This paper examines the issue of burden sharing among creditors. The introduction of market-based debt-reduction programs has made the financial relationships between debtor countries and their various creditors both complex and important in analyses of debt issues. Because official, multilateral, and private creditors typically hold very different types of financial claims on debtor countries, it is difficult to evaluate their contributions to a given financing package. This paper provides a simple framework that can be used to address this important issue.
The need for such a framework is most apparent in cases where the debtor requires additional financing. In this case, the values of the different types of credits are interdependent, and each creditor must consider the behavior of other creditors before committing to any financing plan. It is necessary to have some criterion by which debtors can make partial payments—or, equivalently, receive partial financing—when their feasible payments fall short of their contractual obligations. The “sharing” among private creditors is typically spelled out in their contracts but is generally not made explicit between official and private creditors.
The framework developed in the paper provides a mechanism for the quantification of the consequences of different sharing rules among different types of creditors. The approach necessarily abstracts from some important aspects of the problem, among them the assumptions required about the relative seniority of creditors and about the relationship between financing arrangements and expectations of the debtors’ ability to pay.
Nevertheless, the methodology presented sheds some light on how an appraisal of burden sharing might be derived. The measure suggested is based on the idea that each creditor’s relationship with a debtor country during a financing program is summarized by the rate of return earned on the market value of the creditor’s initial claims on the debtor. Where there is no observable market value—principally official debt—the analogous measure is the expected present value of payments to the creditor relative to the contractual value. The rate of return includes capital gains or losses as well as all payments and receipts generated by financial transactions among creditors and the debtor. These transactions include not only debt-service payments, but “new money” lending and debt-and debt-service-reduction operations.
A creditor is said to suffer a burden if the calculated rate of return is less than the market rate. Creditors earning the same rate of return are said to share any burden equally.