"Preferred creditor status is essential to MDBs' low-cost funding model and must not be diluted in restructurings"

"official creditors.18 Private creditors can be external or domestic residents. Second, the timing of restructuring can be preemptive (that is, before any payments are missed) or after default. (~=51+6.1+9.1+9.9), based on the numbers above and below the blue bars in Figure 3.5. 16Preemptive restructurings can be associated with smaller costs and relatively muted impact on the overall economy compared with postdefault restructurings (Asonuma and Trebesch 2016; Asonuma and others 2021), though historically preemptive restructurings have also been less deep. 17An external debt restructuring refers to a formal renegotia- tion process of outstanding debt instruments issued under foreign jurisdiction and held by external creditors, which may involve a net present value loss for creditors (Asonuma and Papaioannou, forthcoming; Das, Papaioannou, and Trebesch 2012). A domestic sovereign debt restructuring has a similar definition, but the debt instruments are issued under domestic jurisdiction and held mainly by domestic creditors. There are also legal considerations unique to domestic debt restructuring (IMF 2021). 18Note that information on debt restructurings by non–Paris Club creditors is available only for China. Third, the implementation of debt restructuring can take different forms. For example, restructuring can take place through a reduction in the face value of debt (which reduces the debt stock immediately) or through cash flow relief with no face value reduction (for example, an extension of maturity or a reduction in coupon pay- ments). Cash flow relief with no face value reduction reduces the present value of debt through changes in the schedule of payments. Following the introduction of key concepts, the next subsection presents a summary of essential stylized facts pertaining to debt restructuring. Drawing from a compilation of databases, 709 restruc- turing events were reported from 1950 to 2021, across 115 countries. Almost all events were in emerging market economies and low-income countries. Debt restructurings often involve cash flow relief with no face value reduction, tend to happen preemptively (rather than postdefault), Figure 3.5. Factors Affecting the Probability of Consolidations Reducing Debt Ratios (Percent change) 39 43 47 51 55 59 63 Domestic output gap World output gap VIX Debt to GDP Private credit to GDP –8.9 6.3 –9.9 9.1 6.1 Sources: Canova and Ferroni (2022); IMF, Global Debt Database; IMF, Historical Public Debt Database; and IMF staff calculations. Note: Figure shows estimates of a multivariate standardized logit regression with the dependent variable being a dummy equal to 1 for a successful consolidation (in which debt to GDP declines and the successful shock from the vector autoregression contributes at least 10 percent to the decline) and equal to 0 for an unsuccessful consolidation (for example, if debt to GDP increases and the unsuccessful consolidation shock from the vector autoregression contributes at least 10 percent to the increase). The baseline of 51 percent on the y-axis represents the unconditional success probability using this definition. All coefficients are significant at the 10 percent level based on bootstrap standard errors. World output gap variable is orthogonalized with respect to domestic output gap to recover the exogenous component. Sample consists of 21 advanced economies from 1981 to 2019 and 37"

"HIPC Initiative and MDRI were one-off initiatives. Second, face value reductions happen more frequently when the initial debt ratio is high.21 Third, about half of restructuring events with face value reduction happened under the HIPC Ini- tiative (Table 3.5), although the stronger effect of face value reductions on debt ratios is robust to excluding HIPC events from the sample.22 To summarize, debt restructuring in emerging market economies and low-income countries can have a large, negative, and long-lasting effect on debt ratios (see Online Annex 3.5 for similar effects of restructur- ing beyond five years). This effect is heightened when 21The average debt ratios one year preceding the event with and without face value reductions are 90 and 75 percent, respectively. 22The results are qualitatively similar to those reported in Figure 3.9, panel 3, if the treatment includes (1) all non-HIPC events (24 events); (2) events that did not include entry into the HIPC program within three years of the start of restructuring, excluding borderline cases (16 events); or (3) the latter, including private external creditors (33 + 16 = 49 events). Notably, an alterna- tive definition of HIPC treatment based on eligibility at the time of the HIPC decision points rather than completion of restructuring (20 non-HIPC events instead of 24, or 7 non-HIPC if based on an “ever-eligible” HIPC decision point criteria) gives a qualitatively similar finding of bigger effects of restructuring events with face value reductions on debt ratios. Note that information on face value reductions in MDRI programs is not available; hence, the analysis includes only non-HIPC treatment. All restructuring episodes Joint with consolidation All restructuring episodes HIPC and MDRI All restructuring episodes Face value reduction Figure 3.9. Impact of Restructuring on Debt to GDP (Percentage point change) 1. Restructuring Joint with Consolidation –30 –25 –20 –15 –10 –5 0 5 0 1 2 3 4 5 Years 2. Restructuring in HIPC Initiative and MDRI –18 –15 –12 –9 –6 –3 0 3 0 1 2 3 4 5 Years 3. Restructuring by Face Value Reduction –18 –15 –12 –9 –6 –3 0 3 0 1 2 3 4 5 Years Sources: Asonuma, Niepelt, and Ranciere (2023); Asonuma and Trebesch (2016); Asonuma and Wright (2022); Cheng, Díaz-Cassou, and Erce (2018); Cruces and Trebesch (2013); Horn, Reinhart, and Trebesch (2022); IMF (2021); and IMF staff calculations. Note: Figure shows the average treatment effect of restructuring on debt to GDP using augmented inverse probability weighted estimation. Vertical lines indicate the 90 percent confidence interval. X-axis shows the number of years since the restructuring event starts. Sample consists of 111 emerging market and developing economies from 1987 to 2021. See Online Annex 3.5 for details on the estimation of the average treatment effect of restructuring with face value reduction. HIPC = Heavily Indebted Poor Countries Initiative; MDRI = Multilateral Debt Relief Initiative. Debt restructuring has a large and long-lasting impact on"