The Cedi has persistent suffered a very high levels of depreciation. According to Bloomberg the Cedi has lost about 60% 0f its value against the US$ this year, making it the second worst performing currency in the world after the Sri Lankan Rupees. The country has been burdened by unwieldly food and fuel costs which weigh unevenly which has been prone to protest and political chaos. This has resulted in the value of existing government bonds declining. This means that the value of Ghana government bonds has been declining. However, the downgrade by the rating agencies have caused the country to lose access which has caused the steep depreciation of Cedi against the major trading currencies since March 2022 and also suffered higher borrowing costs in the domestic market and in addition harmed growth and investment.
Restructuring only domestic law debt may also offer a way of ringfencing the external reputational consequences of debt restructuring and avoiding loss of access to external debt markets. But at the same time, Ghana’s domestic debt restructuring may impose losses on domestic stakeholders and may have large direct and indirect costs for the domestic financial system, with spillovers to the domestic economy.
3.0 Theoretical framework for debt restructuring
Several studies were conducted to identify the best way to restructure public debt (reduction in the face value, or lengthening of maturities). A restructuring process can be considered useful because it provides relief for the debtor country, and gains fiscal space for structural reform (i.e. reduces a debt overhang problem). In a 1988 study, Krugman compares two strategies that can be adopted by a creditor country: providing new lending (at a lower interest rate) or a reduction in the face value (a ‘haircut’). The best option is identified according to debtor conditions, in order to provide the right incentive to repay – and not to write-down (i.e. reduction of value) creditors’ claims unnecessarily.
Reinhart and Trebesch focused on restructurings in the 1980-1990s, as well as in the post-World War I period (1920-1930s) in their 2015 study. Comparing a ‘haircut’ process (i.e. the Brady Plan and the generalized default of 1934) with measures lengthening maturities (i.e. the 1931 Hoover moratorium and the 1986 Baker plan), they illustrate that ‘haircut’ interventions produce benefits in term of GDP growth rate for the debtor countries.
Continuing the focus on growth, Forni et al. (2016) studied the effects of restructuring procedures between 1970 and 2010. Their 2016 study divides ‘bad’ and ‘good’ restructurings (i.e. ‘restructurings that allow countries to exit a default spell’ and with a low level of debt). In general, they observe that following a restructuring episode, debtor country’s growth rates decline, except in cases of ‘good’ restructurings, associated with increasing growth. There are three options of debt operations in a debt restructuring: debt rescheduling—lengthening of debt maturities and/or reducing the coupon rate, while keeping the face value of debt the same; and debt reduction—a reduction in the nominal face value of old instruments and debt reprofiling can also connotes a transaction in which maturities are extended but there is no principal haircut and typically not even an adjustment to the coupon.
Several studies were conducted to identify the best way to restructure public debt (reduction in the face value, or lengthening of maturities). A restructuring process can be considered useful because it provides relief for the debtor country, and gains fiscal space for structural reform (i.e. reduces a debt overhang problem). In a 1988 study, Krugman compares two strategies that can be adopted by a creditor country: providing new lending (at a lower interest rate) or a reduction in the face value (a ‘haircut’). The best option is identified according to debtor conditions, in order to provide the right incentive to repay – and not to write-down (i.e. reduction of value) creditors’ claims unnecessarily. Reinhart and Trebesch focused on restructurings in the 1980-1990s, as well as in the post-World War I period (1920-1930s) in their 2015 study. Comparing a ‘haircut’ process (i.e. the Brady Plan and the generalized default of 1934) with measures lengthening maturities (i.e. the 1931 Ho over moratorium and the 1986 Baker plan), they illustrate that ‘haircut’ interventions produce benefits in term of GDP growth rate for the debtor countries.
Continuing the focus on growth, Forni et al. studied the effects of restructuring procedures between 1970 and 2010. Their 2016 study divides ‘bad’ and ‘good’ restructurings (i.e. ‘restructurings that allow countries to exit a default spell’ and with a low level of debt). In general, they observe that following a restructuring episode, debtor country’s growth rates decline, except in cases of ‘good’ restructurings, associated with increasing growth. A new theoretical model was provided by Picarelli in 2016, comparing strategies between ‘haircuts’, lengthening of maturities, and conditional additional lending. This model provides the best options available for both creditor countries (in a debt repayment perspective) and debtor countries (in a growth perspective).
Debt restructuring is now defined as an event in which a debtor is in financial difficulty and a creditor grants a concession to the debtor in accordance with a mutual agreement or court judgment. Under the old standard, ‘debt restructuring’ included all arrangements that resulted in modifications of the terms of a debt obligation (Deloitte 2006, pp. 21). The new standard requires the assets or equity interests received or surrendered by the debtor or the creditor are to be measured at fair value. The resulting gains or losses shall be recognized in profit or loss. Under the old standard fair value was not used and debt restructuring gains and losses were transferred to the capital reserve. Sovereign debt restructuring is an exchange of outstanding government debt, such as bonds or gilt- edged securities, for new debt products or cash through a legal process (Das, Papaioannou and Trebesch 2012).
To constitute a debt restructuring, one or both of the two following types of exchange must take place: debt rescheduling, which involves extending contractual payments into the future and, possibly, lowering interest rates on those payments; and debt reduction, which involves reducing the nominal value of outstanding debt. Restructurings often occur after a default, but it is also possible to conduct an early debt restructuring that pre-empts default. In addition to economic variables, the type, timing and terms of a debt exchange are largely determined by negotiations between the sovereign debtor and its creditors. Domestic-law defaults are a global phenomenon. Over time, they have become larger and more frequent than foreign-law defaults. Domestic-law debt restructurings proceed faster than foreign ones, often through extensions of maturities and amendments to the coupon structure.
While face value reductions are rare, net-present-value losses for creditors are still large domestic debt restructuring (DDR) refers to changes to contractual payment terms of public domestic debt (including amortization, coupons, and any contingent or other payments) to the detriment of the creditors, either through legislative/executive acts or through agreement with creditors (IMF,2021) Sovereign debt markets in emerging economies have experienced radical transformations in recent decades. As many sovereigns began to tap international capital markets, bonds replaced bank loans, and increasingly perfected clauses were added to bonds to facilitate debt restructuring (Buchheit et al., 2019; IMF, 2020). Another critical, yet less discussed, change is the increased relevance of domestic debt markets (Gelpern and Panizza, 2021; Reinhart andRogo_, 2008). Traditionally, domestic debt markets for emerging sovereigns were either non-existing or closed to foreigners (CGFS, 2007).
Emerging sovereigns could only borrow from foreign investors in foreign currencies and international markets (Eichengreen and Panizza,2005). Since the 90s, as a result of financial deepening and economic growth, governments are increasingly relying on domestic borrowings to fund their _financing needs (Gelpern and Setser, 2004; Burger and Warnock, 2006; IMF, 2020). The definition of domestic public debt, grounded on whether government debt is governed by the domestic law, highlights a dimension that crucially shapes the restructuring process: debt jurisdiction (Gelpern and Panizza, 2021; IMF, 2021).
Domestic sovereign debt (domestic debt for short) is defined as public debt liabilities that are governed by domestic law, and subject to the exclusive jurisdiction of the domestic courts of a sovereign. While the residence of investors and the currency denomination have implications for the macroeconomic consequences of sovereign default, the jurisdiction directly affect governments’ ability to restructure debt. As described in Chamon et al. (2018) or IMF (2020, 2021), the terms of government debt issued in the domestic jurisdiction can be more easily restructured using legislative or executive measures, with repercussions for market access. Moreover, domestic sovereign debt markets are the backbone of domestic financial systems. According to CGFS (2007), domestic bond markets promote financial stability not only by reducing currency mismatches but also by creating a benchmark (market-determined) yield curve that reflects the costs of borrowing domestically at different maturities. In emerging economies such as Ghana lacking well-functioning domestic debt markets, banks may _find it hard to price and provide long-term lending.
As a result, restructuring upon domestic-law debt may affect the financial standing of the private sector over and beyond what a default of debt governed under foreign laws may do (Gelpern and Panizza, 2021; IMF, 2021). In fact, as the consequences of sovereign default are increasingly borne domestically, government incentives to default have likely changed. While governments defaulting externally are concerned about being excluded from international capital markets, those defaulting domestically are more concerned with the loss of domestic investment and its impact on the domestic economy
4.0. Theoretical argument on domestic versus external debt restructurings
Emerging and some developing countries are facing with growing debt challenges after the Covid 19 pandemic and such countries will have to restructure their debt but restructurings will raise complex issues for both external and domestic debt. On the domestic side, there will be difficult trade-offs between the need to restructure sovereign debt owed to domestic banks, in some cases, and the impact of those restructurings on financial stability and domestic banks ability to finance growth. On the external side, increased diversity in creditor composition raises important coordination challenges. Some of the emerging and developing countries used to borrow mainly from Paris Club official bilateral creditors and private banks, alongside multilateral institutions. Paris Club creditors and Eurobond markets had strong coordination mechanisms, including through a shared understanding on how the two creditor groups interacted.
