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Debt reorganization

Debt reorganization. Frankfurt, February 2006. Background. Debt reorganization can be an important feature of economic transactions that occur in a country Need for consistent recording in the various sets of statistical accounts

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Debt reorganization

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  1. Debt reorganization Frankfurt, February 2006

  2. Background • Debt reorganization can be an important feature of economic transactions that occur in a country • Need for consistent recording in the various sets of statistical accounts • Paper draws on the expertise of government finance and external statistics experts. • It brings together • Work at the Task Force on the Harmonization of Public Sector Accounts in October 2005 (Part I) and • Work on HIPC transactions at the Task Force on Finance Statistics in April 2005,and the IMF Committee on Balance of Payments Statistics in June 2005 (Part II).

  3. Part 1: Debt re-organization and related transactions • Part 1 provides comprehensive guidance on issues relating to debt re-organization • A definition of debt re-organization • Debt forgiveness • Debt restructuring • Debt conversion • Debt prepayments and buybacks • Debt assumption

  4. Part 1 (continued) • Debt payments on behalf of others • Debt write-offs • Debt servicing in arrears • Defeasance

  5. Part II: Debt-service falling due between the Paris Club Agreed Minute Date and the Specified Implementation Date • Issue: Creditor countries as a group usually agree in the non-binding “Agreed Minute” that interest continues to accrue based on the existing loan terms, but payments are not made. • Proposed treatment: Liabilities remain outstanding but given the mutually signed understanding between debtor and creditor, arrears as classified as short-term debt not accruing into the existing instrument.

  6. Part II: Debt-service Moratorium Extended by Creditors Before Completion Point of HIPC Initiative • Issue: Debt-service moratorium involves an individual creditor permitting the debtor a formal suspension of debt-service payments falling due within a given period. • usually involves formal exchange of letters but not necessarily a formal bilateral agreement. • Proposed treatment: Treat debt service moratorium extended by creditors as debt rescheduling provided there was some formal process that demonstrated agreement on behalf of both the debtor and creditor, such as the exchange of letters.

  7. Part II: Treatment of HIPC Debt-service Transaction for Creditors that opt out of the HIPC Initiative • Issue: Debt compilers in debtor countries have sought guidance regarding the treatment of debt-service when an agreement is reached in principle in the Agreed Minute but specific HIPC creditors subsequently opt out of providing debt relief. • Proposed treatment: A creditor’s decision to opt out of providing debt relief does not modify its claim on the debtor and therefore if such claims are not paid when due the debtor is in arrears

  8. Part II: Paris Club Debt Rescheduling Agreements: Timing • Issue: the appropriate timing of the reorganization of debt rescheduling under the Paris Club. • Proposed treatment: debt rescheduling transactions should be recorded when the Paris Club agreement becomes effective.

  9. Part II: HIPC debt transactions linked to social expenditure and the classification of transfers • Issue: Some HIPC debt relief savings are linked to government expenditure in that the local currency equivalent of the debt-service forgiven—as it falls due—is earmarked to finance social development projects • Should such savings be classified by the type of expenditure outlays they finance? • Proposed treatment: Record HIPC debt relief transactions based on the type of debt obligation forgiven rather than the subsequent use of the funds in the government budget

  10. Part II: Rescheduling of Interest Arrears and Interest Not Yet Due • Issue: Clarification of the treatment of rescheduling of (1) interest arrears and (2) interest not yet due. • Proposed treatment: • (1) as long as the existing financial debt contract remains intact, such rescheduling should not result in treating the debt as rescheduled. • (2) as a debt instrument is composed of a stream of future payments the rescheduling of some or all of these payments constitute a change in the existing contract and so the whole of the debt should be regarded as rescheduled.

  11. Part II: Balance of Payments Transactions Related to the HIPC Trust • Issue: under the HIPC Initiative, eligible debt payments to the Fund are made out of the so-called HIPC Umbrella account when the payment installments fall due—that is the debt is not forgiven all at once but remains outstanding and payments are made based on the existing schedule from the Umbrella account. • Proposed treatment: once the HIPC grant is provided irrevocably, there is a clear change of economic ownership of the financial assets—the debtor attains economic ownership of new funds— and payments by the debtor are recorded when made.

  12. Part II: Identification of HIPC Transactions • Issue: There has been some interest from users of debt statistics to identify explicitly HIPC transactions. • Proposed treatment: BOPCOM expressed the need to have a comprehensive treatment of HIPC debt, and supported the inclusion of a chapter in the revised manual to provide guidance on the recording of HIPC debt and similar type of debt transactions. • Would AEG welcome something similar in the SNA?

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