The latest International Monetary Fund (IMF) staff research released Monday listed Jamaica’s debt-swap as a model for avoiding “imminent” default.

The Working Paper entitled Managing Public Debt and Its Financial Stability Implications documented the Jamaican response along with that of Brazil and Uruguay in which intervention in the bond market led to the stabilisation of bond prices.

“In the recent past, Jamaica faced severe debt sustainability problems, and many investors considered default imminent. Default would have triggered significant losses to the financial system, which was dominated by securities dealers heavily exposed to domestic debt,” stated the Working Paper prepared by Udaibir S Das, Michael Papapioannou, Guilherme Pedras, Faisal Ahmed, and Jay Surti.

“The authorities therefore opted for a solution that would not only reduce fiscal costs without putting too much pressure on financial institutions but would also ensure market accessibility,”

The views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the authors and are published to elicit comments and to further debate.

The result of the debt swap or Jamaica Debt Exchange (JDX) resulted in lower yields on domestic debt expected to save $40 billion annually in interest payments. It was a conditionality of the US$1.27 billion IMF stand-by agreement signed in February 2010.

“The government used the call option feature of the old bonds to induce investors to exchange those higher coupon-bearing instruments for new bonds with lower coupons,” stated the IMF on its technicalities.

Jamaica last month passed its third quarter IMF test as it did in the previous two despite storm shocks.

The paper recalled that foreign investors sold off bonds in the Brazilian domestic market in 2008. This action triggered sales orders by other investors, leading to a sharp increase in yields. It added that debt managers intervened by conducting simultaneous buy and sell auctions, which were successful in stabilising yields immediately.

Whilst Uruguay in 2003 conducted a largely voluntary debt restructuring which affected investors only mildly.

“As a result, the restructuring did not significantly damage Uruguay’s ability to raise funds in the market. Indeed, the government was able to access international markets for new funding in October 2003, only five months after the restructuring was completed,” it stated.

The paper concluded that inappropriate debt structures and poor debt management can greatly inhibit a sovereign’s ability to ensure financial stability by affecting investors’ country risk perception and exacerbating pressures, initially on financial institutions and ultimately on sovereign balance sheet thereby raising sovereign risk.