After trimming about GHS90 billion of its domestic debt through a debt exchange programme, the finance ministry is calling on almost all local bondholders to participate in another round of debt restructuring which they classify as the ‘DDEP REOPENING’.

The government is hoping to restructure about GHS13 billion to bring down the debt-to-GDP ratio. However, there seems to be widespread resistance to engaging in any new discussions about debt restructuring.

For instance, pensioner bondholders and individual bondholders’ forums have all rejected the call to participate in the new exchange and have insisted they want a complete exemption. Even the Ghana Association of Bankers says they have no fiscal strength to endure another debt treatment after scarifying significant portions of their bonds in the first exchange programme.

Many experts have criticized the government for performing a shallow and somewhat unilateral first debt restructuring and this has compelled it to keep rolling out additional debt restructuring talks. For instance, exemptions plus allowing some bondholders to convert their existing bonds to treasury bills resulted in the government losing about GHS40 billion of its initial restructuring target of GHS130 billion.

For the IMF, restructuring domestic debt is like surgery: You only do it if you must, and you avoid it if it might do more harm than good. The fund also cautions countries to do it right the first time to avoid doing it over and over again.

The International Monetary Fund (IMF) also urge nations to cast the net wide and be clear and transparent during a debt restructuring. Additionally, the IMF cautions that some creditors may try to use their political influence to protect themselves from burden-sharing, thereby shifting the burden of the adjustment to other creditors.

Cast the net wide, be clear and transparent

To garner broad creditor participation in the restructuring and reduce the likelihood of costly litigation, the process of restructuring has to be perceived as fair and transparent.

The scope of claims for inclusion in any domestic debt restructuring—the perimeter—would generally depend on the amount of debt relief needed to restore debt sustainability and the net benefit that can be obtained from each type of claims. In principle, all the government’s domestic debt liabilities could be included. Some creditors may try to use their political influence to protect themselves from burden-sharing, thereby shifting the burden of the adjustment to other creditors. But casting the net wide and relying on voluntary mechanisms may help boost participation in the restructuring by lowering the relief sought from each creditor group.

A strategy that engages creditors constructively and transparently, that relies on market-based incentives, and that presents the debt exchange as part of a consistent macroeconomic plan typically works best. Explaining convincingly how the restructuring fits with the broader strategy of addressing the causes that led to the sovereign debt stress is important to secure the political support needed for a successful operation that restores debt sustainability.

Anticipate and mitigate the damage

The domestic debt restructuring should be designed to anticipate, minimize and manage its impact on the domestic financial system:

• The authorities need to put in place measures that mitigate losses for banks, non-bank institutional investors, and households and that minimize spillovers. For example, the impact on banks can be limited by extending the maturities and/or lowering the interest rate rather than reducing the nominal amount of the outstanding claims. Losses should be recognized early and may need to be paired with a strategy to restore banks’ capital buffers.
• System-wide emergency support that allows institutions to convert illiquid assets into cash may be needed to ensure the functioning of the banking system and shore up confidence. In some cases, temporary measures to slow panic-driven deposit withdrawals and capital outflows might have to be considered.

The authorities should carefully evaluate the potentially adverse consequences of unilaterally amending domestic law. The inclusion and use of collective action clauses in domestic debt contracts could increase legal certainty and predictability, offering a potentially superior restructuring mechanism compared to retrofitting such a mechanism by law.

Do it right the first time

Restructuring domestic debt is a tool that can be used by sovereigns facing fiscal and economic stress. To be successful it should be well-designed to avoid doing more harm than good. To ensure that it is done right the first time, sovereign domestic debt restructuring should be part of a broader policy package that effectively addresses the underlying problems and debt vulnerabilities.