Chapter

II. Cross-Country Experience with Recent Sovereign Debt Restructurings

Author(s):
Harald Finger, and Mauro Mecagni
Published Date:
April 2007
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To provide the context, the initial conditions that led to a restructuring of sovereign debt are examined; then the scope and salient features of the debt restructurings are reviewed; and, finally, the outcome of the debt restructurings and debt dynamics around the time of restructuring are presented.

Initial Conditions

An overview of key debt indicators prior to the restructurings reveals substantial differences in the level and composition of public debt across the eight countries. In particular, two years prior to the restructuring of sovereign debt, total public debt as a share of GDP ranged from 30 percent in the case of Ukraine to 99 percent in the case of Moldova (2002), and the average debt-to-GDP ratio was 62 percent (see Table 1).5 In countries that eventually restructured preemptively to avoid default, debt ratios were between 30 percent and 99 percent, whereas in Ecuador and Russia, which restructured after a sovereign default, debt ratios stood at 66 percent.6 In terms of the composition of debt, several countries had a very large share of foreign-currency-denominated debt (in Argentina, Ecuador, and Russia, the share was over 95 percent in the central year of restructuring (labeled “t” in Table 1); in Uruguay, it was 91 percent), whereas in the Dominican Republic, Moldova, Pakistan, and Ukraine, the share was somewhat lower (below 85 percent).

Table 1.Public Debt in Recent Cases of Sovereign Debt Restructuring(In percent of GDP)
Public Debt
t2004
Central Year1t–22t–12Before restructuring proj.3After restructuring proj./est.2Est.4Before restructuring proj.3After restructuring proj.2Est.4
Preemptive cases5
Ukraine199929.941.839.255.566.731.340.527.1
Pakistan1999/2000689.491.994.491.683.872.886.467.9
Argentina7
Megaswap and Phase I200147.750.853.562.062.252.4119.0133.9
Moldova200298.784.481.774.473.948.3
Uruguay200345.089.0111.0105.0104.493.097.092.5
Dominican Republic200555.753.949.146.346.352.153.954.1
Post-default cases
Ecuador200065.9120.4172.4123.691.4102.059.747.2
Russia200066.093.3107.273.457.678.545.321.7
Moldova200474.460.656.948.348.356.948.348.3
Argentina8
Global debt exchange2005139.8129.478.278.2134.5129.4129.4
Sources: IMF staff reports; World Economic Outlook database; and own calculations.

Central year of debt-restructuring episode, hereinafter referred to as t; t–2 denotes two years before restructuring, and t–1 denotes one year before restructuring.

As reported in IMF first staff report after restructuring, or inferred (bold italics).

As reported in last IMF staff report before restructuring, or inferred (bold italics).

Actual or latest estimate.

Including Ukraine, which was in technical default for a short period; Moldova, which incurred arrears toward Gazprom but remained current on its Eurobond obligations; and the Dominican Republic, which was in arrears to its London Club creditors but remained current on its international bonds.

Pakistan’s fiscal year, July to June; 2004 column refers to 2003/04. Latest estimates are lower than previous estimates, in part because of an upward revision in the GDP series.

Combined public sector.

2005 projections are based on the assumption of full creditor participation in the debt exchange; data cover the federal government only.

Sources: IMF staff reports; World Economic Outlook database; and own calculations.

Central year of debt-restructuring episode, hereinafter referred to as t; t–2 denotes two years before restructuring, and t–1 denotes one year before restructuring.

As reported in IMF first staff report after restructuring, or inferred (bold italics).

As reported in last IMF staff report before restructuring, or inferred (bold italics).

Actual or latest estimate.

Including Ukraine, which was in technical default for a short period; Moldova, which incurred arrears toward Gazprom but remained current on its Eurobond obligations; and the Dominican Republic, which was in arrears to its London Club creditors but remained current on its international bonds.

Pakistan’s fiscal year, July to June; 2004 column refers to 2003/04. Latest estimates are lower than previous estimates, in part because of an upward revision in the GDP series.

Combined public sector.

2005 projections are based on the assumption of full creditor participation in the debt exchange; data cover the federal government only.

Notwithstanding considerable divergence in pre-restructuring levels and composition of debt, the majority of countries experienced a surge in debt ratios in the run-up to the restructurings. Total debt grew rapidly in the Dominican Republic, Ecuador, Russia, Ukraine, and Uruguay.7 A combination of factors was responsible, including high and increasing public interest obligations (Ecuador and Uruguay), rapid currency depreciation (the Dominican Republic, Ecuador, Russia, Ukraine, and Uruguay), declining economic activity (Ecuador, Russia, Ukraine, and Uruguay), and the fiscal cost of supporting a troubled financial sector (the Dominican Republic, Ecuador, and Uruguay). By contrast, Argentina’s and Pakistan’s debt levels did not increase much before the crisis and Moldova’s debt ratio was in decline.8 In the case of Argentina, overvaluation of the exchange rate before the country abandoned its currency board may have contributed to mask debt-related vulnerabilities. Moreover, the subsequent overshooting of the exchange rate may have overstated near-term debt ratios and, hence, vulnerabilities.

High and/or increasing debt levels gave rise to debt-servicing difficulties in all cases, despite differing economic circumstances and backgrounds.

  • Market confidence in Russia declined in 1998, when the oil-producing economy suffered from low petroleum prices, and a weakening ability to implement domestic policies that would address the fiscal imbalances exacerbated investor concerns in the wake of the Asian crisis. This led to a capital account crisis that culminated in the devaluation of the ruble, considerable problems rolling over the large stock of treasury bills held by foreign investors, and, ultimately, default.9 Gross reserves fell to 15 percent of short-term debt in 1998, compared with 39 percent in 1996.10

  • Neighboring Ukraine was pulled into crisis partly by the problems in Russia, which worsened Ukraine’s market access at a time when high debt-service payments were falling due. While attracting liquidity was the immediate concern, at a debt level of 42 percent of GDP in 1998, there were few solvency concerns. The authorities adjusted the exchange rate band several times in 1998 and finally floated the currency in March 1999. In the event, liquidity became tight, with gross reserves falling to 14 percent of short-term debt at end-1998, compared with 148 percent in 1996. Although Ukraine remained current on its debt-service obligations to private creditors,11 in 2000 it began to fall into arrears on its debt-service payments to official bilateral creditors.

  • In 1998, Ecuador, like Russia, was adversely affected by low oil prices and weaker investor confidence in the emerging market asset class. In addition, the country was hit by a banking crisis. These factors combined led to a devaluation of the sucre in early 1999 and Ecuador’s subsequent default on its debt to private creditors. The public sector debt ratio had surged, and the public sector debt-service burden had increased rapidly (from 8.3 percent of GDP in 1998 to 18.1 percent of GDP in the first quarter of 2000).12 Ecuador had been in arrears to Paris Club creditors since 1996. In the run-up to the crisis, gross reserves declined from 50 percent of short-term debt in 1996 to 30 percent in 2000.

  • In the 1990s, Pakistan’s external debt-service payments increased faster than its export earnings (debt service as a share of export receipts rose from 26 percent in 1992 to 34 percent in 1998). Pakistan entered a liquidity crisis following its nuclear tests in 1998, when it became subject to international sanctions that affected both its current and its capital accounts. In the event, debt-service payments to official bilateral creditors were suspended in 1998, but Pakistan remained current with respect to its obligations to private creditors. By June 1998, gross reserves dropped below 10 percent of short-term debt, compared with 27 percent in June 1996.

  • In Argentina, three years of recession and difficulties containing the fiscal deficit resulted in a confidence crisis, leading to soaring sovereign spreads and doubts about the sustainability of the convertibility regime in 2001. At end-2001, the ratio of gross reserves to short-term debt had declined to 31 percent, compared with 48 percent in 1999. Public sector debt service increased from 38 percent of exports in 1998 to 66 percent in 2001. After undergoing two debt operations, in December 2001 Argentina defaulted on government debt owed to private and official bilateral creditors.

  • In Moldova, public debt built up in the late 1990s owing to a combination of sustained fiscal deficits, negative GDP growth, and a sharp depreciation of the leu following the Russian crisis in 1998. The debt ratio improved somewhat after 1998, but debt-servicing difficulties intensified, partly as a result of increasing amortization payments falling due. Public external debt-service obligations increased from 17 percent of exports in 1998 to 23 percent in 2002. Gross reserves dropped to 39 percent of short-term debt in 2002. Moldova had been in arrears on some of its external debt-service obligations and energy payments to official bilateral creditors as well as to Gazprom since 1994 but remained current on its Eurobond obligations.

  • Vulnerabilities in Uruguay had been building up long before the crisis, owing to a long recession that had begun in 1999, persistent fiscal deficits, and an inability to deal with banking system weaknesses. Debt and debt-service problems surfaced after the 2002 banking crisis (triggered by massive withdrawals of Argentine and, subsequently, domestic foreign-currency deposits) and the ensuing change in the exchange rate regime. External debt-service obligations increased from 36 percent of exports in 2000 to 56 percent in 2002. Gross reserves fell from 34 percent of short-term debt in 2000 to 16 percent in 2002. Given the high level of public debt, there were some concerns about solvency. Uruguay did not default on its commercial or its official debt-service obligations.

  • In the Dominican Republic, the discovery of fraud and losses in the banking system triggered a banking crisis in 2002/03. Private deposits were withdrawn, prompting large official injections of liquidity. Inadequate fiscal-management practices undermined the intended fiscal restraint, setting off a vicious circle of high inflation, peso depreciation, growth of public debt, and capital flight. Gross reserves fell from 151 percent of short-term debt to 31 percent in 2003. Debt-service obligations increased from 11.6 percent of merchandise export earnings in 2001 to 21.5 percent in 2005 (before restructuring). External arrears began to accrue to the Paris Club in 2003 and to commercial banks in 2004. However, the Dominican Republic remained current on its external bond obligations. During the crisis, public debt peaked at 56 percent of GDP in 2003. The country’s debt restructuring has addressed liquidity, rather than solvency, concerns, resolving the bunching of debt-service payments falling due.

The Scope and Outcome of Sovereign Debt Restructuring with the Private Sector

The scope and outcome of sovereign debt restructuring with the private sector varied quite considerably across the eight countries, with outcomes differing according to whether the restructuring took place preemptively or following a default.13 Countries that restructured preemptively generally received less debt reduction than those that restructured post-default but also experienced smaller output declines, on average.14

  • The scope of debt restructuring depended on the share of debt owed to private creditors (see Tables 2 and 3). Argentina (2001 and 2005), Ecuador, and Uruguay restructured approximately half of their public debt. By contrast, in countries whose debt was owed largely to official creditors, the scope for debt restructuring with the private sector was more limited (parallel debt operations with the Paris Club are summarized in Table 4).

  • In preemptive restructuring cases, debt relief was provided largely by extending maturities, with limited reduction in coupon payments. Measured in terms of the decline in the net present value (NPV) of the restructured debt, debt reduction was relatively small (see Table 5). With the exception of Argentina (2001), the preemptive cases received NPV reductions of no more than 8 percent, when evaluated at a common discount rate of 10 percent.15 In Argentina’s megaswap, the NPV value increased by 28 percent, while the subsequent Phase I restructuring resulted in an NPV reduction of 32 percent. Jointly, the two restructurings resulted in an NPV reduction of 10 percent. The four post-default cases received NPV reductions of 25 percent (Ecuador), 44 percent (Russia), 58 percent (Moldova’s 2004 agreement), and 75 percent (Argentina’s 2005 global debt exchange).16

  • The difference between preemptive and post-default cases has been more pronounced with respect to the reduction of principal outstanding (see Tables 6 and 7). Among the preemptive cases, no country received more than a 6 percent reduction of nominal principal (some countries even saw a small increase), while post-default debt operations yielded substantial reductions.

  • While countries that restructured their debt post-default have tended to receive greater debt reductions than those that restructured preemptively, they also experienced, on average, deeper economic contractions.17 Real GDP in the preemptive restructuring cases contracted by 3.6 percent, on average, in the year of lowest growth during the crises (year t in Figure 1), compared with 7.5 percent in the post-default cases.18

  • In countries that could be characterized as exhibiting solvency problems, the amount of debt relief was greater when the restructuring took place following a default. In this context, the decision to restructure preemptively may have had some impact on the debtors’ incentives to reach an agreement. In particular, failure to reach an agreement with creditors could subject the debtor to significant reputational, political, and economic costs in the event that default could not be avoided. Under these circumstances, sovereign debtors may acquiesce to debt-restructuring terms that satisfy their creditors but are not sufficient to restore sustainability. The factors that affect the negotiation strategies of creditors and debtors are, however, broad and complex. It is not possible to disentangle the impact of a decision to default from the broader economic circumstances surrounding that decision, including the more severe recessions endured by post-default countries.

Table 2.Summary: Scope of Debt Restructuring
Debt Affected
Period(percent of GDP)(percent of public debt)
Preemptive cases
Ukraine1998–200012.820.9
Pakistan19991.01.0
Argentina200130.048.1
MegaswapMay–June 200111.017.6
Phase INov–Dec 200119.030.5
Moldova20022.43.0
Uruguay200348.349.3
Dominican Republic20057.014.3
Post-default cases
Ecuador1999–200049.445.0
Russia1998–200023.739.3
Moldova20044.38.9
Argentina
Global debt exchange1200559.753.1
Source: IMF staff reports.

Calculations are based on inclusion of all past due interest.

Source: IMF staff reports.

Calculations are based on inclusion of all past due interest.

Table 3.Scope of Debt Restructuring
UkraineFollowing three rounds of selective restructuring of private claims in 1998 and 1999 (together covering about $800 million) but faced with substantial maturities of bonds falling due in the immediate future, Ukraine launched a comprehensive exchange offer in February 2000. This offer involved four different Eurobonds and Gazprom bonds maturing in 2000 and 2001 covering principal outstanding of $3.3 billion.1 In sum, private sector restructuring covered 21 percent of Ukraine’s public debt. Regarding Paris Club debt, an agreement for rescheduling was reached in July 2001 (see Table 4).
PakistanThe restructuring of sovereign debt to private creditors took place as a requirement under the comparability-of-treatment clause for the January 1999 Paris Club rescheduling. Only a small share of external debt was owed to private creditors. Consequently, the scope of private sector restructuring was too small to have a sizable impact on debt sustainability. In addition to the rescheduling of commercial loans (see Appendix II), Eurobonds falling due between December 1999 and February 2002 with a face value of $608 million, equivalent to about 1 percent of GDP, were restructured. In 2001, Pakistan benefited from two additional Paris Club reschedulings, providing it with substantial debt-service relief.
ArgentinaPrior to the default in late 2001, two rounds of debt treatment were undertaken: a debt swap (megaswap) involving debt equivalent to 11 percent of GDP, followed by a restructuring of debt held mainly by domestic investors (Phase I), covering debt equivalent to 19 percent of GDP. More than three years after the default, in 2005, Argentina offered to exchange 152 different defaulted securities held by investors both inside and outside Argentina, with a face value equivalent to 60 percent of GDP (global debt exchange). The rescheduling of official bilateral debt is yet to take place.
MoldovaIn a piecemeal strategy, notable steps included the restructuring in 2002 of a single Eurobond with outstanding principal of $39.7 million, or 3 percent of total debt, and the 2004 agreement with Gazprom on a settlement of defaulted promissory notes with a face value of $111.1 million (9 percent of total debt).2 Moldova’s external debt, like Pakistan’s, was owed largely to official creditors, limiting the scope for debt restructuring to the private sector and its possible impact on debt sustainability. No Paris Club rescheduling was agreed, but Moldova concluded bilateral agreements with China, Germany, Romania, and Russia.
UruguayIn a single exchange in 2003, all foreign-currency-denominated sovereign bonds were restructured, including $3.6 billion in Eurobonds, $250 million in Samurai bonds, and $1.6 billion in domestic bonds, totaling nearly 50 percent of GDP.
Dominican RepublicThe restructuring of debt held by private creditors was motivated, in part, by the comparability-of-treatment provision of the April 2004 Paris Club treatment (see Table 4). The restructuring covered the majority of privately held external debt: $1.4 billion (12 percent of total debt) in two external bonds and $175 million in obligations to commercial banks.
EcuadorFollowing the default in 1999, Ecuador launched a comprehensive debt restructuring that included debt amounting to almost 50 percent of GDP. In addition to Brady and Eurobond debt with a face value of $6.5 billion, the debt operation included domestic public debt maturing between September 1999 and end-2000 amounting to $346 million, and external credit lines in closed domestic banks of about $80 million. Ecuador reached agreement for a Paris Club rescheduling in September 2000.
RussiaFollowing the August 1998 sovereign default, the successive rounds of rescheduling until February 2000 covered debt equal to 24 percent of GDP. This included ruble-denominated debt, arrears relating to principal payments on the MinFin-3 bond, and the entire stock of Soviet-era debt owed to London Club creditors. An agreement for a Paris Club rescheduling was reached in August 1999, providing additional relief to Russia (see Table 4).

In the run-up to this exchange offer, Ukraine deferred selected principal payments to respect intercreditor equity and, as a consequence, was briefly in technical default during the period of the exchange offer.

Other elements of Moldova’s strategy are described in Appendix II.

In the run-up to this exchange offer, Ukraine deferred selected principal payments to respect intercreditor equity and, as a consequence, was briefly in technical default during the period of the exchange offer.

Other elements of Moldova’s strategy are described in Appendix II.

Table 4.Recent Paris Club Reschedulings
Amount Treated
Date of TreatmentTerms(US$ million)(percent of debt owed to Paris Club)Consolidation Period (in months)Grace Period (in years) ODA/Non-ODAMaturity (in years) ODA/Non-ODA
Preemptive cases
UkraineJuly 2001Classic58052.721312
PakistanDecember 2001Ad hoc12,50093.83615/3–538/18–23
January 2001Houston1,75214.4121020
January 1999Houston3,25426.71210/320/18
Moldova (no reschedulings, but bilateral agreements were reached with China, Germany, Romania, and Russia)
Uruguay (no reschedulings)
Dominican RepublicOctober 2005Classic1376.712512
April 2004Classic19312.412512
Post-default cases
EcuadorJune 2003Houston813.01210/320/18
September 2000Houston88035.01210/320/18
RussiaAugust 1999Ad hoc8,11315.96219
Argentina (no reschedulings since 2001)
Source: Paris Club.

Note: ODA denotes official development assistance.

Source: Paris Club.

Note: ODA denotes official development assistance.

Table 5.Debt Reduction in Net Present Value (NPV) of Recent Debt Restructurings(In percent)
OperationNPV Reduction1Discount RateSource
Preemptive cases
UkraineSep 1998 t-bill restructuring
Oct 1998 commercial bank agreement
Aug 1999 commercial bank agreements
Apr 2000 Eurobond and Gazprom bond restructuring5102
PakistanNov 1999 exchange offer27213
810Estimate
ArgentinaJun 2001 megaswap–2approx. 154
–2810Estimate
Nov 2001 Phase I restructuring35154
32104
MoldovaJune 2002 exchange offer610Estimate
08Estimate
UruguayMay 2003 debt exchange20165
13125
8102
Dominican RepublicApril/May 2005 debt exchange110Estimate
Oct 2005 commercial bank agreements210Estimate
Post-default cases
EcuadorOct 1999 domestic debt restructuring94
010Estimate
Aug 2000 Brady and Eurobond restructuring2510Estimate
RussiaMay 1999 t-bill restructuring40–7567
Nov 1999 MinFin-3 restructuring41–6367
Aug 2000 London Club agreement408
4410Estimate
MoldovaApr 2004 Gazprom agreement5810Estimate
Argentina2005 Global Debt Exchange75109

Negative numbers indicate an increase in the net present value of debt.

Kozack (2005).

IMF (2001).

Various unpublished IMF studies.

Uruguay: 2003 Article IV Consultation and Third Review Under the Stand-By Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria—Staff Report; Staff Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uruguay, IMF Country Report No. 03/247. Available on the IMF’s Web site, www.imf.org/external/pubs/ft/scr/2003/cr03247.pdf.

Based on exit yields.

Sturzenegger and Zettelmeyer (2005).

Russian Federation: Staff Report for the 2000 Article IV Consultation and Public Information Notice Following Consultation, IMF Staff Country Report No. 00/145. Available on the IMF’s Web site, www.imf.org/external/pubs/ft/scr/2000/cr00145.pdf.

Argentina: 2005 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Argentina, IMF Country Report No. 05/236. Available on the IMF’s Web site, www.imf.org/external/pubs/ft/scr/2005/cr05236.pdf.

Negative numbers indicate an increase in the net present value of debt.

Kozack (2005).

IMF (2001).

Various unpublished IMF studies.

Uruguay: 2003 Article IV Consultation and Third Review Under the Stand-By Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria—Staff Report; Staff Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uruguay, IMF Country Report No. 03/247. Available on the IMF’s Web site, www.imf.org/external/pubs/ft/scr/2003/cr03247.pdf.

Based on exit yields.

Sturzenegger and Zettelmeyer (2005).

Russian Federation: Staff Report for the 2000 Article IV Consultation and Public Information Notice Following Consultation, IMF Staff Country Report No. 00/145. Available on the IMF’s Web site, www.imf.org/external/pubs/ft/scr/2000/cr00145.pdf.

Argentina: 2005 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Argentina, IMF Country Report No. 05/236. Available on the IMF’s Web site, www.imf.org/external/pubs/ft/scr/2005/cr05236.pdf.

Table 6.Nominal Principal Reduction in Recent Debt-Restructuring Cases
Nominal Principal Reduction1Up-front Cash (percent of restructured debt)
Period(percent of GDP)(percent of restructured debt)Inclusion of PDI2
Preemptive cases
Ukraine1998–20000.00.04.9Yes
Pakistan19990.0–1.00.03
Argentina2001–0.9–2.90.03
MegaswapMay–June 2001–0.9–7.80.03
Phase INov–Dec 20010.00.00.03
Moldova20020.26.410.03
Uruguay20030.51.00.03
Dominican Republic20050.00.01.9Yes4
Post-default cases
Ecuador1999–200018.437.33.8Yes
Russia1998–20004.117.20.4Yes
Moldova20042.557.942.1Yes
Argentina
Global debt exchange200537.056.00.9Partly5

Source: IMF staff reports.

Negative numbers indicate an increase in principal.

Past due interest.

Not applicable; case did not involve arrears.

London Club agreement included up-front clearance of $30 million in arrears.

In the offer, only past-due interest through end-2001 was recognized.

Source: IMF staff reports.

Negative numbers indicate an increase in principal.

Past due interest.

Not applicable; case did not involve arrears.

London Club agreement included up-front clearance of $30 million in arrears.

In the offer, only past-due interest through end-2001 was recognized.

Table 7.Results of Debt Restructurings1
Preemptive restructurings to avoid default
UkraineThe restructurings of sovereign debt did not lead to a reduction in nominal principal obligations. In NPV terms, estimates are available only for the 2000 restructuring, for which the NPV reduction was limited (5 percent of restructured debt).
PakistanEurobond obligations were exchanged for a U.S. dollar-denominated six-year Eurobond with three years’ grace and a 10 percent coupon. The restructuring led to a nominal increase in principal obligations. In NPV terms, there was an 8 percent debt reduction.2
Argentina (2001)The megaswap of June 2001 resulted in a small increase in the debt stock. Moreover, while providing debtservice relief in the short term, it was costly: the NPV of exchanged debt increased by about 28 percent. The November/December 2001 Phase I restructuring, completed under the imminent threat of default, did not involve any reduction in principal but yielded a 32 percent NPV reduction on restructured principal. Given that the Phase I operation covered a larger portion of debt ($51 billion) than the megaswap ($29.5 billion), together the two debt exchanges resulted in a net NPV reduction of approximately 10 percent.
Moldova (2002)The 2002 debt exchange resulted in a principal reduction of $2.6 million (6.4 percent of restructured debt) and featured an up-front cash payment of $3.97 million (10 percent of restructured debt). In NPV terms, the restructuring resulted in a haircut of 6 percent.
UruguayThe voluntary bond exchange of April/May 2003, involving $5 billion in outstanding debt, resulted in a nominal reduction of principal of $49 million, equivalent to 1.0 percent of the exchanged bonds. In NPV terms, there was a debt reduction of about 8 percent.3
Dominican RepublicIn line with the fact that the Dominican Republic was faced largely with a liquidity rather than a solvency problem, the debt-restructuring operations did not feature a reduction in principal and yielded a negligible NPV reduction (bond exchange: 1 percent; commercial banks: 2 percent).
Post-default restructurings
EcuadorThe restructuring of external public debt to private creditors led to a principal reduction of nearly 40 percent (equivalent to 18 percent of GDP), while domestic public debt was rolled over without a reduction of principal. For the external debt operation, there was an NPV reduction of 25 percent, while there was no NPV reduction on domestic debt. Past due interest was fully recognized in the offer.
RussiaThe restructuring operations of Soviet-era debt held by the London Club involved a principal reduction of approximately 17 percent of total restructured debt (equivalent to 4.1 percent of GDP), with the haircut in NPV terms estimated at 44 percent (applying a 10 percent discount factor).4 As in the case of Ecuador, past due interest was fully recognized. Russia’s earlier debt operations had not involved haircuts on principal.
Moldova (2004)Moldova’s 2004 Gazprom agreement led to a substantial reduction in principal outstanding as well as in the NPV of outstanding claims (close to 60 percent). Past due interest was fully taken into account.
Argentina (2005)The 2005 global debt exchange yielded a principal reduction of 56 percent (equivalent to 37 percent of GDP) and an NPV reduction of 75 percent. The high amounts of debt reduction were reached, in part, by not explicitly recognizing past due interest accumulated since 2002. The participation rate in the global debt exchange was 76 percent, below levels reached in other debt exchanges, and almost $20 billion remains in arrears.5

Sources: IMF staff reports; and other documents.

Further details are presented in Appendix II.

Evaluating the reduction at a higher discount rate, as done in IMF (2001), leads to a much higher debt reduction.

Although Uruguay’s debt stock remained high after the restructuring (see Chapter III), the authorities chose not to propose a deeper haircut given that their primary consideration was to improve the debt profile by lengthening maturities, avoid default, and minimize contractual interference, thus aiming at a collaborative process and a voluntary exchange in an effort to support market confidence.

A factor facilitating the high debt relief was the change in the obligor of many original claims (Vneshekonombank).

Principal arrears and past-due interest recognized through end-2001.

Sources: IMF staff reports; and other documents.

Further details are presented in Appendix II.

Evaluating the reduction at a higher discount rate, as done in IMF (2001), leads to a much higher debt reduction.

Although Uruguay’s debt stock remained high after the restructuring (see Chapter III), the authorities chose not to propose a deeper haircut given that their primary consideration was to improve the debt profile by lengthening maturities, avoid default, and minimize contractual interference, thus aiming at a collaborative process and a voluntary exchange in an effort to support market confidence.

A factor facilitating the high debt relief was the change in the obligor of many original claims (Vneshekonombank).

Principal arrears and past-due interest recognized through end-2001.

Figure 1.GDP Growth Before and After Crises

(In percent)

Source: World Economic Outlook.

Note: “t” denotes year of weakest output growth during crisis.

Debt Dynamics Around the Time of Restructuring

Debt dynamics around the time of restructuring were characterized by increases in debt in the run-up to the crisis, followed by a reduction in the aftermath, but experience has differed markedly among the cases. Figures 2 and 3 show the debt dynamics around the restructuring period for preemptive and post-default cases, respectively, comparing actual debt ratios to prerestructuring, post-restructuring, and recent IMF projections. The figures show the build-up of public debt-to-GDP ratios through the crisis in each case. In Argentina, Ecuador, Moldova, Pakistan, Russia, Ukraine, and Uruguay, public debt ratios fell considerably following the crisis. The Dominican Republic’s debt ratio has also started to decline since its recent crisis.

Figure 2.Evolution of Public Debt in Cases of Preemptive Restructuring

Source: IMF staff reports.

Note: Scales vary across countries, reflecting differences in the range of debt levels.

1 October 2005 data contain a substantial revision of historical GDP data, leading to reduced debt-to-GDP ratios.

Figure 3.Evolution of Public Debt in Cases of Post-Default Restructuring

Source: IMF staff reports.

Key factors driving post-restructuring debt dynamics included fiscal performance, economic growth, real interest, and exchange rates.19 In cases where sufficient time has passed since the restructuring episodes, actual debt dynamics can be compared with projections in IMF staff reports following the restructurings.20Figure 4 shows a comparison of changes in debt-to-GDP ratios in the post-restructuring period (evolution from the respective central year of restructuring until 2004) for Ecuador, Pakistan, Russia, Ukraine, and Uruguay. In a majority of cases (Pakistan, Russia, Ukraine, and Uruguay), debt dynamics were better than anticipated at the time of restructuring.21

Figure 4.Change in Debt-to-GDP Ratios, Post-restructuring Period

(In percentage points)

Source: IMF staff reports.

A decomposition of debt dynamics sheds light on the reasons for the better-than-expected performances. Debt dynamics as projected after the restructurings are decomposed and compared with an ex post decomposition from recent IMF debt-sustainability assessments. Analytically, the decomposition—based on the public-sector-debt-sustainability template for middle-income countries—helps explain the impact of changes in the primary balance, the exchange rate, and the interest-growth differential on debt dynamics (see Appendix III for a detailed analysis).

The analysis shows that in their post-restructuring periods, two countries (Russia and Uruguay) outperformed the primary fiscal path projected by IMF staff following the restructurings.22 Three countries (Pakistan, Ukraine, and Uruguay) had firmer exchange rates than implicit in IMF projections, helping to contain the debt-to-GDP ratio more quickly than anticipated. Moreover, in Pakistan, Russia, and Ukraine, the real interest-growth differential turned out to be more favorable than expected. Overall, these factors contributed to better debt dynamics than anticipated in four out of the five cases.

A part of Moldova’s and Pakistan’s debt was on concessional terms.

Past experience shows that approximately 60 (40) percent of entries into sovereign debt crises occurred when debt levels in the year preceding the crises exceeded 39 (59) percent of GDP (see Chapter III).

In the Dominican Republic, the debt ratio more than doubled between 2002 and 2003.

In Argentina, the debt ratio surged only in 2002, after the abandonment of the convertibility regime. In Pakistan, the depreciation of the rupee was relatively small (in the two years before the restructuring, the rupee depreciated by 12.6 percent against the U.S. dollar), and the economy continued to grow despite fiscal tightening. Moldova’s debt situation was helped mainly by negative real interest rates and by primary surpluses. However, Moldova faced increasing debt-servicing difficulties, which were due, in part, to increasing amortization payments falling due.

Russia defaulted on its t-bill obligations in August 1998, on restructured loans (PRINs) in December 1998, on the MinFin-3 bond in May 1999, and on interest arrears notes (IANs) in June 1999. Russia had been in arrears to Paris Club creditors since 1998 (regularized in July 1999), and to some non–Paris Club bilaterals since 1996, in pursuit of treatment comparable to the 1996 Paris Club agreement.

In this paragraph, short-term debt is defined on a remaining-maturity basis and includes external arrears.

Except for a short period during the time of the exchange offer in 2000; see Table 3, footnote 1.

Ecuador defaulted in August/September 1999 on all Brady and Eurobond debt, all domestic public debt maturing by end-2000, and external credit lines in closed banks.

The role of the IMF during the restructuring process in the different cases is summarized in Appendix I.

For an evaluation of the differences between individual restructured instruments in recent cases of restructuring, see Sturzenegger and Zettelmeyer (2005).

Reported values depend critically on the discount rate applied. As restructurings generally extend the maturity profile and/or reduce coupon rates, a higher discount rate will normally be associated with a higher NPV reduction. In this paper, a common rate of 10 percent is used for ensuring comparability across countries. By contrast, for general country work, using a range of discount rates, from the country’s medium-term nominal GDP or export growth to its projected borrowing costs under noncrisis conditions, is recommended. For a fuller discussion on the choice of discount rates, see Kozack (2005).

Debt reduction in Argentina is calculated on the basis of total claims (principal and past due interest), assuming full creditor participation.

While countries may find it harder to avoid a default during a severe economic contraction, they generally make every effort to remain current on their sovereign obligations. The economic, social, and political costs of sovereign default can be high, as a default is likely to disrupt market access, which may lead to disorderly fiscal and balance of payments adjustments. Against this background, countries experiencing debt-servicing difficulties and emerging pressures in their external accounts have an incentive to reach agreement with creditors on preemptive debt restructurings to avoid default. In addition to alleviating liquidity pressures, a preemptive restructuring could forestall or help reduce possible solvency problems by providing the time and scope for adopting corrective measures that, among other things, foster economic growth and provide for greater upside potential.

By contrast, the countries that restructured post-default generally rebounded more quickly following the contraction. In the year after the trough, real GDP grew 6 percent, on average, in the post-default cases but only 1 percent in the preemptive restructuring cases. Countries defaulted on official bilateral obligations more frequently or earlier than on private sector claims. Ecuador and Russia defaulted on bilateral official debt before defaulting on private sector claims, while the Dominican Republic, Moldova, Pakistan, and Ukraine defaulted on bilateral official obligations but remained current on their Eurobonds through their financial crises. Argentina defaulted on both types of obligations at the same time, while Uruguay remained current on both.

Comparing the evolution of these factors with staff projections made at the time of restructuring can shed light on the reasons for relatively favorable or unfavorable debt dynamics since the restructuring (see Appendix III).

This analysis is confined to comparing outcomes with projections made by IMF staff after the restructurings. The staff’s analysis may have differed from private sector market participants’ views.

Detailed specifications are given in Appendix III.

Post-restructuring periods encompass the years after the restructuring, up to and including 2004 (see Appendix III).

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