The pitfalls of value recovery instruments in sovereign debt restructuring:theory and practice

This note explores the theoretical appeal and practical challenges of Value Recovery Instruments (VRIs) in the context of sovereign debt restructurings. While VRIs and other state-contingent debt instruments have the potential to align debt repayment with a country’s ability to pay, their actual success has been limited in practice. The note traces the history of VRIs from their origins in the 1989 Brady exchanges to their inclusion in more recent debt restructurings. It delves into the rationale behind VRIs, identifies the main challenges associated with their issuance - particularly their asymmetric structure, and discusses three specific cases. The document concludes by taking stock of the ongoing debate about the future of VRIs.