Limbering up

23 Nov 2020 By Anna Szymanski

The IMF says countries could sweeten future debt restructurings with extras that will jump in value in good times. A better option may be to copy a junk bond instrument that offers respite during cash crunches. Persuading investors to accept either will be the biggest hurdle.

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The International Monetary Fund said on Nov. 19 that state-contingent debt instruments, such as warrants linked to economic growth, should be more widely used in sovereign debt restructurings, and offered in a more standardized format. Such instruments would offer holders higher payouts when economic conditions improved.

The Washington-based international lender said these instruments had not been used frequently partly because their bespoke designs and illiquidity meant investors tended to discount their value heavily. The IMF said these instruments could be made more attractive by standardizing terms and linking payouts to variables over which the government had less control, such as commodity prices.

The Group of 20 major developed and emerging nations on Nov. 13 agreed on a common approach to restructuring government debt that provides guidelines for how to reduce or otherwise alter the terms of unsustainable debt.

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