Domestic Debt Restructuring: An Exercise in Laser Surgery
A Domestic Debt Restructuring (DDR) may be necessary when a sovereign government is carrying substantial domestic debt and the effort required by external creditors to put the debt back on a sustainable footing has become exceedingly demanding.
Yet, even in those circumstances where a DDR becomes necessary, conducting such a restructuring requires particular care. Indeed, a DDR can create second-round and even third-round effects that may thwart the expected benefits of the exercise.
In this paper, Lazard's Sovereign Advisory group in Paris, leveraging its unique experience in advising governments facing financial distress, explores the potential use cases for DDRs, the circumstances in which a debt restructuring can yield a positive outcome, and those situations in which a DDR may end up weakening repayment capacity.
The authors ultimately conclude that a DDR can be a viable fallback solution for both debtor governments and creditors, but only when the second-round macroeconomic and financial effects are expected to be muted or controlled, and when the third-round effects are thoroughly thought through.
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