Reprofiling Sovereign Debt

8 Pages Posted: 1 Dec 2014

See all articles by Lee C. Buchheit

Lee C. Buchheit

Center for Contract and Economic Organization; Cleary Gottlieb Steen & Hamilton LLP - New York Office

G. Mitu Gulati

Duke University School of Law

Ignacio Tirado

Universidad Autónoma de Madrid; European Banking Institute

Date Written: November 30, 2014

Abstract

• The IMF staff’s 2013 proposal to reprofile (i.e., stretch out for a short period without haircutting principal or interest) the maturing debt of a country that has lost market access is a sensible policy in cases where the IMF is uncertain whether the country’s debt stock is sustainable.

• The motivation for the policy is to avoid situations, such as occurred during the Eurozone debt crisis, in which Fund resources are used to bail-out commercial creditors in full.

• But a debt reprofiling is a species of debt restructuring and as such is susceptible to holdout creditor behaviour.

• By allowing a small portion of its loans to the debtor country to be used to neutralise some or all of the additional credit risk caused by the reprofiling, the IMF could minimise holdout creditors in these operations.

• The authors propose a technique for minimizing the risk that certain creditors may elect to decline a reprofiling proposal, no matter how lenient its terms.

Keywords: sovereign debt, IMF, restructuring, reprofiling

JEL Classification: F33, F34, F36, H63

Suggested Citation

Buchheit, Lee C. and Gulati, Gaurang Mitu and Tirado, Ignacio, Reprofiling Sovereign Debt (November 30, 2014). Available at SSRN: https://ssrn.com/abstract=2532158 or http://dx.doi.org/10.2139/ssrn.2532158

Lee C. Buchheit

Center for Contract and Economic Organization ( email )

New York, NY

Cleary Gottlieb Steen & Hamilton LLP - New York Office ( email )

One Liberty Plaza
New York, NY 10006-1470
United States

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Ignacio Tirado

Universidad Autónoma de Madrid ( email )

Campus de Cantoblanco
Madrid, Madrid 28049
Spain

European Banking Institute ( email )

Frankfurt
Germany

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