Restructuring Domestic Debt Must Be Credible, Fast, Comprehensive

Abstract

With the possibility of restructuring domestic debt increasing, there are concerns about the impact of such a restructuring on the financial markets. A limited restructuring, in which only government debt held by the Central Bank is restructured, is unlikely to resolve the fundamental issue of government solvency. Indications are that only treasury bills (T-Bills) held by the Central Bank will be restructured while restructuring of treasury bonds (T-Bonds) may be expanded to the rest of the market. An expanded restructuring involving private sector participants (and potentially public institutions) would, however, need to be managed carefully. In a report issued by Verité Research in October 2022 titled The Desirability of Domestic Debt Restructuring, we provided calculations and analysis to show why the restructuring of domestic debt may be needed to help lift the economy from the current crisis. In that report, we proposed a maturity extension for domestic debt rather than any cut to the principal. In this article, I will assume that this is being considered and argue that the government must prioritize three objectives to successfully complete the restructuring of domestic debt: to be credible, to do it fast, and to do it comprehensively.