Debt rescheduling is the reorganization of an outstanding debt amount (stock) and/or its terms. Debt rescheduling is undertaken in situations where the debtor faces serious obstacles in repaying the debt, either on time or at all. Often this procedure is referred to as debt reprogramming. In most instances when debt rescheduling is undertaken it eases the position of the debtor, addressing the issues of his/her liquidity and the potential of insolvency. The rescheduling of the debt may address the amount that is borrowed, where the creditor may reduce the principal in order to facilitate the debt service, but all the other conditions of the original contract remain in force. Or, the creditor may focus more on the servicing of the debt and facilitation of the repayment process, allowing the deferral of payments due, reducing the interest rate, extending the maturity, etc. In critical situations, the rescheduling may target both the outstanding debt stock and the conditions of contract. The creditor is interested in saving as much as possible of his/her own money and also ensuring the economic viability of the debtor, as a potential future client as well.
Debt rescheduling is a contract that alters the previous debt contract and requires the full consent of both contractual parties. Both creditor and debtor have to agree on new terms and conditions in order to have this contract concluded. Often it is assumed that unilateral actions are debt rescheduling modes, but this is not the case. Unilateral actions are usually undertaken by the creditor in situations where it is difficult, if not impossible, to gain consent of the debtor, and where the debtor’s situation is virtually hopeless and it is necessary to undertake measures that would ease its position, even without consent. This on a few occasions has been the case with the least developed countries (LDCs), where their inability to service loans has been endemic and the only way forward was to write off part of the loan, or arrears, or sometimes both. Even if a new credit follows unilateral action of the creditor, these two consequent contracts should be regarded separately. Debt rescheduling is just one of the modalities of debt restructuring (reprogramming). Rescheduling entails the changes in terms for repayment of the principal and/or interest of the signed contract, or deferment of some or all payments until some mutually agreed future date. In the case of deferment, one can focus on flow rescheduling or stock rescheduling. If debt rescheduling is entertained, the debtor may find it a temporary relief, but if the structural problems are not addressed, the eventual capitalization of interest and future possible successive rescheduling agreements may prove far too costly to be done in the future. Rescheduling of debt in a narrow sense of the term means changing the conditions of the contract and not really addressing the underlying problems of inability to meet payments either on time or in general.
Debt refinancing is another modality of debt rescheduling in a wider sense, and in the case of refinancing, the debtor is getting a new loan that would consolidate all existing debts, and/or will provide full accounting support for the activities. In the case of refinancing the client would look for favorable (lower) interest rates and/or longer maturities. In the case of increased competition in the banking sectors worldwide, it is likely that some new entrants in the market would attempt to penetrate the market with underpricing, and therefore these refinanced credits can prove to be a time bomb. Refinancing options can be either voluntary or involuntary. In the former case the country is short of cash, foreign reserves, etc. and simply cannot meet the payments; while in the latter case the country is just following the market conditions, and if a country can raise the money in the financial markets cheaper, it will be prone to repaying the costly debt and looking for another, cheaper one.
One of the possibilities for rescheduling is the debt buyback. In this case the debtor may purchase its own debt at a discount. The creditor would agree to this transaction, in order to salvage at least some of the costs invested. Most recently Nigeria has repurchased a significant amount of public debt due to the unexpected revenues from oil. The debt buyback model is promoted by the International Development Association (IDA), which targets the world’s poorest nations; IDA provides support if requested. IDA has created a special debt reduction facility that gives grant funding either alone or in partnership with some of the players.
Another instrument for debt restructuring is debt conversion and swaps. Swaps offer a possibility of exchanging the loan in foreign currency for a loan in domestic currency and in this way reduces the risks of foreign exchange rates. A number of conversions/ swaps can take place: debt-for-equity swaps, debt-for nature swaps, debt-for-development swaps, debt-for-education, and debt-for-debt swaps. Although debt swaps may be attractive, they may have a series of disadvantages, such as the fiscal impact of prepayment, associated inflationary risk, and high transaction costs in the case of a bespoke service.
Although debt rescheduling is a two-way process, either of the contractual parties may initiate the process. Often the debtor is the one who initiates the change in terms and proposes the amendments to the existing contract. Usually both sides begin with negotiations as to how to change the current contract to reflect the current situation and immediate future (in economic terms) of the debtor. The debtor can also put forward a finalized proposal and ask creditors to adhere to it. In the case of Dominica in 2003, the preemptive restructuring was intended to head off the default on public debt. The government of Dominica had approached all creditors (multilateral, bilateral, private, and so on) and offered the exchange of the bonds that were in default for three new classes of bonds. Because the situation was rather serious, almost three-quarters of all creditors have endorsed the proposal.
In the end, debt restructuring may have several outcomes. Debt rescheduling is usually seen as short-term relief, as is refinancing, while write-off (although a unilateral action) and various swaps are perceived to have contributed to the permanent reduction in debt exposure. Both the London (a group of creditors representing commercial banks) and the Paris Clubs (a group of creditors consisting of national governments, official bilateral creditors) have endorsed the policy of debt restructuring (rescheduling) from the late 1980s, when the problem of high international indebtedness emerged. In a number of instances, without the well-designed model, many countries would have defaulted on their credits, and it would have led to a serious systemic shake-up of the international financial system. Debt rescheduling (restructuring) is now accepted as a common practice.
- Berg and J. Sachs, “The Debt Crisis,” Journal of Development Economics (v.29, 1988);
- Katy Cornwell and Brett Inder, “Evidence for the Ineffectiveness of Debt Rescheduling as a Policy Instrument,” Applied Economics (v.39/17, 2007);
- C-T. Ebenroth, Maina Peter, and M. J. Kemner, “Rescheduling of the Sovereign Debt: A New Role for the Paris Club,” Journal of International Banking Law (v.10, 1995);
- Claude Fluet and Paolo G. Garella, Relying on the Information of Others: Debt Rescheduling with Multiple Lenders (Centro Studi Luca d’Agliano, 2007);
- Chris Jochnick and Fraser A. Preston, Sovereign Debt at the Crossroads: Challenges and Proposals for Resolving the Third World Debt Crisis (Oxford University Press, 2006);
- Marchesi, Adoption of an IMF Programme and Debt Rescheduling: An Empirical Analysis, Warwick Economic Research Papers (University of Warwick, 1999).
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