Debt restructuring is a process by which an entity in financial distress renegotiates its debts. One of the most visible debt restructuring efforts underway today is for the Commonwealth of Puerto Rico. American cities like Detroit, Michigan, and Stockton, California, and sovereign nations like Greece and Argentina have also faced this process. Entities facing restructuring face numerous challenges, including:
- Restructuring frameworks: US municipalities can pursue bankruptcy and restructuring under US federal law, but when the entity requiring restructuring is not subject to federal law there may be no established legal framework or pathway. Puerto Rico required US Congress to pass legislation establishing a restructuring framework (PROMESA) for the territory. In the case of sovereign nations, there is a wide diversity of circumstances and approaches. Supranational lenders like the International Monetary Fund and the Paris Club frequently become involved.
- Economic forecasts: Throughout the restructuring process, understanding the economic effects of proposed policies and how they will affect future cash flows and debt sustainability is crucial. This requires sophisticated economic analysis of existing economic conditions and drivers of economic growth as well as the interactions between these growth factors and policy.
- Restoring viability: Following a debt crisis, it is vital that the indebted entity address the underlying conditions that contributed to the debt crisis and develop a feasible, credible plan for restoring economic viability in the future. A sustainable path forward requires pursuing the right economic policies and will involve shared sacrifices by all stakeholders. A restructuring proposal must include reasonable prospects for restoring financial viability. Determining a course of action requires a comprehensive understanding of specific economic conditions and thorough analysis of policy alternatives.
- Transparency: Transparency is a guiding principle in debt restructuring. Transparency enhances accountability and facilitates due diligence by creditors. This entails disclosing information about the debtor’s economic and financial condition that entities may not typically share, as well as details about the forward-looking economic strategy as justification for the debt restructuring.
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