Belize’s Repeat Restructuring Redaction
As the IMF reconsiders its private debt bail-in approach in view of the latest Argentina, Caribbean and Europe experiences, a working paper attempts to draw procedural and substantive lessons from Belize’s dual operations in 2007 and 2012 where it was active without a formal program. It finds they were pre-emptive although relatively “smooth and transparent” and driven by respective liquidity and solvency concerns that have not restored sustainability. Despite a strong fiscal adjustment post-2005 which brought a primary surplus debt was almost 100 percent of GDP at mid-decade as coupon payments were missed on external commercial obligations but maintained on local and official ones. A creditor committee was formed and agreed to consolidate $500 million owed into a single “super-bond” with step-up installments that would double over the medium-term. The instrument featured no principal haircut with the net present value reduction put at 25 percent. Its collective action provision required 85 percent approval of the terms and 98 percent participation resulted. The exchange documents recognized the risk of additional write-downs in view of Fund cash-flow analysis and further concessional funding from the Inter-American and Caribbean Development Banks to cover gaps with debt/GDP still at 85 percent. Immediate servicing costs fell to 15 percent of revenue aided by oil discovery and tourism FDI increase, but economic growth was just 2 percent with consecutive weather disasters and rising crime. The government then nationalized telecom and electricity companies with compensation due the former owners representing 15 percent of output in contingent claims. In the 2012election Prime Minister Barrow ran on a platform of super-bond relief that dropped the secondary price to 40 percent of face value. Bondholders controlling $200 million organized to respond as the new leadership skipped interest payments and S&P downgraded the sovereign rating to default. The initial proposal for steep haircuts was rejected, but another 30 percent NPV cut was eventually accepted by all investors in early 2013. The compromise included novel legal commitments to creditor engagement and data transparency as well as clarification of pari passu and other technical language. The Fund completed Article IV consultations at the same time and offered debt management advice and training. Partial guarantees were considered as in the Seychelles and St. Kitts and Nevis cases but the authorities did not formally request them.
Total cash-flow help came to $375 billion over 15 years and the rating was soon returned to B-minus as the price jumped to 65 cents. However the outstanding utility seizure payments are essentially equal to the super-bond write-off leaving long-term sustainability in question without historic fiscal adjustment, the paper believes. In an admonition applying to neighbors and other small nation borrowers it concludes that a workable process did not produce successful outcomes. The second negotiation evolving from a political campaign pledge was viewed by major creditors as unwillingness rather than lack of capacity to honor the previous deal in a man-made tragedy.
