Indicators signalling the need for debt restructurings

19 March 2014

The third Session of the UNCTAD Working Group on a Debt Workout Mechanism was held in Geneva on 19 March 2014. The discussions reflected an attempt to provide indicators signalling the necessity to engage in a sovereign debt restructuring process as well as helping negotiators during this process.

The discussions were based on two background papers

  1. Legal frameworks and general principles for indicators in sovereign debt restructuring by Michael Riegner

    The paper introduced different general legal principles on which the design and use of indicators in a Debt Workout Mechanism (DWM) may be grounded. These principles comprised efficiency and sustainability, transparency, ownership, and human rights and social protection.

    The Working Group suggested, among others, that creditors should be bound to preserve minimum baseline social expenditures throughout the restructuring process. The principle of transparency further raised the question of data quality while the principle of ownership provoked a discussion on the conflict between the concept of impartiality and a country's ownership of the data collection and interpretation process.

  2. Early warning indicators in a debt restructuring mechanism by Jasper Lukkezen and Hugo Rojas-Romagosa

    The paper proposed a country-specific indicator framework that signals unsustainable debt paths, which - in combination with an (unexpected) triggering event - may provoke the necessity for debt restructuring.

    Participants agreed that this indicator was strong in its technical elaboration and that indicators should be country-specific and account for economic and debt fundamentals as well as volatility and financial soundness.

    The Working Group further emphasized the importance of using a comprehensive set of indicators that may not function as a triggering event itself. Further work was proposed on the nature of the triggering events that may be identified as indicating the emerging need for a debt restructuring. Such triggering events would include external or internal shocks but also political decisions.

The last presentation made by Jürgen Kaiser reflected upon the practical case of Grenada and the type of indicators that were proposed in that context. It was argued that early warning indicators for debt restructuring would have to be read in conjunction with qualitative assessments and other commonly used indicators. During that discussion, the MDG indicators were mentioned as potentially addressing the frequent lack of reference to social concerns in the course of debt restructuring negotiations.

The Working Group agreed upon the importance of a public discussion on the need for an international body responsible for qualitative assessments as well as on the institutional and operational requirements that would ensure its independence and impartiality. Using early warning indicators produced following UN contribution would further add an international public governance dimension to the private credit ratings that are already at work on global markets.