Debt Rescheduling

Debt rescheduling is the renegotiation of a loan or bond so that the borrower repays over a longer period or on a different timetable from the one originally agreed. Creditors typically extend maturities, defer principal payments for a grace period or capitalise missed interest, while the face value of the debt is often left unchanged. The aim is to give a borrower facing a cash crunch time to recover and avoid a disorderly default.

The term is used most often for governments in financial trouble, where rescheduling is one of the main tools for resolving a sovereign default. It is closely related to, but narrower than, debt restructuring, which may also cut the principal or interest rate. Banks also reschedule loans to households and companies, and regulators set rules on how such loans must be classified and provisioned.

Imagine you owe a friend money and lose your job. Rather than demanding everything back at once, which you cannot pay, the friend agrees you can repay in smaller amounts over three years instead of one. You still owe the same total, but the pressure eases and the friend is more likely to see the money in the end.

Countries do the same with their lenders. A government short of dollars may ask creditors to wait before collecting. The lenders accept because a forced default would probably leave them with less, and because a recovering economy is better able to pay later.

Economists distinguish between several kinds of debt treatment:

• Rescheduling or reprofiling. Payments are pushed into the future, often with the same interest rate and face value.
• Refinancing. New loans are issued to repay maturing ones.
• Reduction or restructuring with a haircut. Creditors write off part of the principal or cut interest rates.

Even a pure rescheduling usually imposes a loss in present-value terms, because money received later is worth less. The standard way to measure this is the net present value haircut, using a common discount rate for both the old and new payment streams (see net present value):

• $H$ is the haircut, as a share of the original value.
• $PV_{\text{new}}$ is the present value of payments under the rescheduled terms.
• $PV_{\text{old}}$ is the present value of payments under the original terms.

Worked example: a government owes 100 due in one year and agrees to repay the same 100 in five years instead, with no extra interest. At a 10% discount rate, the old claim is worth $100 \div 1.10 \approx 90.9$ and the new one $100 \div 1.10^{5} \approx 62.1$. The haircut is $1 - 62.1 \div 90.9 \approx 0.32$, or about 32%, even though the face value is unchanged.

Official bilateral loans from governments have been rescheduled mainly through the Paris Club, an informal group of creditor countries that first met in 1956 to deal with Argentina and now has 22 permanent members. Its "terms" have grown more generous over time, from standard rescheduling to Naples terms in 1994 and Cologne terms in 1999, which allowed large reductions for the poorest countries, alongside the Heavily Indebted Poor Countries (HIPC) initiative led by the IMF and the World Bank.

Commercial bank loans were rescheduled through ad hoc bank committees, sometimes called the London Club, during the Latin American debt crisis of the 1980s, which ended with the Brady Plan of 1989 converting bank loans into tradable bonds with partial write-offs. Today most private sovereign debt takes the form of international bonds, such as Eurobonds, which are restructured through exchange offers. Collective action clauses let a qualified majority of bondholders bind all holders, limiting hold-out creditors.

Because China and other new lenders are not Paris Club members, the G20 created the Common Framework in November 2020 to coordinate debt treatments for low-income countries. Chad, Zambia and Ghana have largely completed treatments under it, while Ethiopia reached an agreement in principle with official creditors in 2025. Middle-income countries such as Sri Lanka restructured outside the framework. The Global Sovereign Debt Roundtable, set up in 2023 by the IMF, World Bank and G20 presidency, works on speeding up the process. Historical precedents include the Hoover Moratorium of 1931 and the London Agreement on German External Debts of 1953.

Banks routinely reschedule loans for borrowers in temporary difficulty. During the Covid-19 pandemic, central banks including the State Bank of Pakistan and the Reserve Bank of India allowed banks to defer or reschedule repayments without automatically classifying the loans as bad. Supervisors watch such cases closely, because repeated rescheduling can hide losses, a practice sometimes called "evergreening".

Supporters see rescheduling as a cheaper and faster alternative to deep debt write-offs, preserving market access and creditor relationships. Critics argue that repeated "extend and pretend" deals keep countries over-indebted for years, delay growth and transfer losses to taxpayers when official lenders refinance private creditors. Debtor governments and campaigners argue the process favours creditors and should include more principal relief, while creditors stress the risks of moral hazard and the need for comparable treatment among all lenders, including debt seniority rules for multilateral institutions. The question of whether some debt is odious debt adds a political dimension, and IMF programmes that accompany rescheduling are often criticised as harsh structural adjustment. Rising sovereign risk across developing countries since 2022 has kept the debate active.

• Paris Club
• International Monetary Fund: Sovereign debt