The promise and limits of the new G20 template for debt restructuring
On May 27, the Group of Twenty (G20) released its illustrative template memorandum of understanding (MoU) for future sovereign debt restructuring (SDR) with official bilateral creditors. The template formalizes and operationalizes the SDR process under the so-called Common Framework (CF), which was launched in 2020.
At first glance, that might sound technical. In reality, it is highly consequential for how sovereign debt crises will be managed in the future. What looks like a bureaucratic roadmap is actually an attempt to enhance the transparency of the SDR process and shape expectations and behavior for both negotiating parties and market participants.
But there’s a catch: by codifying a relatively rigid process, the template may do more harm than good, potentially worsening conditions for both debtors and creditors—and missing a real opportunity to meaningfully improve the SDR framework.
A straightforward but rigid roadmap
The illustrative template sets out a clear sequence of steps for countries in debt distress to initiate and carry out a restructuring once obligations become unsustainable. While many of these steps have been used in past restructurings, codifying them in this form risks creating the impression of a rigid process, potentially constraining flexibility for all parties involved.
If eligible, a debtor country can request a debt treatment under the CF with its official bilateral creditors—who would promptly form an Official Creditor Committee (OCC) to coordinate engagement with the country in question.
The next—and most substantive—step is to reach a Staff Level Agreement (SLA) with the International Monetary Fund (IMF) for a new IMF-supported economic program, based on the macro framework and Debt Sustainability Analysis (DSA). The SLA provides the parameters for any resulting debt restructuring—including the range of debt subject to treatment—necessary to restore debt sustainability and close the balance-of-payments gap of the debtor country. Before the IMF assistance program can be approved by its board of executive directors, the OCC must provide financing assurances.
The OCC then proposes the main terms of debt restructuring consistent with the restructuring envelope contained in the IMF program. This includes adjustments to nominal debt service over the program period, net present value debt relief, and maturity extensions for the claims in scope. The debtor country accepts the proposals and signs an MoU with the OCC.
However, this MoU becomes effective only when the debtor country has submitted a debt restructuring proposal to all of its other, mostly private, creditors with terms not better (from the creditors’ perspective) than in the MoU; and it has publicly announced that it will remain in arrears to those creditors until an agreement is reached. After the MoU takes effect, the debtor country concludes a bilateral agreement with each individual official creditor to implement the restructuring according to the terms of the MoU. Failure to comply fully with the terms of the MoU and the IMF program will allow the OCC to declare the debt treatment program ineffective, restore original payment terms, and impose a compensatory interest rate of 5 percentage points on top of the original rates.
Procedural clarity may come at a price
While the steps outlined in the illustrative template would improve procedural clarity, they also risk making the process more rigid and sequential than in past practice. The template repeatedly invokes Comparability of Treatment considerations to ensure that official emergency financing is not indirectly used to service private creditors. Taken together, these design features could create serious problems.
Firstly, the requirement that the debtor country initiate restructuring with private creditors unilaterally, offering them terms no better than those agreed with the OCC while putting their claims into arrears as a condition for the MoU to take effect, would likely leave both the debtor country and its private creditors worse off, and could make debt crisis resolution more difficult.
The debtor country would be denied the opportunity to pursue a pre-default restructuring approach, under which it could engage private creditors on a voluntary basis to address debt problems while remaining in good standing—preserving goodwill with creditors and maintaining at least partial access to international capital markets. If negotiations with private creditors drag on—as a result of limited flexibility or bargaining space—the debtor country could be locked out of international capital markets for longer than usual, thereby deepening the crisis.
Meanwhile, private creditors would be placed in a take-it-or-leave-it position: facing a default on their contractual claims unless they accept restructuring terms no better than those agreed with the OCC—terms determined by the IMF program (based on its DSA) and the OCC without input from or consultation with private creditors. This could be perceived by many investors as coercive rather than reflective of good-faith negotiation, a principle advocated by the Global Sovereign Debt Roundtable to encourage information sharing and constructive engagement. Consequently, securing the qualified majority required under collective action clauses in international bonds may become harder, as may restraining holdouts—some of whom may resort to litigation.
Secondly, according to the MoU’s claw-back clause, a 5 percentage points compensatory interest rate may be imposed by the OCC if the debt treatment program is declared ineffective. This would risk pushing the country into a worse financial position than the one that triggered the restructuring in the first place. It is therefore questionable whether public policy should pre-commit to outcomes that could exacerbate sovereign distress.
What remains to be done
More broadly, the release of the illustrative template represents a missed opportunity for the G20 to incorporate consensus proposals coming out of the GSDR—which it co-sponsors together with the IMF and World Bank.
In particular, two important proposals could meaningfully strengthen the sovereign debt restructuring framework. The first is conducting debt treatment discussions with official and private creditors in parallel, or in more closely coordinated sequences supported by structured information-sharing channels, in order to reduce delays and improve the likelihood of timely agreement. The second is expanding the scope of the CF beyond seventy-three low-income countries to include vulnerable middle-income countries, thereby providing a clearer pathway for restructuring when their debt becomes unsustainable.
In the absence of such coordination mechanisms, the illustrative template provides greater procedural clarity to the sovereign debt treatment process, but it does so at the cost of flexibility, leaving the strengthening of the CF an unfinished task.
Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a senior fellow at the Policy Center for the New South, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.