March 16, 2021

Washington, DC: As part of an active work program on debt-related issues outlined in earlier papers and blogs, Fund staff recently published a paper examining the economic case for Debt- and Debt-Service-Reduction Operations (DDSROs): cash payments (usually through market-based buybacks) or collateral offered as part of a debt restructuring offer. The paper analyzes the relevance of the Fund’s 1990s policy on such operations to the present, post-COVID, context.

Under the Debt- and Debt-Service-Reduction (DDSR) policy, the Fund supported members’ DDSROs by earmarking a portion of Fund financing to assist such members in making debt buybacks and collateral purchases. This policy was discontinued in 2000, two years after its last use.

Given the evolution of the sovereign debt landscape and broader Fund policies, staff does not see the need for reviving the DDSR policy at this juncture. If a member wants to finance DDSROs in the context of a Fund supported program, it could do so using the general balance of payment support provided by the Fund, without requiring a dedicated policy for DDSROs. However, while the paper identifies circumstances in which including cash or collateral in a debt exchange offer and/or buying back debt in the secondary market could contribute to resolving a member’s balance of payments problems, the circumstances under which Fund resources could be used to support DDSROs are narrow. The Fund has not received any request for such support at this time.

While a systemic sovereign debt crisis is not in staff’s baseline scenario, it remains critical to thoroughly review the toolkit available to address a potential crisis. The Fund and its staff will continue to make progress in this area in order to best serve its members.