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IMF says state-contingent debt instruments can aid sovereign debt restructurings

Kitco News

WASHINGTON, Nov 19 (Reuters) - As the International Monetary Fund presses governments to sign on to a new sovereign debt restructuring framework, it faces a conundrum: How to make such actions more palatable to private investors and avoid months or years of haggling.

The IMF on Thursday said that wider and more standardized use of state-contingent debt instruments (SCDIs), which allow for increased payouts based on improved economic outcomes, could play an important role in sovereign debt restructurings.

SCDIs, including warrants linked to GDP growth, are attractive in theory. However, they have been rarely used in practice because fixed income investors have steeply discounted their value, largely due to non-standard designs, illiquidity, and unpredictable risk profiles, the IMF said in a research note ahead of a G20 leaders summit this weekend.

The instruments could be made more attractive by standardizing their terms and linking their coupons to variables outside the control of the government issuing them, such as commodity prices. SCDIs could also offer debt-to-equity conversions in significant state-owned enterprises and public-private partnership projects that would make them more like private-sector debt restructurings. (Reporting by David Lawder Editing by Chizu Nomiyama)

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