Sovereign debt restructurings are complex processes that involve negotiations with a sovereign’s creditors to alter the terms of existing debt, aiming to restore fiscal sustainability and ensure long-term economic stability. Factors such as escalating debt service and borrowing costs, liquidity pressures originating from foreign exchange shortages and revenue shortfalls, limited revenue base resulting from recessions or stagnation from structural weaknesses such as declining competitiveness or having a narrow export base, or more subjective factors such as internal or external political pressure to ensure social stability at any given moment, often prompt considerations of debt restructuring.
The nature of a restructuring depends on many things, including the types of creditors, which can be, among others: (a) official creditors, typically other sovereign states (or agencies thereof) or multilateral financial institutions (these latter generally having a “preferred” status over all other sovereign creditors) providing loans under official development assistance programs or other multilateral agreements, often driven by geopolitical considerations and international cooperation mandates, (b) external private creditors such as commercial banks, bondholders, and other private financial entities, or (c) domestic private creditors, typically domestic entities such as local banks, non banking financial institutions, and the domestic bond market.
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