Sovereign Restructuring Stack

Problem solved

Sovereign debt teams, multilateral country teams, and EM credit funds need a structured ordering of which instruments take what haircut in what sequence when a country enters or exits an IMF program. The framework stacks instruments by legal seniority, by domestic-versus-external political optics, and by debt-service math required to clear an IMF debt-sustainability analysis. It produces the haircut schedule that creditors and the IMF actually negotiate around.

Inputs

• Sovereign debt stock by instrument: external commercial bonds, external official (Paris Club, China bilateral, IMF, World Bank, regional banks), domestic banking system, domestic non-bank, central bank credit
• Maturity profile by instrument over the program window plus 5 years
• Coupon structure: fixed, floating, indexed, currency
• IMF DSA debt-to-GDP and gross financing needs targets
• Existing collective action clauses (CACs) and aggregation mechanisms
• Domestic political constraints: pension fund holdings, banking system fragility, deposit insurance ceiling
• Bilateral creditor positions, including the China Common Framework participation status

Outputs

• Stack ordering: which instrument absorbs the haircut first, second, third
• Haircut schedule by instrument with NPV and face-value reductions to hit the DSA target
• Maturity-extension and coupon-reduction alternative reaching the same NPV cut
• Domestic political-cost flag by instrument (pensioner exposure, bank-balance-sheet hit, deposit run risk)
• Common Framework feasibility check and bilateral-creditor coordination map
• Catalytic effect estimate: NPV cut required to unlock IMF program and market reaccess

Method

1. Step 1. Build the debt stock. Reconcile IMF Article IV, World Bank IDS, and country sources. Stack by instrument with face value, NPV at 5 percent, 10 percent, and program-rate discount, and maturity profile.
2. Step 2. Apply legal seniority. IMF, World Bank, and regional development banks are de facto senior and rarely take haircuts in standard restructurings. Bilateral official sits next. External commercial bonds with CACs are the marginal mover. Domestic debt sits below in legal terms but above in political terms.
3. Step 3. Apply political optics. Domestic-pensioner-held debt, domestic-bank-held debt, and central-bank-held debt carry the highest political cost per dollar of haircut. The framework converts this into a political-shadow-price multiplier on the haircut required.
4. Step 4. Compute the DSA-clearing haircut. Given the IMF target debt-to-GDP and gross financing needs trajectory, solve for the NPV cut required across the negotiable stack. Run two cases: principal-haircut and maturity-extension-and-coupon-cut.
5. Step 5. Stack-order the haircut. Place the cut on the instruments with the lowest political-shadow-price first, subject to legal seniority. External commercial bonds typically lead, bilateral official follows, domestic debt as a last resort.
6. Step 6. Run the Common Framework or G20 process check. Score whether bilateral creditors (especially China, post-2020 the largest variable) are likely to participate, hold out, or block. Holdout risk shifts the haircut back onto commercial bondholders.
7. Step 7. Catalytic check. Run the post-restructuring market-reaccess timeline. The NPV cut has to be deep enough to clear the DSA but shallow enough that the country can issue again within 36 months at sub-12 percent.

Assumptions

• IMF preferred-creditor status is binding. The framework does not score IMF haircut scenarios; that is a separate exercise.
• World Bank and major regional development banks are de facto preferred creditors. Recent precedents (Zambia, Ghana, Sri Lanka) confirm.
• Domestic-debt restructuring is feasible but politically costly. The framework computes the political-shadow-price multiplier explicitly rather than assuming a uniform haircut.
• Common Framework outcomes hinge on bilateral-creditor coordination, which is contestable. The framework runs three scenarios: full participation, partial participation, holdout.
• Market reaccess at sub-12 percent within 36 months is the catalytic-effect threshold. Below this, the restructuring is judged to undershoot.

Limitations

• China's bilateral debt position is opaque. The framework uses Horn-Reinhart-Trebesch and AidData estimates with explicit confidence ranges.
• Domestic non-bank holders are heterogeneous (pension funds, insurance, retail). The framework requires country-specific holder data; in its absence, it reports a wider band.
• Litigation risk on holdout creditors (the Argentina precedent) is a structural risk that the framework flags but does not fully model.
• The framework is a stack-ordering tool, not a negotiation simulator. Final outcomes depend on coordination and political will that the framework documents but cannot predict.

Example application

Applied to Pakistan's 37 month Extended Fund Facility entering its second program review. The Restructuring Stack runs the seven steps on Pakistan's external and domestic debt stock, applies the Common Framework feasibility check (China bilateral participation is the swing variable), and reports the haircut schedule under three Common Framework scenarios. External commercial bondholders absorb the largest NPV cut in the base case; domestic banks absorb a maturity extension only; central bank credit is held flat. See Pakistan in 2026: IMF program economics under fiscal stress.