How to Restructure Public Debt
- 1). Announce through the country's finance ministry that the debt is too much to repay. Bondholders will just have to take a write-down (that is, a loss of the bond's face value) on debt holdings. This sets a bar that if the debt is not restructured, then no one will get paid and the country will go into default.
- 2). Threaten litigation rather than default. Long, costly international litigation is the worst scenario for most bondholders.
- 3). Meet with domestic banks first, since these often hold much of debt. See what their debt "floor" is, that is, what is the maximum they are willing to forgive or write off. Once this is ascertained, then approach international bondholders and the International Monetary Fund (IMF).
- 4). Go to the IMF, seeking emergency infusions of capital. This is what the IMF does. Strike a deal that trades cash for promises not to default or to go to litigation. Making deals with the IMF is the best way to convince bondholders that they must take a loss on debt holdings in exchange for an easier route to limited repayment. Bondholders want some repayment, especially if they have already accepted that they will not get 100 percent of the bond's value.
- 5). Present a national budget that strikes at the deficit. This always provides new confidence to bondholders. If a country addresses its budget deficits, it signals that it is restructuring its whole financial process. This sends positive signals to global capital markets.
- 6). Go straight to bondholders once a deal is struck with the IMF. Countries normally arrange meetings for debt negotiations at places like the World Economic Forum. The intent of negotiation is to determine the maximum amount that creditors will write down.
- 7). Realize that the country is in an embarrassing situation that will affect its long-term economic prospects. Searching for capital after restructuring will be difficult, with many concessions demanded by future bondholders.
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