Person:

Grigorian, David

Since the approach envisaged under the Common Framework attempts to bring together a larger and more diverse group of creditors than usually observed in sovereign debt restructurings, consistent with the Theory of Collective Action, additional measures may be required to compensate for the added complexity and incentive issues. To address this de facto collective action problem, the paper proposes a modified framework that is based on: (1) simplicity and speed with elements of coercion and enticement, (2) improved coordination based on a more prominent role for the US and China, (3) a more nuanced treatment of domestic debt within the restructuring perimeter, and (4) a modified “comparability of treatment” principle. While multilateral debt will not be restructured under the proposed approach, the International Financial Institutions with exposure to sample countries are expected to contribute to safeguarding financial stability of domestic financial sectors.

Domestic debt restructurings (DDRs) are monetary events as much as fiscal ones, yet the monetary policy stance around them has not been measured directly. This paper estimates—for Jamaica (2010), Ghana (2022–24), and Barbados (2018–19)—how far each central bank departed from its own implicit reaction function around the exchange, using a regime-appropriate measure in each case. Four findings hold across different regimes. First, no central bank was passive: in each case the largest departure in the sample, or close to it, falls inside the restructuring episode. Second, what each did was governed by its regime rather than by a common disposition—the two floating rate cases ran looser than their rules implied, while Barbados, defending a peg with a few weeks of import cover, withdrew financing from the government. Third, the departure attaches to the announcement rather than to the execution of the exchange, and it does not persist: the more tightly constrained the central bank, the shorter it proves. Finally, using a money multiplier equation, the study finds no evidence that any of the three exchanges impaired monetary transmission. Three recommendations for DDR design and monitoring follow.