Following are excerpts from a document prepared by the International Monetary Fund (IMF) on Grenada's plans to restructure its massive national debt of approximately EC$1.5 billion.

A successful commercial debt restructuring process provided
substantial near-term cash-flow relief. Following Ivan, the authorities indicated that they would not be able to service their debts and would seek a collaborative restructuring of outstanding claims.

The debt exchange offer, eventually launched in September 2005, helped restructure more than 90 percent of eligible commercial debt (accounting for about 45 percent of total public sector debt).

The exchange did not involve any reduction of principal, but the lower interest rates in the near to medium term that the new bonds carry, nonetheless imply that creditors accepted a haircut in NPV terms of some 40-45 percent. Prospects for near-term output growth are good.

Reflecting ongoing reconstruction activity, preparations for and the eventual hosting of the 2007 Cricket World Cup, and an anticipated recovery in tourism, real GDP growth should rise to above 5 percent in 2006 and 2007.

Beyond 2007, however, growth is likely to slip back as agriculture activity and exports, in particular, are likely to remain depressed for some time. The tourism sector, the mainstay of foreign currency earnings, is also unlikely to expand strongly in the absence of new investment.

Consequently, staff and the authorities were of the view that fiscal consolidation would be important to reduce the policy uncertainties caused by the current high level of public debt, and improvements to the investment climate would be needed for the economy to revert to its long-term potential growth rate.

The planned reforms are expected to raise the real GDP growth rate to a sustainable 4 percent, the long-run average. Grenada started incurring arrears on most of its commercial debt after authorities declared public debt to be unsustainable after Hurricane Ivan struck in September 2004.

Almost a year after Ivan, Grenada launched an exchange offer for its commercial debt. The offer covered about half of the country's total public sector debt, and sought to restructure approximately US$190 million of external debt (including one global bond of US$100 million) as well as US$86 million of domestic debt.

(The eligible debt included claims by domestic banks of about US$17 million for which the authorities reached a separate settlement in October, ahead of the closing of the general offer.)

The exchange of commercial debt was successfully completed on November 15, 2005, and has several noteworthy features: The authorities sought a co-operative solution with their creditors.

Together with their advisors, the authorities met individually and in groups with creditors and, in response to creditor's suggestions, adjusted the structure of the offer while maintaining consistency with the overall financing envelope (the coupon structure was raised slightly, resulting in a lowering of the NPV haircut by about 5 percentage points).

There were especially close consultations, but not formal negotiations, with a creditor committee which represented about 70 percent of the eligible external debt. Participation was high. Overall participation reached 91 percent of eligible claims, or about US$237 million.

Participation was especially high on the external side, reaching 93 percent. Participation among domestic creditors exceeded 86 percent. The exchange entails significant, and front-loaded, cash flow relief to the government.

It provides an 83 percent reduction in Grenada's commercial debt service costs between 2005 and 2008 and a reduction of 73 percent between 2009 and 2012. Creditors accepted a substantial net present value (NPV) reduction. The debt exchange did not involve any write down of principal, and past-due interest was fully capitalized.

The new bonds have a 20-year maturity and interest rates of 1 percent for the first three years, which gradually increase thereafter. For creditors, on average, this implies an NPV haircut of 40-45 percent for exit yields in the 9-10 percent range. Credit rating has improved following the restructuring.
The new bonds issued in the debt exchange have received a B-minus rating from Standard and Poors, thereby lifting Grenada from the Sovereign Default status it had since the end of 2004.

The current rating, however, falls still short of the BB- rating Grenada enjoyed before Ivan struck.