According to the International Monetary Fund IMF, governments need to take measures to limit the impact on local banks and investors, and restructuring local debt burdens will likely play an increasing role in emerging markets.
The share of debt issued by developing nations in their local markets has gone from 31% to 46% over the past two decades, according to a blog published on Wednesday by the International Monetary Fund's Peter Breuer, Anna Ilyina and Hoang Pham.
Domestic debt restructuring may be easier to achieve, according to the authors, and could be achieved by changing the terms of debt contracts in domestic law.
This would avoid costly things such as the loss of access to international capital markets due to a restructuring of external debt, often contracted under New York or English law.
With much of local debt held by domestic creditors, sovereign debt distress can easily spread to a country's banks, pension funds, households and other parts of the economy and authorities needed to take pre-emptive action to minimize spillovers.
The authors said that the impact on banks can be limited by extending the maturities and lowering the interest rate rather than reducing the nominal amount of outstanding claims. Losses should be recognized early and may need to be paired with a strategy to restore banks capital buffers. In June of this year, the IMF said seven of the world's poorest countries had been in debt distress due to emergency measures that allow lenders to convert illiquid assets into cash. org external pubs ft dsa DSAlist.pdf, while another 29 countries were at high risk of becoming so. In recent years a number of countries have restructured both local and external debt burdens, such as Argentina in 2020, https: www.reuters. Article argentina-debt idUSKBN 25 S 4 HC.