8
Suspension and Cancellation. The World Bank may suspend disbursements and, in
some cases, may cancel the loan in response to any of the following: “payment failure,”
“performance failure” (referencing transaction-specific terms), fraud, corruption,
misrepresentation, unauthorized assignment of obligations, ineligibility to draw,
withdrawal from membership in the World Bank or the IMF, “cross-suspension” of
other World Bank loans, or any of a series of events that convince the lender that the
program is unlikely to be carried out. The latter include material financial, policy, and
legal changes. Suspension and even cancellation are distinct from default under market
instruments. The focus is on the policy objectives and the use of proceeds consistent
with the lender’s mandate. Ideally, the prospect of suspension of all World Bank
disbursements across the board should bring the authorities to the negotiating table and
fix the underlying problem. However, it is not meant to bring about the collapse of the
sovereign’s debt structure through cross-default.
Refund. The World Bank can require sovereigns to refund past disbursements if it
determines that they were used in a manner inconsistent with its loan agreement,
typically due to fraud or corruption. The 2017 revision made clear that the refund
requirement was not intended, and was not perceived in the market, as a cross-default
trigger for bonds and loans.
Acceleration. The World Bank can demand immediate repayment of a disbursed loan
in the event of a payment default on any of its exposure to the sovereign, subject to a
30-day grace period, and in the event of a performance default, subject to a 60-day grace
period. Unauthorized assignment, material adverse change, failure of co-financing, and
events specified in transaction-specific agreements may trigger acceleration under some
circumstances. Of all the sanction triggers specified in Article VII of General
Conditions, the term “default” is only used in the third category, “Events of
Acceleration,” which is understood to interact with cross-default terms in loan and bond
contracts.
7.1.4. Domestic Debt—No Definition, No Default?
11. Debt governed by the sovereign issuer’s domestic law typically has few express terms. For
example, it is not customary for domestic-law debt to include a litany of EoD. As a result, it
can be difficult to identify a clear contractual definition of default on domestic debt. The
relevant contractual terms may be incorporated by reference to statutes and administrative
regulations, which vary in form and substance among different countries (Addo Awadzi 2015).
For instance, the Uniform Offering Circular is a U.S. federal regulation that sets out terms and
conditions for most tradable U.S. Treasury securities. Out of its 34 sections, 30 spell out
auction procedures; one tells when the creditors are paid, and none address substantive
modification or default (31 C.F.R. 356 and 356.30).
12. This does not mean that governments cannot default on domestic debt. Instead, default and
remedies for default are a matter of background law—contract, constitutional, and
administrative, among others. For instance, in most jurisdictions, a debtor that simply fails to
pay as promised would be in default. However, as Austin (2015) illustrates with examples of
payment disruptions on U.S. Treasury securities in 1814, 1933, and 1979, missing domestic