LONDON (Reuters). Despite the fact that restructuring local sovereign debt will be a more important role in emerging market economies, the International Monetary Fund(IMF) recommends governments take precautions to avoid financial losses for local investors and banks.

According to the IMF’s Peter Breuer and Anna Ilyina (Hoang Pham), the percentage of local debt that is issued by emerging nations has increased from 31% to 46% during the past 20 years, a blog post published Wednesday showed this.

The authors write that domestic debt restructuring might be simpler to achieve. They also suggest changing domestic law terms for debt agreements.

Also, this would prevent some expensive things such as losing access to capital markets international during restructuring of external debt. These are often contracts under New York and English laws.

Due to the large amount of domestic debt, sovereign debt distress could easily spread to banks, pension funds and households. Authorities must take preventive measures to minimize spillovers.

According to the authors, “For instance, banks can limit the effect by extenuating maturities and/or lowering interest rates rather than decreasing the nominal amount outstanding claims.” “Losses should be recognized early and may need to be paired with a strategy to restore banks’ capital buffers.”

As well as emergency support for lenders who need to convert liquid assets into cash, temporary measures may also be required to stop “panic-driven capital withdrawals” and capital outflows.

The IMF said in June that seven of the world’s poorest countries were in debt distress https://www.imf.org/external/Pubs/ft/dsa/DSAlist.pdf while another 29 countries were at high risk of becoming so. Recent years have seen a number of countries restructure both local and external debt burdens, such as Argentina in 2020 https://www.reuters.com/article/argentina-debt-idUSKBN25S4HC.