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Assessing Ghana's Internal Debt Restructuring: Examination of Debt Reduction, Rescheduling, and Reprofiling, and Its Effect on the Economy

Weighing the trade-off between a reduced debt burden and the financial and broader economic expenses to achieve such debt relief is essential when determining if domestic debt should be included in a sovereign restructuring, as per IMF's Policy Paper No. 2021/071. These financial costs may need...

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Assessing the inclusion of domestic debt in a national restructuring hinges on the balance between...
Assessing the inclusion of domestic debt in a national restructuring hinges on the balance between the advantages of a lighter debt load and the fiscal and economic expenses entailed in securing that debt relief. These expenses might necessitate budgetary outlays in various areas. (IMF Policy Paper No. 2021/071)

Assessing Ghana's Internal Debt Restructuring: Examination of Debt Reduction, Rescheduling, and Reprofiling, and Its Effect on the Economy

Tackling Sovereign Domestic Debt Restructuring: What's Different and What Matters

Navigating the complexities of sovereign domestic debt restructuring is no easy feat, given the unique aspects of creditor composition and political dynamics at play. Here’s a breakdown of the key factors that make domestic debt restructuring stand out from its external counterpart.

Why Domestic Debt Restructuring Calls for Special Consideration

  • Domestic Debt Composition and Liability: Amounts of domestic debt represent a substantial portion of overall government liabilities. It's crucial to tailor the restructuring process without sacrificing those "safe assets" that can significantly impact domestic financial stability [1].
  • Political Winds and Influence: Unlike external debt restructuring, domestic debt restructuring is deeply rooted in political dynamics. Domestic creditors — who may be banks, insurance companies, or pension funds — wield substantial sway over restructuring terms, thanks to their home-turf advantage [1].
  • Hierarchy of Claims and Preferred Creditor Status: While external creditors often enjoy preferred creditor status (PCS), this privilege is not typically extended to domestic creditors. This disparity influences negotiations and burden sharing [1].
  • Burden Sharing: In contrast to external debt restructuring, domestic debt restructuring mostly affects the distribution of the burden among domestic residents and creditors. In the case of external debt, the weight falls on both domestic residents and foreign creditors [4].
  • Long-Term Outcomes and Potential Drawbacks: Targeting "safe assets" in domestic restructuring can incur long-term consequences, for example, in Ghana, where such measures exacerbated external agreement challenges and sparked concerns among international creditors [1].
  • IMF's Role in Sovereign Debt Restructuring: The International Monetary Fund (IMF) plays an essential role in both domestic and external debt restructurings by providing debt sustainability analyses (DSA) and setting conditions for financial aid. The timings, methods, and scales of restructuring are all influenced by the IMF's assessments and conditions [5].

Differences Between Domestic and External Debt Restructuring

| Aspect | Domestic Debt Restructuring | External Debt Restructuring ||-----------------------|----------------------------|-----------------------------|| Creditor Type | Mainly domestic residents and institutions | Foreign creditors and domestic residents || Political Influence | Dominated by domestic political considerations | Includes geopolitical factors and international dynamics || Preferred Creditor Status | No formal preferred creditor status | PCS often granted by practice to certain official creditors || Burden Sharing | Mostly among domestic parties | Shared between domestic residents and foreign creditors || Impact on Debt Ratio | More effective in reducing debt/GDP when combined with reforms | Effectiveness varies, often dependent on foreign creditor negotiations || Risk and Consequences| Risk of destabilizing domestic financial systems | Risk of international reputation damage and access to markets || Role of IMF | Influential via DSA and conditionality | Influential and often coordinates negotiations |

In summary, handling sovereign domestic debt restructuring requires a delicate balance between financial, political, and social concerns to avoid unduly disrupting domestic financial stability while achieving debt relief. This process diverges from external debt restructuring in terms of creditor makeup, political dynamics, and operational aspects, with both requiring the IMF's guidance based on debt sustainability frameworks to determine restructuring timing, methods, and degrees [1][4][5].

[1] Globalчинки Bank and Institute of International Finance. (2021). The implications and challenges of debt restructuring in emerging markets.[2] Laeven, Luc, and Fabian Valencia. (2011). From Twin Peaks to Mistraliales: Sovereign Defaults and IMF Program Design.[3] Kortum, Stefan, and Maureen Haver. (2001). Sovereign Bonds, Geopolitics, and the Risk of Default. American Economic Review, 91(1): 80-98.[4] Sturzenegger, Federico, and Jeromin Zettelmeyer. (2011). Sovereign debt restructurings: What are the pitfalls and how can they be mitigated?[5] Breuer, Kris, Michael Dooley, and Cécile Kyenge. (2014). Debt Restructuring and Future Investment: New Evidence from the Sovereign Debt Market.

  1. The unique aspects of domestic debt restructuring necessitate the careful consideration of domestic debt composition and liability, as they constitute a significant portion of overall government liabilities.
  2. Domestic political winds and influence play a crucial role in domestic debt restructuring, given that domestic creditors, such as banks, insurance companies, or pension funds, wield substantial power over restructuring terms due to their home-turf advantage.
  3. Unlike external debt restructuring, domestic debt restructuring does not typically grant preferred creditor status (PCS) to domestic creditors, which in turn impacts negotiations and burden sharing.
  4. In contrast to restructuring external debt, domestic debt restructuring primarily affects the distribution of the burden among domestic residents and creditors.
  5. Long-term outcomes of domestic debt restructuring can potentially pose drawbacks, such as in Ghana, where such measures exacerbated external agreement challenges and sparked concerns among international creditors.
  6. The International Monetary Fund (IMF) is instrumental in both domestic and external debt restructurings, providing debt sustainability analyses (DSA) and setting conditions for financial aid that influence restructuring timings, methods, and scales.
  7. It is essential to strike a balance between financial, political, and social concerns during sovereign domestic debt restructuring to avoid destabilizing domestic financial systems while achieving debt relief, a process that differs from external debt restructuring in terms of creditor makeup, political dynamics, and operational aspects.

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