Pooling debts in domestic and foreign currency under the same measure of GFN, when the capacity to rollover different debts is different, is obviously problematic. Sri Lanka’s recent restructuring is an example of the perils of that methodology: Sri Lanka’s treasury clearly faces a higher rollover risk of its foreign currency debt than of its domestic currency debt, largely debt with the central bank, but the methodology implemented by the IMF does not capture that difference appropriately(see Maret and Setser[2023] for a more comprehensive analysis). Besides, capital account regulations would have a different impact on domestic currency debt held by residents or non-residents, and therefore would provide an additional instrument to deal with external debts in domestic currency that is not available for external debts in foreign currency. 10 Ultimately, the principles that guide debt restructuring processes may affect the development of domestic capital markets and thus affect their capacity to borrow in domestic currency in the future. In turn, this affects currency mismatches, exchange rate instability, and debt sustainability. DSA are contingent on policies and practice, which are influenced by the stance taken regarding those principles. Thus, the IMF choice of principles for DSA and debt restructuring is a matter with practical consequences both in the short term and long term. 8.4 Choosing the right discount rate in IMF DSAs While for a debtor what matters in a restructuring is the amount of relief, for a creditor what matters is the value of the security it receives in exchange for the unsustainable bond or loan. Thus, debtors need to frame debt negotiations in terms of sustainability prospects, while creditors usually frame debt negotiations in terms of the “recovery” value of the bonds that are issued in the swap. While the latter is irrelevant from the viewpoint of the restoration of debt sustainability, the exercise may be necessary for the assessment of the different treatment to different classes of creditors – what’s been called“comparability of treatment” in the literature(Guzman and Stiglitz, 2023; Diwan et al, 2023). Assessing the present discounted value of a bond that will be issued in a debt restructuring presents an obvious problem: the choice of a discount factor for a security that has not been issued yet. The choice of such a discount factor is often associated with disagreements between the debtor and its creditor. In a scenario that assumes that a restructuring is effective for restoring debt sustainability, the discount factor should be close to the risk-free rate. However, this is not what happens in practice. Typically, creditors claim that the discount factor should be much higher than the risk-free rate, using standard credit rating categories. For instance, for Zambia, a CCC rating implied the use of a discount factor of about 10 per cent for measuring haircuts on the restructured debt in its last restructuring. The use of a high discount factor should instead be seen as an indication that the restructuring is not deep enough to restore debt sustainability. Interestingly, calculations of numbers that economically do not mean much may have political consequences: when creditors’ framing prevails, public debates over restructurings are framed in the wrong terms. The country is told that a large fraction of the debt is being written down. In reality, using the correct discount rate, the creditor loss may be nonexistent, and the actual write-down may be smaller than what is needed to restore debt sustainability. At the same time, the financial press abroad often excoriates the government for a presumably large debt write-down. A DSA is supposed to guide a restructuring so that sustainability is restored and there is a low probability of default ex-post, i.e. after the restructuring. However, the IMF often uses interest rates that assume that the market will still deem the debt as risky even when market access is restored. That way of proceeding entails the 10 The adoption of capital account regulations eliminates the full arbitrage that leads to the interest rate parities for securities denominated in different currencies, implying that the real returns on domestic currency bonds will not move proportionally with market yields on foreign currency bonds. Series: Debt Sustainability Assessments& Their Role in the International Financial Architecture 12