An Analysis of Puerto Rico's Debt Relief Needs to Restore Debt Sustainability

PurposeThe Covid-19 pandemic has rekindled interest in sovereign debt crises amidst calls for debt relief for developing and emerging countries. But has debt relief lessened the debt burdens of emerging and developing economies? The purpose of this paper is to empirically address this question. In particular, the focus is on the implications of debt relief and institutional qualities for sovereign debt in emerging and developing economies.Design/methodology/approachThe model extends the framework on the probability of default by incorporating the receipt of debt relief by a debtor country. Doing so allows to better explain movements of sovereign defaults relating to debt relief. The model is estimated via the regular probit regression.FindingsThe analysis shows that the debt relief provided, thus, far, failed to ease the debt overhang problems of developing and emerging countries and reduced investment. The current debt relief schemes may underscore the prospects of self-enforcing and self-fulfilling sovereign debt crises rather than eliminating the dilemma completely. Regarding the forms of debt relief, the analysis shows that debt forgiveness offers favourable prospects in terms of debt sustainability and economic outcomes than debt rescheduling. Perhaps, the sovereign debt crises, particularly in low-income countries, hinge on insolvency problems rather than transitory illiquidity issues.Practical implicationsAny debt relief mechanism should consider seriously the potential incentive effect that reinforces expectations of future debt-relief initiatives. Importantly, solving the sovereign debt problem requires a programme for sustained investment and economic growth, while not discounting the critical role of prudent debt management policies and institutions.Originality/valueThis study contributes a different angle to the debate on sovereign debt distress. Aside from the structural and economic factors, this study investigates the role of debt management policy in the debtor nation and the implications of debt relief benefits for sovereign risk. The framework also focuses on whether the different forms of debt relief exert distinctive impacts.

This chapter builds on the emerging consensus in the development literature that the enhanced HIPC Initiative does not fully remove the debt overhang in many poor and highly indebted countries. It examines the six most crucial problems of the enhanced HIPC initiative: the use of inappropriate eligibility and debt sustainability criteria; the use of overly optimistic growth assumptions; insufficient provision of interim debt relief; the delivery of some HIPC debt relief through debt rescheduling; non-participation and financing shortfalls of creditors; and the use of currency-specific short-term discount rates to calculate the net present value (NPV) of outstanding debt. To address these shortcomings, the chapter suggests: revising the HIPC eligibility and debt sustainability indicators; using lower bounds of growth assumptions; providing deeper and broader interim debt relief; delivering HIPC debt relief only through debt cancellation; adjusting the current equal burden-sharing concept by releasing the HIPC Trust Fund resources immediately to finance-constrained small regional MDBs; exempting minor creditors from the provision of HIPC debt relief; and using a single fixed low discount rate for all NPV calculations. However, even with these changes, the long-term debt sustainability of HIPCs would remain fragile. The chapter argues that more aid coordination is urgently needed for HIPCs that have not yet reached their decision points; that it makes sense to substitute some loans with grants; that HIPC debt relief has thus far been neither frontloaded nor additional and that 100 per cent debt relief would be feasible as well as desirable for the poorest debtors, irrespective of what their debt levels are.

Heavily indebted low-income countries benefited from significant debt relief over the past decade. Under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), assistance of about $117 billion in nominal terms had been committed to 35 HIPC as of end-April 2009. This debt relief represents about half of the 2007 Gross Domestic Product (GDP) of these countries, whose debt burden is expected to drop by more than 80 percent once full debt relief is granted. As a result of relief already provided, debt-service payments have plummeted and expenditures on pro-poor growth programs increased. The book is divided into four parts. Part one examines the design of debt-relief initiatives and provides evidence of its effect on education, health, and economic growth. Part two describes the risks and opportunities developing countries face following debt relief. It identifies how they can safeguard debt sustainability; describes the role of sovereign risk for private sector access to capital; and draws lessons from the experience of market-access countries on the links between sovereign debt and development. Part three examines the concept and various policy proposals of dealing with 'odious' debt. Part four looks at debt management, debt restructuring, and the interplay between debt and fiscal policies. It provides guidance on debut sovereign bond issues; examines the issuance and management of sub-national debt; describes the challenges of crafting fiscal policy and managing debt and oil revenues in a (temporarily) oil-rich country (the Republic of Congo); and draws lessons from Chile's experiences using debt swaps in the 1980s.

High level of external debt poses a serious constraint on the ability of poor countries to pl.ll.'SUe sustainable development and reduce poverty. The Heavily Indebted Poor Countries (HIPC) Initiative was designed to relieve the high external debt of some of the world's poorest nations by either writing-off or reducing debt to sustainable levels. It was launched by the World Bank and the International Monetary Fund (IMF) in 19% and "enhanced" in 19()9 to expand and accelerate the process of debt relief and free scarce public resources fur sustainable economic development, in particular, broad based development to reduce poverty. Whether debt relief, in general, or the HIPC Initiative, in particular, can achieve such development outcomes has been the subject of much debate. 1bis paper argues while the HIPC initiative is a positive step towards debt relief and sustainability, it is important to note that sustainable debt is not an end in itself, but should be an essential element in realizing the growth needed to reduce poverty and achieve the Millennium Development Goals (MDGs). To realize the full potential of debt relief, donor countries will not only have to be more generous, and the recipient countries need to undertake deeper structural reforms, debt sustainability assessments should specifically take into account how the poor countries can achieve the MDGs.

In mid-2005, the Group of Seven (G7) finally accepted the argument that the multilateral debt of many poor countries should be wiped out entirely. The decision was an important one in the recent tortured history of multilateral debt relief that began almost a decade earlier with the 1996 Highly Indebted Poor Country (HIPC) initiative. That earlier initiative had first identified 41 countries that couldbeeligibleforwrite-downsoftheirdebtstomultilateralfinancialinstitutions, including the World Bank’s International Development Association (IDA), the International Monetary Fund (IMF) and regional development banks such as the African Development Bank (AfDB). Its goal had not been to wipe out the debts of these countries but rather simply to make them ‘sustainable’, a concept that was defined at the time in a highly restrictive manner. Countries were also not eligible for the promised debt relief until they had implemented IMF-backed economic reforms: an initial amount of debt relief was offered at a ‘decision point’ after reforms had been in place for three years, while the remainder was released only at a ‘completion point’ after six years of reforms. In the face of widespread protests mobilised by the worldwide Jubilee movement, the G7 leaders soon acknowledged that very few countries were qualifying for multilateral debt relief under the HIPC initiative and that the relief offered was too little and too slow. At their Cologne summit in 1999, they announced an Enhanced HIPC initiative that claimed to respond to calls for faster, deeper and broader multilateral debt relief. The definition of debt sustainability was made less restrictive, more debt relief was offered at the decision point and the completion point could now be reached earlier than the six-year timeframe according to policy reform performance. In addition, debt relief was now tied more explicitly to poverty reduction measures in recipient countries. But these changes still fell far

In the closing months of the last century, the debt problems of heavily indebted poor countries (HIPCs) enjoyed unprecedented exposure as Jubilee 2000, and related non-governmental organization (NGO) campaigns for debt forgiveness for these countries, shifted into high gear. The governments of creditor countries and international financial institutions responded to that challenge. First, at their annual meeting in Cologne in June 1999, the G7 governments committed to broader, faster, and deeper debt relief for the poorest countries. Then, at the annual general meetings of the International Monetary Fund (IMF) and the World Bank in September 1999, the HIPC Initiative, the instrument for delivering multilateral debt relief to these countries, was upgraded to the Enhanced HIPC Initiative. This new initiative offers more generous interpretations of debt sustainability, the chance for more rapid qualification for debt relief, and the conditioning of debt relief on a commitment by these countries to poverty reduction.

Heavily indebted low-income countries benefited from significant debt relief over the past decade. Under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), assistance of about $117 billion in nominal terms had been committed to 35 HIPC as of end-April 2009. This debt relief represents about half of the 2007 Gross Domestic Product (GDP) of these countries, whose debt burden is expected to drop by more than 80 percent once full debt relief is granted. As a result of relief already provided, debt-service payments have plummeted and expenditures on pro-poor growth programs increased. The book is divided into four parts. Part one examines the design of debt-relief initiatives and provides evidence of its effect on education, health, and economic growth. Part two describes the risks and opportunities developing countries face following debt relief. It identifies how they can safeguard debt sustainability; describes the role of sovereign risk for private sector access to capital; and draws lessons from the experience of market-access countries on the links between sovereign debt and development. Part three examines the concept and various policy proposals of dealing with 'odious' debt. Part four looks at debt management, debt restructuring, and the interplay between debt and fiscal policies. It provides guidance on debut sovereign bond issues; examines the issuance and management of sub-national debt; describes the challenges of crafting fiscal policy and managing debt and oil revenues in a (temporarily) oil-rich country (the Republic of Congo); and draws lessons from Chile's experiences using debt swaps in the 1980s.

In this paper I analyze the relationship between fiscal policy,aggregate public sector debt sustainability, and debt relief. I develop a methodology to compute the fiscal policy path that is compatible with aggregate debt sustainability in the post-HIPC era. The model explicitly considers the role of domestic debt and quantifies the extent to which future debt sustainability depends on the availability of concessional loans at subsidized interest rates. The working of the model is illustrated for the case of Nicaragua, a country that in 2002 had one of the highest net present value of public external debt to GDP ratios. JEL no. F3, F34, F35.

The purpose of this paper is to analyze the relationship between fiscal policy, aggregate public sector debt sustainability, and debt relief. In particular, we develop a methodology to compute the fiscal policy path that is compatible with aggregate debt sustainability in the post-HIPC era (Highly Indebted Poor Countries relief initiative). This model explicitly considers the role of domestic debt, and quantifies the extent to which future debt sustainability depends on the availability of concessional loans at subsidized interest rates. The working of the model is illustrated for the cases of Honduras and Nicaragua. Both countries differ markedly in terms of the burdens of their external and internal debts. The results from our simulation analysis indicate that unless Nicaragua receives substantial concessional aid in the future, its public sector debt is likely to become unsustainable. In the case of Honduras, our simulation exercise shows that under reasonable parameters the country's fiscal stance as of 2001 is sustainable.

Will World Bank and IMF Lending Lead to HIPC-IV? Debt Déjà-Vu All Over Again

In this paper I analyze the relationship between fiscal policy,aggregate public sector debt sustainability, and debt relief. I develop a methodology to compute the fiscal policy path that is compatible with aggregate debt sustainability in the post-HIPC era. The model explicitly considers the role of domestic debt and quantifies the extent to which future debt sustainability depends on the availability of concessional loans at subsidized interest rates. The working of the model is illustrated for the case of Nicaragua, a country that in 2002 had one of the highest net present value of public external debt to GDP ratios. JEL no. F3, F34, F35.

This article discusses the links between climate and debt sustainability by focusing on how climate mitigation and adaptation are paid for, and who pays for it. This requires thinking about instruments such as sovereign bonds, carbon credits, conditional official grants and debt relief from both public and private sources. The article discusses the role of green bonds, carbon offsets, grants and debt relief. Among these solutions, no single instrument appears to be right for all countries or at all times. To move forward, we make six proposals and policy recommendations that can jointly address climate change and debt sustainability.

INTRODUCTIONIn recent years public and media attention to the debt problems of developing countries has been growing. In contrast to the crisis of the 1980s, which largely affected middle-income countries burdened by private commercial debt, the present crisis and ensuing discussions have centered on the poorest countries, most of which are in subsaharan Africa.This article explores the developing country debt issue from the perspective of a bilateral donor, with particular emphasis on issues that affect the Canadian International Development Agency (CIDA). Although bilateral aid donors have participated on the margins of policy debates surrounding the need for debt relief initiatives and their implementation, the implications of the enhanced Heavily Indebted Poor Countries (HIPC) initiative (which defines the global debt strategy for the poorest developing countries) implies a stronger role for bilateral development agencies if it is to succeed. However, for some donors such as CIDA, participation is contingent upon overcoming certain capacity constraints.An examination of the evolving pattern of official debt relief in the 1990s - and the role for donors - should begin with the historic and modern day role of the Paris Club(f.1) before looking at the first effort to implement the HIPC initiative (1996-9). The second part of this article will discuss more recent developments in the global debt strategy, stemming from endorsements made at the September 1999 Interim and Development Committee meetings of the International Monetary Fund (IMF) and World Bank, which have a potential impact on bilateral aid agencies.THE PARIS CLUB AND THE GLOBAL DEBT STRATEGY PRIOR TO HIPCMost developing countries in need who request debt relief from their creditors and who have a demonstrated track record of economic reform through an IMF programme are eligible for non-concessional or concessional rescheduling packages from the Paris Club on their outstanding official debts.(f.2) The maximum amount of concessionality offered to developing countries has increased over time beginning with the introduction of the Toronto Terms in 1988.(f.3) Regardless of the depth and breadth of debt relief, the decision was always based more or less on the objective of debt sustainability. In other words, the debtor should be able to manage the debt repayments. However, for many poor developing countries, particularly in subsaharan Africa, the objective was not always achieved. The burden of servicing the debt was such that many countries - Cote d'Ivoire, Madagascar, Niger, and Senegal for example - had to return repeatedly to the Paris Club.(f.4)In Canada, the Department of Finance heads the Paris Club process, in consultation with the Department of Foreign Affairs and with input from the major Canadian creditor agencies: the Export Development Corporation, the Canadian Wheat Board, and CIDA. In the event of a rescheduling, Canada and other official creditors meet in Paris with representatives of the debtor country to negotiate the terms. The affected national creditor agencies then have to negotiate bilateral agreements with the debtor country within a timeframe established by the Paris Club. Although CIDA continues to manage a portfolio of approximately $1.6 billion of official development assistance (ODA) loans,(f.5) it has forgiven most CIDA loans to Paris Club debtor states. It has, therefore, been involved only infrequently in the workings of the Paris Club. Nonetheless CIDA has, over the past five years, finalized (or is close to finalizing) Paris Club rescheduling agreements with Egypt, Algeria, Morocco, Indonesia, and Pakistan.The formal Paris Club operations have often been complemented by unilateral debt forgiveness, typically of ODA loans. Since 1978, for example, Canada has forgiven over $1.3 billion in outstanding ODA loans, mostly to subsaharan states. Debt conversion programmes have also complemented Paris Club actions. …

Da die hohe Verschuldung in den Niedrigeinkommensl¤ndern h¤ufig auf lang anhaltende strukturelle Probleme und auf exogene Schocks zuruckzufuhren ist, werden die meisten Niedrigeinkommensl¤nder kurz- und mittelfristig auf eine Subvention der Gebergemeinschaft angewiesen sein. In den vergangenen zehn Jahren hat die Gebergemeinschaft Niedrigeinkommensl¤ndern umfangreiche Schuldenerlasse im Rahmen von zwei Initiativen angeboten: der Heavily Indebted Poor Countries-Initiative (HIPC-Initiative) und des multilateralen Schuldenerlasses. Aber Schuldenerlass allein bearbeitet nur die Symptome und nicht die Ursachen von Entwicklungshemmnissen. Daher wird Schuldenerleichterung bei der HIPC-Initiative an wirtschaftliche und politische Reformen geknupft. Damit die ¤rmsten L¤nder langfristig Schuldentragfahigkeit erreichen konnen, mussen aber alle Beteiligten — Gl¤ubiger und Schuldner — geeignete langfristig wirkende wirtschaftspolitische Masnahmen ergreifen.

No development issue has quite captured the public imagination in the same way as debt relief. The juxtaposition of the billions of dollars owed and the grinding poverty of the countries concerned deliver an easy campaigning slogan and a seemingly straightforward policy recommendation: cancel the debt. But at the same time debt is also a complex issue, evident in measuring the stream of principal and interest payments over time (the net present value — NPV — of debt with, in turn, its assumptions about discount rates), the arcane language of ‘decision points’ and ’completion points’, the vexed question of what we mean by ‘debt sustainability (and the assorted ratios of debt-to-exports, debt-to-GDP, and debt-to-revenue), not to mention the interconnections with Poverty Reduction Strategy Papers (PRSPs) and the Millennium Development Goals (MDGs). Successive debt relief initiatives from the 1980s onwards with, since the mid-1990s, the heavily indebted poor countries (HIPC) initiative (later ’enhanced’) and now the Multilateral Debt Relief Initiative (MDRI) have steadily become more generous — but just how generous remains a matter of dispute. And not all indebted poor countries are HIPCs, and not all poor countries have large debts. The issue of horizontal equity across countries as well as the problem of moral hazard therefore arise.