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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a senior fellow at the Centre for International Governance Innovation, a former executive director at the IMF and former WTO staff member
Venezuela’s government intends to restructure its public debt of about $240bn. If completed, this would be the largest sovereign debt restructuring in history. Yet, remarkably, Delcy Rodríguez’s government appears determined to negotiate with creditors before securing an IMF debt sustainability analysis (DSA) or the fund’s financial support.
In doing so, it seems to be following the same strategy pursued by Argentina’s former economy minister, Martín Guzmán, in 2020: first reach an agreement with private creditors and then use their support to induce the IMF — a preferred creditor — to align itself with the restructuring.
Argentina’s experience suggests that this is unlikely to succeed. Private creditors were understandably reluctant to commit without knowing whether the IMF would endorse the underlying debt sustainability assumptions and continue refinancing its own exposure, or insist on being repaid while forcing the country to impose even larger haircuts on those creditors. Not surprisingly, without an IMF-backed framework, investors had little confidence that the restructuring would restore Argentina’s debt sustainability. (I was executive director at the IMF for Argentina during the 2005 debt restructuring, but had no involvement in 2020).
That uncertainty was immediately reflected in market prices. Instead of enjoying the customary “honeymoon” that often follows a successful restructuring — when the price of newly issued government bonds appreciates as default risk recedes — Argentina’s government debt quickly traded at deep discounts. Markets concluded that the restructuring had not resolved the country’s underlying financing problem. Eventually, the government was forced to request a new IMF bailout.
The importance of early involvement by the IMF extends beyond financing. An IMF DSA is valuable not only because it is a precondition for unlocking fund resources, but also because it serves as a co-ordination mechanism between private creditors. Sovereign debt restructurings involve hundreds of investors, all of whom have different incentives, risk assessments and expectations. The fund’s assessment provides a common benchmark for what constitutes a sustainable debt burden and the amount of debt relief required to restore sustainability.
Without that anchor, each creditor must now form its own expectations about Venezuela’s future financing needs and the IMF’s eventual role. This will make negotiations more difficult, weaken confidence in any agreement that is reached and increase the likelihood that the restructuring will fail to restore market access.
The co-ordination role played by the IMF is often overlooked. But debt restructurings are not simply negotiations over how to distribute losses among creditors; they are exercises in rebuilding confidence.
The DSA reduces informational asymmetries among investors, while the fund’s financial support signals that the adjustment strategy is technically sound and adequately financed. Together, they provide the foundation needed for markets to believe that the restructuring marks a genuine turning point rather than merely delaying the next crisis.
As it works out its own future, Venezuela should make sure it draws the right lesson from Argentina’s experience. Attempting to negotiate first with private creditors and only bringing the IMF on board later is unlikely to strengthen its bargaining position. On the contrary, it risks undermining the very confidence on which a successful restructuring depends. Without IMF support, a restructuring may secure signatures — but it is unlikely to restore credibility.
