- Harald Finger, and Mauro Mecagni
- Published Date:
- April 2007
The purpose of this paper was to review recent experience with the restructuring of sovereign debt owed to private creditors and to try to determine whether the objective of restoring sustainability has been achieved. Three broad criteria have been applied in evaluating whether countries have succeeded in this objective: (1) the debt profile and debt vulnerability scores as estimated by an EWS model; (2) vulnerabilities stemming from the liquidity position, as indicated by the financing needs and the level of international reserves; and (3) medium-term debt-related vulnerabilities as presented in sensitivity analyses conducted in the context of the DSAs.
Countries that restructured preemptively have had diverse experiences since restructuring, with specific factors playing a prominent role.
Liquidity more than solvency was the issue in the Dominican Republic and Ukraine. Consequently, the focus of the debt operations was on debt-service relief rather than on debt reduction. In the case of Ukraine (classified as low vulnerability, implying that the country is currently regarded as having a low medium-term risk of another debt crisis), this appears to have been sufficient to ensure a durable exit from crisis, while in the Dominican Republic (medium vulnerability), risks with respect to liquidity and debt dynamics remain.
The scope of restructuring of private sector–held claims was too limited to have a significant impact on debt sustainability in Moldova and Pakistan. However, reschedulings of debt owed to official creditors yielded significant debt relief for Pakistan and moderate debt-service relief for Moldova.48 In Pakistan (low vulnerability), this was sufficient to reduce significantly the probability of a future crisis, while risks stemming from financing needs persist in Moldova (medium vulnerability).
In the remaining cases, there was evidence of solvency problems, yet sufficient debt relief could not be secured in Argentina (2001) and Uruguay. Argentina defaulted shortly thereafter. In Uruguay, considerable debt-related vulnerabilities have remained in the aftermath of the crisis: while on a declining trend, debt is still fairly high and the liquidity position relatively tight, although improving. However, near-term risks have been significantly reduced as a result of generally favorable external financing conditions and the country’s build-up of international reserves.
For the three cases of post-default restructuring, the indicators examined in this paper do not point to high debt-vulnerability rankings during the period under consideration.
In Russia, favorable external conditions played a key role, and the country is now classified as having a low debt vulnerability.
Ecuador has been classified for the period examined as a medium-vulnerability country. Despite a decline in the debt-to-GDP ratio, setbacks in domestic policy implementation have prevented the country from reducing vulnerabilities, even in an environment of high oil prices.
In Argentina, vulnerabilities also appear to be in the medium range, given the large stock of debt in arrears remaining after the closing of the 2005 debt exchange. Dealing with creditors that did not participate in the exchange is key to further reducing the debt burden and facilitating access to international capital markets that can be sustained in times of less favorable global liquidity conditions.
The small sample of restructuring cases implies that broad conclusions are highly tentative. Nevertheless, the recent experience suggests some differences between cases of preemptive and post-default restructuring:
In all three cases where sovereign bonds were restructured after a default, there were clear concerns about solvency problems, and debt restructuring led to a sizable reduction in principal payments and in the NPV of debt. However, the evidence in this paper has not disentangled the impact of the decision to default on incentives in negotiations from the broader economic circumstances surrounding that decision, including the more severe recessions endured by post-default countries.
In contrast, the NPV reduction in the six countries that restructured preemptively was considerably smaller. The debt operations appear to have addressed liquidity rather than solvency concerns, even in the two cases where the evidence pointed to solvency problems. While the sample is very small, in these two cases either the debt restructuring left significant debt vulnerabilities (Uruguay), or there was another crisis (Argentina).
The more substantial Paris Club reschedulings of Pakistan’s public debt, particularly the concessional December 2001 ad hoc rescheduling, had more of an impact.