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Addressing Debt Overhang: Experiences from Two Debt Operations in Jamaica

Jamaica entered the world economic downturn in 2008 from a position of ongoing weak economic performance and high, increasing debt levels. As a result, Jamaica's fiscal situation quickly became unsustainable. Starting in 2010, the government made important efforts, including two domestic debt exchanges, to bring its debt trajectory on a sustainable path. This brief assesses the two debt exchanges and explores whether their design was appropriate to address Jamaica's debt sustainability. A major issue in the case of Jamaica is the high exposure of the financial sector to government debt, creating a link between the fiscal situation and financial sector stability. In addition, the composition of Jamaica's debt restricts debt operations to domestic government securities, which comprise around half of total debt. Any attempt to restructure the debt stock through a debt action, such as a haircut, is likely to have a substantial impact on the domestic financial sector, which has a sizeable exposure to sovereign securities. Any losses of the financial sector would likely have negative multiplier effects on GDP growth, employment, and poverty. As such, the brief concludes that the scope of fiscal savings from debt restructuring in the absence of financial sector crisis was always small.