Reprofiling Sovereign Debt

Abstract

• The IMF staff’s 2013 proposal to reprofile (i.e., stretch out for a short period without haircutting principal or interest) the maturing debt of a country that has lost market access is a sensible policy in cases where the IMF is uncertain whether the country’s debt stock is sustainable.• The motivation for the policy is to avoid situations, such as occurred during the Eurozone debt crisis, in which Fund resources are used to bail-out commercial creditors in full.• But a debt reprofiling is a species of debt restructuring and as such is susceptible to holdout creditor behaviour.• By allowing a small portion of its loans to the debtor country to be used to neutralise some or all of the additional credit risk caused by the reprofiling, the IMF could minimise holdout creditors in these operations.• The authors propose a technique for minimizing the risk that certain creditors may elect to decline a reprofiling proposal, no matter how lenient its terms.