following the devastating earthquake in Haiti
ƒƒ Aims to restore public debt sustainability, while
in 2010, the IMF established a Post-Catastrophe
preserving access to financing resources under
Debt Relief (PCDR) Trust that allows the IMF to
favourable conditions (98)
join international debt relief efforts for very poor
ƒƒ Encourages consideration of further debt relief
countries impacted by the most catastrophic natural
steps [for severe natural disasters and social or
disasters. Following the 2014 Ebola outbreak in West
economic shocks that undermine a country’s
Africa, in 2015 the IMF transformed the PCDR into
debt sustainability], where appropriate, and/
the Catastrophe Containment and Relief (CCR)
or other measures for countries affected in this
Trust to provide grants for debt relief for very poor
regard, as feasible (102)
countries in the context of public health disasters
Implementation of the HIPC Initiative and (such as fast-spreading epidemics of infectious dis-
the Multilateral Debt Relief Initiative is nearly com- eases) as well. In addition, the IMF has expanded its
plete, with 36 countries having reached the “com- emergency lending toolkit through the Rapid Credit
pletion point” under the HIPC Initiative. In April Facility (RCF) and Rapid Financing Instrument
2015, Chad became the latest country to reach the (RFI). As indicators to mitigate the impact of exter-
completion point. Three pre-decision-point coun- nal shocks on debt sustainability, the IMF proposes
tries — Eritrea, Somalia, and Sudan — have yet to to evaluate annually and cumulatively post-2015 the
start the process of qualifying for debt relief under number of times the CCR, RCF and RFI are tapped.
the HIPC Initiative. While creditor participation in Similar reporting can cover emergency debt relief
the initiatives has been strong among the multilat- provided by other international institutions. As per
eral and Paris Club creditors, accounting for most the Addis Agenda, the adequacy of the full package
of the debt targeted for reduction, participation of of such steps, including the use of public and private
some non-Paris Club official bilateral and private finance with contingent repayment obligations (see
commercial creditors continue to be a challenge. section 2.4), could be monitored.
Efforts to reduce debt burdens in least devel-
oped countries and other vulnerable countries will 3.2. Additional mechanisms, including
be reported by the Task Force. Monitoring can involving private creditors
include levels of concessional and non-concessional
official lending to countries that have received debt As more developing countries tap the international
relief and/or are identified as at high risk of debt dis- financial markets and more countries draw upon
tress In addition, to monitor incidences of problems alternative sources for sovereign financing, the num-
in servicing debt, any pre- or post-default debt oper- ber of countries for which a more comprehensive
ations such as debt restructurings, debt swaps and approach to debt crisis workouts is needed may grow,
debt buy-backs involving official or private creditors especially in a challenging global environment. The
will be reported. Monterrey Consensus welcomed consideration of an

5 See http://www.clubdeparis.org/en/communications/page/exceptional-treatments-in-case-of-crisis.
110 Addis Ababa Action Agenda — Monitoring commitments and actions

international debt workout mechanism. Since then, tual provisions, and informing the Executive Board
international agreements have focused on market- and the public by providing periodic progress reports
based solutions, such as contractual clauses in bond with respect to the status of sovereign issuers’ inclu-
contracts. The Addis Agenda: sion of the enhanced contractual provisions. The
Task Force can follow-up on IMF progress reports in
ƒƒ Affirms the importance of debt restructurings
this area, the first of which was issued in September
being timely, orderly, effective, fair and negoti-
2015 and showed that a large majority of new issu-
ated in good faith. (98)
ances since October 2014 included enhanced CACs.
ƒƒ Welcomes reforms to pari passu and collective
In addition, in December 2015, the IMF’s
action clauses proposed by International Capi-
policy on non-toleration of arrears to official bilat-
tal Market Association (100)
eral creditors was amended to allow the IMF to
ƒƒ Encourages countries, particularly those issu-
lend in the presence of arrears to official bilateral
ing bonds under foreign law, to take further
creditors under carefully circumscribed circum-
actions to include those clauses in all their bond
stances. The reform is designed to strengthen
issuance (100)
incentives for collective action when official sector
ƒƒ Recognizes the “Paris Forum” initiative by
support is required, and prevent non-contributing
Paris Club (99)
official bilateral creditors from impeding an IMF-
ƒƒ Takes note of ongoing discussion of debt issues at
supported programme. Furthermore, in January
the IMF and the United Nations (99)
2016, the IMF approved an important reform to
The IMF Executive Board in October 2014 the institution’s policy on lending to countries that
endorsed key features of enhanced collective action request large-scale financing. This reform will allow
clauses (CACs) and the pari passu clause, aimed IMF lending decisions to be better calibrated to
at reducing vulnerabilities to holdout creditors members’ debt vulnerabilities, while avoiding
that could delay or block an agreement on a debt unnecessary costs for the member, its creditors, and
restructuring with other cooperating creditors. The the overall system. It also includes the removal of
proposals were consistent with a number of features the systemic exemption to limits on allowed bor-
of the clauses that had recently been adopted by the rowing from the Fund, which had been introduced
International Capital Market Association as pro- in 2010 in the wake of the global financial crisis.
posed standard features in new international sov- In the context of a review of its lending-into-
ereign bond contracts. While the introduction of a arrears policy for private creditors, the IMF is study-
new generation of CACs might facilitate future debt ing issues related to debtor-creditor engagement in
restructurings by limiting opportunities for creditor sovereign debt restructurings in the light of expe-
holdouts, the existing stock of outstanding bonds rience with such engagement since 2002 (both in
without enhanced CACs, valued at around US$ 860 pre- and post-default cases) with a view to assess-
billion, leaves risks for disorderly debt workouts in ing the adequacy of existing modalities in promot-
the coming years. Tracking the spread of the new ing efficient resolution of sovereign debt crises. The
clauses (and further refinements of them) can, to an Task Force can report on policy proposals made in
extent, inform the international community of the this regard.
degree to which risks remain to smooth debt work- The Paris Club together with the Group of 20
outs, at least as concerns debts owed to private credi- continues their series of consultations in the annual
tors. In the context of its October 2014 endorsement, “Paris Forums”, which in November 2015 brought
the IMF Executive Board also called on IMF staff to together more than 50 sovereign creditors and debt-
follow up by collecting detailed information on the ors and international organizations to express their
CACs and pari passu provisions in the stock of exist- positions on ways to improve the current framework
ing international sovereign bonds, engaging with the of coordinated and orderly sovereign debt restructur-
membership on the merits of the enhanced contrac- ing processes. 6 In recent conferences organized by

6 See http://www.clubdeparis.org/en/communications/press-release/paris-forum-2015-20-11-2015.
 Debt and debt sustainability 111

academics, 7 UNCTAD, DESA, multilateral devel- This policy debate has in part been reignited by
opment banks, such as the Inter-American Devel- the success of litigating creditors in capturing signifi-
opment Bank, senior legal scholars and economists, cantly larger repayments than what had previously
practitioners and officials informally exchanged been accepted by the creditors that cooperated in
views on sovereign debt workout reforms. These a country’s debt restructuring. National legislative
issues have also been raised by UN GA resolution actions have been taken in certain creditor coun-
A/RES/69/319 that defines nine “Basic Principles tries to limit disruptive activities by non-cooperative
on Sovereign Debt Restructuring Processes” and in creditors. The relevant commitments in the Addis
the UNCTAD Roadmap and Guide to Sovereign Agenda build on the welcoming “of recent steps
Debt Workouts. taken to prevent aggressive litigation against HIPC-
The Task Force will monitor and report on any eligible countries” in the Doha declaration (60), and
follow-up efforts to these and other events. The UN extends the commitment to promote measures to
General Assembly agreed by consensus to encour- limit aggressive litigation by non-cooperative minor-
age the Forum on FfD Follow-up to consider how ity bondholders beyond HIPC-eligible countries.
to improve the process of sovereign debt restructur- The Task Force can provide a summary over-
ing (A/RES/70/190). If requested by Member States, view of past activities of non-cooperative minority
the agencies involved in the Task Force will be in bondholders in sovereign bond markets and their
a position to contribute their expertise in support impact on sovereign debt restructurings, together
of such deliberations, owing in particular to their with an assessment of existing arguments for and
international mandates. against these activities. It can also provide a survey
of existing national legislative and policy initiatives
3.3. Legislative efforts to address non-
to prevent and/or minimize the activities of such
cooperative minority creditors creditors and assess, where possible, their effective-
While the new CACs aim to reduce the ability of ness and limitations up to date. It can also identify
non-cooperating bondholders to undermine a pend- ways in which existing national legislative actions in
ing and otherwise agreed voluntary restructuring some countries can be adapted to other countries. It
of sovereign debt, the success of ex post litigation can also report on institutional mechanisms through
has highlighted a gap in the architecture for debt which LDCs have accessed advisory legal services
crisis resolution. The Addis Agenda expressed con- and the provision of donor country financial sup-
cern about the ability of such creditors to disrupt port to LDCs facing such litigation, including for
the willingness of the large majority of bondholders legal assistance.
to accept a sovereign restructuring, and noted legis- Subsequent Task Force reports can also draw
lative steps taken by some governments to prevent on any advances related to data on litigation by cred-
such disruptive activities. Thus, the Addis Agenda: itors after debt restructurings to report on progress
in regard to relevant national legislation and legisla-
ƒƒ Encourages all Governments to take (legislative) tive projects. Case/country studies can highlight spe-
action (on non-cooperative minority bond hold- cific aspects and impacts of litigation and legislation.
ers), as appropriate (100) While this section will focus primarily on national
ƒƒ Welcomes provision of financial support for legislative initiatives, it can also briefly take account
legal assistance to LDCs and commit to boost of national policy initiatives such as improvements
international support for advisory legal ser- in the contractual features of sovereign bonds and
vices (100) the use of new financial instruments, where these
ƒƒ Commits to explore enhanced international directly affect the activities of non-cooperative credi-
monitoring of litigation by creditors after debt tors. In addition, the General Assembly agreed to
restructuring (100) focus continued international attention on this issue

7 See http://wwwf.imperial.ac.uk/business-school/sovereign-debt-restructuring-conference/ and http://www.law.

georgetown.edu/academics/centers-institutes/iiel/debtcon/index.cfm
112 Addis Ababa Action Agenda — Monitoring commitments and actions

by holding a special event in its Second Committee domestic capital market development in chapter II.B
in 2016 on lessons learned from the legislative steps on private business and finance.
taken by certain countries and other actions to limit With the increased volume of domestic sover-
the vulnerability of sovereigns to holdout creditors eign debt, it becomes increasingly important to spec-
(A/RES/70/190). This event will inform the work of ify how the bonds will be treated in the event of dif-
the Task Force. ficulty in maintaining normal payments. Although
legal frameworks will vary by country, Task Force
3.4. Strengthening national legislation to
reports could survey core features of national leg-
address domestic sovereign debt islative frameworks in both developing and devel-
There has been an increasing issuance of sovereign oped countries. It could report on increased issu-
bonds in domestic currency under national laws. ance of sovereign bonds in domestic currency under
The Addis Agenda: national legislation, and identify both strengths and
common shortcomings and corresponding areas of
ƒƒ Notes the possibility of countries voluntarily
and guidelines for improvements. A certain amount
strengthening domestic legislation to reflect
of analytical work in this regard has been completed
guiding principles for effective, timely, orderly
in the UNCTAD Roadmap and Guide to Sovereign
and fair resolution of sovereign debt crises (101)
Debt Workout Mechanisms, 8 as well as in work by
Developing countries increasingly find they the Financing for Development Office at DESA.
are able to issue sovereign bonds in domestic cur- The Task Force could also provide progress reports
rency and under domestic law to domestic and for- on national legislative initiatives to govern the issu-
eign investors, helping to attenuate currency mis- ance and restructuring of domestic sovereign bonds
matches. Monitoring of the size and data on local on a case study basis.
bond markets is further elaborated in the section on

8 See http://unctad.org/en/PublicationsLibrary/gdsddf2015misc1_en.pdf.