2 THE NEW SCHOOL Milano School of International Affairs, Management and Urban Policy “Public Finance and Debt in Development” Fall 2014 Final Exam Ground rules: you are allowed, even encouraged, to study together and talk to each other in preparing your responses but please write your own answers. I will be available for email and personal consultation. Don’t hesitate to ask questions. I. The debt situation of Grenada The Caribbean island of Grenada is in a sovereign debt crisis. It has been working with the IMF to resolve its crisis. Grenada is in default on its obligations to most of its creditors. A year ago October, the Conference of Churches of Grenada met with the government and presented a set of four recommendations, which are attached. Your assignment is to analyze them using the latest IMF Grenada report and what you know about public finance and debt from the course; don’t waste time searching for other materials on the Internet (the IMF report is on line at http://www.imf.org/external/pubs/ft/scr/2014/cr14196.pdf; the “background” and “recent developments” sections will give you context, but you will also need to look deeper into the report). In particular, please answer the following: A. [40 points] The churches called for a reduction of the government’s debt to 50% of GDP, requiring a two-thirds reduction of the debt. Referring to the IMF report, let us examine the situation and the outlook for Grenada’s debt ratio without debt reduction (hint: the debt sustainability analysis begins on page 58). a. [10 points] How much did Grenada owe to its domestic and foreign creditors at the end of 2013 (measured as share of GDP) and what classes of foreign creditors were the main lenders to Grenada? b. [10 points] IMF undertakes its Grenadian sustainability analysis in terms of the present value of the government’s external debt relative to GDP; how much does that differ from the nominal external debt to GDP ratio? The difference does not seem large. Why? c. [20 points] Describe how the ratio of the present value of external debt to GDP is projected by the IMF Staff to change over the projection period, mentioning first the “baseline”, how it differs from the “historical” scenario and why. Then, identify the stress test with the most extreme impact (shocks are referred to as “bound tests” in table A3a) and what that shock would do to worsen the debt ratio. d. Are you convinced the country needs debt reduction? You should be! B. [20 points] In their second recommendation, the churches proposed the government take a different approach to the debt workout from the standard processes. In fact, Grenada is following the standard approach. Briefly describe what negotiations will be required to restructure its external sovereign debts. C. [20 points] The third recommendation seeks transparency and public approval of the package of economic reform measures that are expected to accompany the debt restructuring. The fourth recommendat.

1. 2
THE NEW SCHOOL
Milano School of International Affairs, Management and Urban
Policy
“Public Finance and Debt in Development”
Fall 2014
Final Exam
Ground rules: you are allowed, even encouraged, to study
together and talk to each other in preparing your responses but
please write your own answers. I will be available for email and
personal consultation. Don’t hesitate to ask questions.
I. The debt situation of Grenada
The Caribbean island of Grenada is in a sovereign debt crisis. It
has been working with the IMF to resolve its crisis. Grenada is
in default on its obligations to most of its creditors. A year ago
October, the Conference of Churches of Grenada met with the
government and presented a set of four recommendations, which
are attached. Your assignment is to analyze them using the
latest IMF Grenada report and what you know about public
finance and debt from the course; don’t waste time searching
for other materials on the Internet (the IMF report is on line at
http://www.imf.org/external/pubs/ft/scr/2014/cr14196.pdf; the
“background” and “recent developments” sections will give you
context, but you will also need to look deeper into the report).
In particular, please answer the following:

2. A. [40 points] The churches called for a reduction of the
government’s debt to 50% of GDP, requiring a two-thirds
reduction of the debt. Referring to the IMF report, let us
examine the situation and the outlook for Grenada’s debt ratio
without debt reduction (hint: the debt sustainability analysis
begins on page 58).
a. [10 points] How much did Grenada owe to its domestic and
foreign creditors at the end of 2013 (measured as share of GDP)
and what classes of foreign creditors were the main lenders to
Grenada?
b. [10 points] IMF undertakes its Grenadian sustainability
analysis in terms of the present value of the government’s
external debt relative to GDP; how much does that differ from
the nominal external debt to GDP ratio? The difference does not
seem large. Why?
c. [20 points] Describe how the ratio of the present value of
external debt to GDP is projected by the IMF Staff to change
over the projection period, mentioning first the “baseline”, how
it differs from the “historical” scenario and why. Then, identify
the stress test with the most extreme impact (shocks are referred
to as “bound tests” in table A3a) and what that shock would do
to worsen the debt ratio.
d. Are you convinced the country needs debt reduction? You
should be!
B. [20 points] In their second recommendation, the churches
proposed the government take a different approach to the debt
workout from the standard processes. In fact, Grenada is
following the standard approach. Briefly describe what
negotiations will be required to restructure its external
sovereign debts.
C. [20 points] The third recommendation seeks transparency and
public approval of the package of economic reform measures
that are expected to accompany the debt restructuring. The
fourth recommendation looks to the future to engage public
oversight to prevent a recurrence. You have seen
recommendations of this sort before in the course. Describe one

3. such approach.
II. Proposals for sovereign debt workout reform
[20 points] Choose one of the many proposals that have been
suggested for reform of how sovereign debt crises might be
resolved (choose ONE and only one from among the proposals
described in the syllabus readings) and explain how it would
organize a workout that is more effective for the debtor and fair
to the debtor and its different creditors.
The Conference of Churches in Grenada, its local and
international partners, met with Minister
Oliver Joseph and members of the government on 1-2 October
2013 to discuss the country’s urgent
debt situation. The workshop welcomed the participation of
Grenada Civil Society Organisation, the
Caribbean Debt Network, Jubilee Germany, Jubilee USA and
the United Nations Development
Programme.
The Conference of Churches in Grenada emphasises the
importance of a people-centred resolution
to the debt crisis.
We make the following recommendations to the Government of
Grenada:

4. 1. We urge the government to push for a reduction in Grenada’s
debt stock to a maximum
level of 50% of GDP due to the harmful effects of debt above
this level on economic growth.
This will require, in practice, an upfront debt stock reduction of
approximately two-thirds. It
is essential that debt restructuring in Grenada restore long-term
debt sustainability and
support a return to economic growth.
2. The debt restructuring process should involve all external
creditors, namely commercial,
multilateral and bilateral. This will ensure fairness between
creditors and mean that each
creditor is subject to a lower ‘haircut’ on its claims. This will
also be an incentive for all
creditors to take part. We encourage the government to explore
options for a
comprehensive solution. These include an independent debt
sustainability assessment,
external mediation and a creditors’ conference.
3. We appreciate that the government wishes to resolve the
current debt situation in a timely

5. manner and secure access to new sources of external finance to
meet the country’s needs.
This is likely to involve an IMF-supported economic adjustment
programme. Before the
government signs any programme, it must seek consensus with
the people on the package
of reform measures the country will undertake. This will ensure
that the programme
respects the priorities of the local people. We therefore insist
that the government share all
documents with the Committee of Social Partners and the public
with ample time for review
and debate before any agreements are signed.
4. Looking forward, it will be essential for Grenada to reduce
the risk of future debt crises. We
insist that the government strengthen legal and administrative
structures to ensure greater
transparency, accountability and participation. Specifically, we
insist that the government
commits to a mechanism which monitors and evaluates new debt
commitments. This
mechanism must involve the social partners. There is also a
need to improve debt

6. management capacities. These reforms will help put in place the
tools to reduce the risk of
future debt crises.
_____________________________________________________
___
Rev. Dr. R. Osbert James – Chairman, Conference of Churches
in Grenada