(Reuters) -The legal framework surrounding private-sector-owned sovereign debt has proven largely effective, especially for bonded debt, but gaps remain for loans and collateralized debt and restructurings have become longer and more complex, the International Monetary Fund said in a paper published on Tuesday.
The paper, updated every five years by the IMF, draws on restructuring cases from 2020 to mid-2025 and highlights lessons from eight restructurings involving private creditors and shows a mix of successes and bottlenecks in the process.
Government debt and deficits increased significantly after the COVID pandemic, and even as debt levels have stabilized the risks remain, according to the fund. Delays in restructurings are costly to governments in need of fresh financing, to their companies and people, while they add to creditors’ risks.
The most progress has come in bond restructurings, where collective action clauses were used in five of the restructurings and strongly voted in favor, with only one bond series, Sri Lanka 2022, now in litigation. Different types of votes were used to successfully exchange bonds of countries like Suriname, Ghana, Zambia and Ukraine.
“The restructuring of international bonds was effectively facilitated by enhanced collective action clauses, delivering very high creditor participation rates and only one case of a holdout,” according to the paper.
But Ghana, Sri Lanka, Zambia and Suriname have still unresolved negotiations with loan creditors, with lack of majority voting provisions in loan contracts and fragmented creditor groups among the issues. The amounts are small except in Zambia, but according to the paper the delay has hampered credit upgrades by ratings agencies.
“Limited coordination among non-bonded creditors means that the debtor has to negotiate with each creditor bilaterally, which is very time-consuming and costly for countries with lower capacity,” the fund said.
One recurring challenge is the rise in collateralized obligations, or debt that is backed by a pool of assets. Countries have pledged anything from natural resource revenues, state-owned enterprise shares, or even their own bonds as collateral. The IMF flags this as a barrier to fair burden-sharing in restructurings, since secured creditors can demand better terms or resist restructuring altogether.
“Collateralized debt has proven to be a complication,” the report says. “Such imbalances can affect burden-sharing, intercreditor equity and reduce the prospects for resolution.”
Importantly, coordination between official and private creditors should increase, according to the fund, as it remains a sticking point when it comes to comparability of treatment. Chad, Ghana, Sri Lanka and Zambia completed deals with bilateral creditors before negotiating with private lenders, which has made the process much longer. The average duration from default or announcement of restructuring to debt exchange has jumped to 2.5 years from 1.1 in the previous five years.
More debt transparency, and a more active IMF facilitation could reduce delays and remove risk. As the fund says, “there is room for further improvements.”
(Reporting by Rodrigo Campos in New York; Editing by Andrea Ricci)
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