Abstract

As noted in Section II above, the balance of payments position of many developing countries has become increasingly difficult in recent years for a number of reasons and debt servicing difficulties have become widespread. As a result, there has been a sharp increase since 1980 in the number of countries that have approached commercial banks, either for formal debt restructuring in the form of refinancing or rescheduling or for other forms of relief arrangements, such as rollovers and informal extensions of maturing loans. This trend intensified late in 1982 and the first part of 1983, when in rapid succession some of the largest developing country borrowers in the international capital markets, including two major oil exporting countries, started negotiations with their creditor banks. As a result, the amount of member countries’ commercial bank debt that was restructured rose dramatically from an annual average of about US$1.5 billion during the period 1978 to 1981 to about US$5 billion in 1982 and to nearly US$60 billion by early October 1983 (Table 8).

Introduction

As noted in Section II above, the balance of payments position of many developing countries has become increasingly difficult in recent years for a number of reasons and debt servicing difficulties have become widespread. As a result, there has been a sharp increase since 1980 in the number of countries that have approached commercial banks, either for formal debt restructuring in the form of refinancing or rescheduling or for other forms of relief arrangements, such as rollovers and informal extensions of maturing loans. This trend intensified late in 1982 and the first part of 1983, when in rapid succession some of the largest developing country borrowers in the international capital markets, including two major oil exporting countries, started negotiations with their creditor banks. As a result, the amount of member countries’ commercial bank debt that was restructured rose dramatically from an annual average of about US$1.5 billion during the period 1978 to 1981 to about US$5 billion in 1982 and to nearly US$60 billion by early October 1983 (Table 8).

Table 8.

Incidence of Bank Debt Restructurings, 1978–Early October 19831

article image
Source: Table 12.

Signed or agreed in principle; excluding two nonmember countries of the Fund.

Peru rescheduled twice in the year.

Turkey rescheduled twice in the year.

Excluding the two Polish reschedulings (April and November) with a combined total of US$4.6 billion.

Excluding the Polish rescheduling for an amount of US$1.0 billion.

This section reviews the experience of the 28 member countries—26 non-oil developing countries and 2 oil exporting countries—that have sought a restructuring of their bank debt from the beginning of 1978 to early October 1983. As of December 1982, claims of banks in the reporting area of the Bank for International Settlements (BIS) on the non-oil developing countries examined in this study were equivalent to 61 percent of total external claims on all non-oil developing countries and 57 percent of total external claims on all developing countries. The experience with bank debt restructuring, whether completed or still continuing, is examined to establish a reasonably comprehensive factual record of the developments through early October 1983. Because several countries have negotiated a bank debt restructuring more than once, the number of case studies is significantly larger than the number of countries (Table 9). As of early October 1983, 43 negotiations had already been completed by 24 Fund member countries. Thirteen of these agreements had been concluded since the end of June 1983, resulting for the first time in recent years in a very significant reduction in the number of bank debt renegotiations in process.

Table 9.

Chronology of Bank Debt Restructuring Cases, 1978–Early October 19831

article image
Source: Table 11.

Fund members only. Bank debt restructuring is defined here to cover either the rescheduling or the refinancing, or both, of debt service payments in arrears (generally principal repayments) and/or of future service payments on the short- and medium-term debt. Rescheduling is a formal deferment of debt service payments over a period exceeding one year with new maturities applying to the deferred amounts. Refinancing is either a straight rollover of maturing debt obligations or involves the conversion of existing and/or future debt service payments into a new medium-term loan.

Agreement either signed or reached in principle as of early October 1983. In addition, Poland—not a member of the Fund—completed reschedulings on 1981 maturities in April 1982, on 1982 maturities in November 1982, and on 1983 maturities in November 1983. Moreover, Cuba—also a nonmember country—has been engaged in rescheduling negotiations since 1982.

The restructuring agreement includes new financing.

Agreed in principle but not finally signed.

Tentative agreement.

Institutional Arrangements and Framework

In contrast to the arrangements for official rescheduling, no formal framework existed for conducting commercial bank debt negotiations when the serious problems of major borrowing countries became evident during the course of 1982. As noted above, bank debt restructurings in previous years were sporadic and involved smaller amounts, which posed less serious difficulties for bank management or less potential strain on the international financial system. The problems emerging in 1982 required effective procedures to achieve agreements involving significantly greater amounts and a far larger number of banks than in the past. Moreover, creditor banks and officials in the borrowing countries needed to find a framework to facilitate the maintenance of short-term bank exposure both during and after the debt restructuring exercise and to reach agreement on very sizable commitments of new money. Both of these objectives were crucial to the success of orderly adjustment in the debtor countries, but they raised difficult issues of “burden-sharing” among the creditors concerned, including nonbank private creditors and official creditors.

During the course of restructurings in the second half of 1982 and until October 1983, the recurrent need to resolve the problems of short-term debt and new financing, with several hundred creditor banks involved in some debtor countries, resulted in some further convergence in the framework and approach adopted. While there remained important variations in modalities, the major restructuring operations included a number of common features. A coordinating or steering committee of bankers was established to act as an advisory and liaison group with all bank creditors to discuss the coverage and terms of the restructuring and, as required, the maintenance of short-term bank exposure and the provision of new financing. Generally there was close linkage between the debtor country’s negotiation of rescheduling or refinancing with the advisory committee and its discussion of a Fund-supported adjustment program. In this context the Fund, at the request of the interested parties, has participated in meetings with the bank coordinating committees in several of the negotiations and, on occasion, has sought assurances that the additional financing crucial for orderly adjustment and progress toward a viable balance of payments position would be forthcoming.

Achievement of these objectives has demanded intensive coordination among banks, governments, the Fund, and other multilateral agencies on the financial requirements associated with the adjustment programs, including the provision of new finance as well as liaison by the coordinating banks with all creditor banks to secure agreement on the restructuring packages. In several instances, the large number of creditor banks, and significant differences in their degree of involvement in lending to the countries concerned, have made it difficult to achieve agreement on rolling over short-term debt and commitment of new medium-term financing. During these negotiations, bridging finance to debtor countries has been provided in various ways, including loans from commercial banks, interested governments, and the BIS.

Thus, in concluding these major negotiations, two elements in the framework have proved especially important. The first is the role of the committee of banks—and its regional coordinators—in ensuring broad financial support for the package from all banks with exposure to the debtor country. The second is the continuing linkage between the commitment of the borrowing country to a viable economic program and the assurance by the various official and private creditor groups of adequate new financing.

Terms of Restructuring18

Coverage of Debt Consolidated

Bank debt restructuring has evolved in recent years from simple refinancing of specific outstanding debt obligations into formal “multilateral” rescheduling or refinancing arrangements. Increasingly these have involved large future principal payments on the nonguaranteed19 medium-term commercial debt, and the number of individual banks involved has increased significantly. Prior to 1981, in problem cases banks frequently refinanced outstanding debt obligations as they matured, either by simply rolling them over or by consolidating them into a new medium-term loan. Banks generally preferred to avoid a formal debt renegotiation (although there were exceptions); to some extent, this view was also shared by debtor countries. More recently, however, both debtors and creditors have been willing to discuss, on a more timely basis, formal restructuring arrangements, including rescheduling or refinancing of principal in arrears and principal payments falling due. In a number of the most recent cases, banks have been discussing the restructuring of large amounts of principal payments falling due in the future and, often to support the initiatives underlying the country’s economic program, the provision of considerable new net medium-term financing.

All except one20 of the bank debt restructuring agreements here reviewed covered principal repayments on the medium- or long-term bank debt contracted or guaranteed by the public sector of the debtor country. However, these restructurings excluded all bank debt guaranteed by a creditor country government or export insurance agency, as such debts were restructured—if at all—as part of a Paris Club or other official multilateral agreement. In only a few instances was medium- or long-term debt contracted by the private sector in the debtor country and not officially guaranteed by the debtor government, also included in the restructuring arrangements. In some such cases where debtor country authorities proposed the inclusion of this type of private sector debt in the debt restructuring, banks requested that a public guarantee be extended. In some instances, private borrowers discharged their obligations by effecting debt service payments in local currency to the central bank of the debtor country, which then became the debtor vis-à-vis foreign banks. However, in most instances official entities did not extend guarantees to cover purely commercial risks. Thus, loans to private borrowers that, at the time of the agreement, were judged to be unable to meet the debt service payments in local currencies were excluded from the restructuring.

Short-term debt was covered in about half of the agreements. As indicated earlier, the maintenance of short-term bank exposure was often an important and difficult task, owing to the large number of creditor banks, the divergence of interests among them, and the various types of short-term debt instruments involved. Often, when short-term debt was not formally restructured, it was agreed that it would be rolled over on an informal basis and its level maintained over time. This particular approach was taken in a number of countries, both with regard to trade-related short-term debt and financial short-term deposits. In some instances, interest spreads were adjusted commensurate with the de facto transformation of short-term into medium-term debt.

An important problem that emerged was the treatment of interbank obligations (including private deposits or placements). In one important instance (Mexico), banks initially considered that only “true” interbank credits (i.e., money market operations used for short-term liquidity management) should be excluded from a restructuring arrangement. Even though it appeared that part of the interbank borrowing of foreign branches and subsidiaries of developing country banks might have been used to fund lending operations in their home country, rather than as an instrument of short-term liquidity management, the consensus that eventually emerged was to exclude all interbank operations from the debt to be covered in the formal restructuring arrangement. However, there was an informal agreement among the banks to maintain the prenegotiation level of interbank exposure. In Brazil, interbank deposits (placements), which were sizable, were specifically covered in the debtor’s proposal, with a view to restoring the amount of such interbank placements at a date some months in the past. However, it proved very difficult to ensure that each of the several hundred banks contribute its share under these agreements and many questions arose as to the treatment of different categories of deposits. In the end, the attempt to restore interbank placements fell substantially short of target and new solutions were explored. In the financing package for Brazil under negotiation in October 1983, it was proposed by the commercial banks’ advisory committee that banks provide some form of firm commitment regarding the maintenance of current levels of exposure to Brazilian banks abroad.

The treatment of publicly issued securities and notes, including floating rate notes, proved to be a further difficult issue in the negotiation of a few recent arrangements. In one, floating rate notes and other similar marketable securities were covered by the agreement. In another, it was agreed that only bonds and floating rate notes held by financial institutions would be covered by the arrangement. In a further instance, the arrangement covered publicly issued bonds and floating rate notes held (for their own account) by lenders signing both the extension and the restructuring of maturities due in 1983.

Most of the bank debt restructuring agreements reviewed covered principal payments that were to fall due within approximately 12 months from the opening of negotiations. Given the procedural delays, the agreements were on occasion signed well after the due dates of most of the restructured principal payments. Since the beginning of 1982, there have been only two agreements in which no future debt service was covered. Moreover, one of these was only a modification of a previous arrangement. This was in contrast to earlier years, when it was somewhat more frequent for overdue payments to be rescheduled but not debt servicing payments falling due in the future.

As a result of regulatory procedures, as well as accounting practices, banks have been generally unwilling to reschedule either interest in arrears or interest payments falling due in the future. There have only been two countries in which interest in arrears was rescheduled. In general, countries that had accumulated interest arrears at the time negotiations started were required, under the terms of the agreements, to clear the arrears either on the consolidation date or shortly thereafter. Even when arrears on interest payments were rescheduled, part of such arrears had to be settled before signing, and on one occasion the terms relating to the rescheduled amounts were less favorable than those relating to principal payments in arrears.

Consolidation Periods

The consolidation period of a restructuring arrangement refers to the period of time encompassing the original due dates of all the debt that is refinanced or rescheduled in the arrangement. Consolidation periods may include those periods during which (i) arrears accumulated,21 or (ii) future debt payments become due, either or both of which may be refinanced or rescheduled in the arrangements. Consolidation periods (covering arrears and principal payments falling due to be restructured) varied significantly between bank debt restructuring agreements that have been reached in principle or signed since 1978.

Consolidation periods for principal payments falling due typically were between one and two years, with one year being somewhat more frequent than two years, while consolidation periods for arrears ranged from a few months to more than three years. Consolidation periods generally include the year in which an agreement was reached in principle or a formal agreement was signed. In many restructuring exercises taking place in 1982 and 1983, consolidation periods for principal payments falling due have lengthened noticeably. In one agreement, all scheduled principal payments on short-, medium-, and long-term debt, as well as financial payments arrears outstanding, were refinanced. In some recent instances, the debtor countries asked the creditor banks to consider overall consolidation periods (including arrears and principal payments falling due) of up to four years, but banks were generally unwilling to agree to such terms.

With only four exceptions, the agreements completed since 1978 cover at least 80 percent of the principal payments falling due during the consolidation periods, and in over half of the agreements, 100 percent of the principal payments falling due. Between 90 percent and 95 percent of principal payments falling due were restructured in virtually all the other cases.

Maturity and Interest Rate on Bank Debt Restructured

During 1978–81, the maturities applying to restructured principal payments falling due in the future typically ranged from five to seven years. Restructured maturities for principal payments in arrears and for short-term debt generally were about the same as those for principal payments falling due on medium- and long-term debt. The maturity increased slightly for those cases dealt with in 1982 and 1983. Overall, such terms compared favorably with average maturity terms in both 1981 and 1982 of new medium- and long-term bank lending commitments not related to restructuring arrangements. Only rarely have maturities of restructuring loans differed substantially from these averages, with new maturities of ten years in some instances. In Brazil, the debt restructuring proposed to other banks by the banks’ advisory committee at the end of September 1983 contains, for medium- and long-term debt maturing in 1984, new maturities of nine years, with five years’ grace, and new financing on identical terms. This compares with a grace period of 2½ years and a final maturity of 8 years on rescheduling and new lending contained in the February 1983 agreement.

In most of the agreements reviewed, including arrangements under negotiation, interest charges are based on the three- or six-month LIBOR for the U.S. dollar or on the interbank rates for the respective other currencies. However, in some completed agreements and other arrangements under negotiation, interest charges are to be based on either LIBOR or the U.S. prime rate, at the lenders’ options.

Spreads applied to the basic interest rate (i.e., LIBOR or U.S. prime rate) in agreements reached in principle or signed since 1978, typically ranged from 1¾ percent to 2¼ percent. There were few exceptions and in only one agreement did the spread amount to as much as 2½ percent. In Brazil, the terms proposed by the banks’ advisory committee in September 1983 for the restructuring of 1984 maturities and for new loans entail slightly lower spreads than those in the agreement signed in February 1983 for the rescheduling of 1983 maturities and for new financing. Detailed information on the (weighted) original spreads of the loans that were restructured generally is not available, but it is known that these spreads have differed greatly.

Comprehensive information is not available on the refinancing or rescheduling fees applied between 1978 and 1982. However, as regards more recent restructuring agreements, relatively more information has been published mainly by various news agencies; complete information has not been released by the banks or the debtor country authorities. While types and amounts of fees appear to have varied on a country-by-country basis, for some of the large restructuring agreements completed in 1983 such fees amounted to 1 percent to 1 percent of the amounts restructured. Available information suggests that these restructuring fees were by and large identical to, or lower than, the fees charged on the new lending commitments extended to these countries at the time of the restructuring (Table 10). In addition to these restructuring fees, there may have been other costs and charges as well, but these cannot be quantified because of an absence of specific information.

Table 10.

Partial Overview of Restructuring and Facility Fees, 19831

article image
Sources: Agence Economique et Financière (Paris); Euromoney (London); Institutional Investor (New York); and other news sources.

Data on restructuring and facility fees are based on news services and must be considered tentative in nature. As regards the November 1983 agreement with Poland, a rescheduling fee of 1 percent was reported.

Only trade financing was restructured.

Linkage with Economic Adjustment Programs and Official Debt Restructurings

Except for some bank debt restructurings under negotiation and some recently completed agreements, there is only limited information available concerning the specific scope and types of undertakings by both the banks and the debtor countries. For most countries, the full documentation on restructuring loans has not been made public. Nonetheless, certain recurring features are noteworthy.

Some bank debt restructuring arrangements were made conditional on the existence of an arrangement in the upper tranches with the Fund before an agreement in principle could be reached with banks. In other instances, the signing of the agreement reached in principle was made conditional upon there being an arrangement with the Fund before the end of the consolidation period. In one case, the agreement explicitly specified that the nonexistence of an arrangement with the Fund by a specified date would be treated as an “event of default.”22 Many bank debt restructuring agreements were conditional upon compliance with performance tests under arrangements with the Fund. On occasion, the disbursement of a new medium-term syndicated loan was timed to coincide with drawings scheduled under the stand-by arrangement.

In one instance, the bank debt restructuring was conditional upon the debtor country reaching agreements with its official creditors on a debt restructuring. In other instances, undertakings by the debtor country also included assurances regarding comparable treatment between debt restructured by banks and that restructured under the auspices of the Paris Club or through individual arrangements with other creditors. Also, in all the agreements reviewed, the debtor country committed itself to be current on rescheduled interest in arrears by a specified date and to remain current on all future interest payments.

New Financing in Bank Debt Restructuring Arrangements

Few of the bank debt restructuring agreements completed between 1978 and the end of 1982 provided for new bank financing within the context of the arrangements. However, some of the major restructuring arrangements since concluded or still under negotiation involve sizable new medium-term bank financing closely linked to the restructuring per se, in addition to official new financial assistance and other forms of new financing (for example, trade-related credits). For four major restructurings (i.e., Argentina, Brazil, Chile, and Mexico), total new bank lending commitments agreed to as a part of the package amounted to over US$13 billion in the first eight months of 1983, accounting for more than half of new publicized medium-term commitments by banks to non-oil developing countries in that period. As regards Yugoslavia, emphasis was placed on the provision of new lending in lieu of a formal “rescheduling.” In certain debt restructurings under negotiation, proposals included possible new financing. In some cases, the commitment of substantial new bank financing was identified as crucial to the success of an orderly adjustment program, and agreement on the provision of additional bank loans was obtained before approval of a Fund arrangement. In a number of instances, short-term bridging finance was provided by various sources (including commercial banks) to cover financing needs while new medium- and long-term lending commitments were finalized. Bridging finance was often provided by the BIS, including for the first time to non-BIS member countries, and such short-term financing to Argentina, Brazil, and Mexico alone amounted to about US$3.5 billion.

Impact of Bank Debt Restructurings

The assessment of the impact of bank debt restructuring on a country’s external payments position is a complex matter, in part because many recent restructurings involved more or less simultaneously the rescheduling or refinancing of maturing medium-term and long-term debt, formal or informal rollover of short-term bank debt, and the establishment of a payments schedule for arrears. At the same time—particularly in large rescheduling exercises—banks often committed very large new medium-term credits, either as part of the restructuring effort per se or closely linked to it. Moreover, since a large number of debt restructuring exercises were completed as recently as early October 1983, the precise amounts rescheduled or refinanced and the timing of the disbursement of new loan commitments remain to some degree uncertain. Also, as mentioned earlier insufficient information is available to assess adequately the fees and other costs of restructuring that were payable in the year these arrangements were completed.

In many countries, anticipated debt relief from banks was so important that it was an essential element in the financing foreseen in the adjustment programs supported by the Fund, as were the new medium-term credits extended in conjunction with various debt restructuring exercises. The total consolidated amounts generally represented between 15 percent and 30 percent of the disbursed debt owed to banks, although, in some cases, they represented more than 60 percent of total bank debt outstanding. In one instance, all commercial bank debt, including arrears, is to be restructured. When compared with the bank debt falling due in the year of the agreement, the consolidated amounts generally exceeded 50 percent. Also, with few exceptions, the debt relief has been large in relation to gross domestic product (GDP), ranging from 4 percent to 8 percent.

Although available data on bank debt restructuring suggest that the relative importance of the debt relief varied considerably from country to country, the restructuring of medium- and long-term debt in conjunction with the postponement or rollover of short-term debt generally resulted in a very significant reduction of scheduled debt service payments to banks for the period covered by the agreement. In some instances, the countries’ debt service ratios were further reduced by the existence of a multilateral official restructuring (for example, the Paris Club). For the eight largest bank debt restructuring cases (all in 1983), the average debt service ratio (including short-term debt) is estimated to have declined in 1983 from over 80 percent to less than 50 percent. Moreover, the new bank lending commitments extended as part of, or in conjunction with, the debt restructuring exercise were often high relative to the postrescheduling debt service payments and often critical to the countries’ ability to adhere to the revised debt servicing schedule.

Because the restructuring of medium- and long-term loans and the new lending commitments generally had a grace period of two years or more, the debt servicing schedule in the immediate postconsolidation period was only marginally affected by the postponement of maturities. Short-term bank debt, however, often was rolled over or otherwise extended for relatively shorter periods, thus affecting significantly the debt servicing requirements of the postconsolidation period. In most instances, prospects are for significantly increased debt servicing obligations after the expiration of the grace period, reflecting a “bunching” of amortization payments due on consolidation loans. These considerations under-score the importance of visible, sustained progress in the implementation of Fund-supported adjustment programs. Such progress will be essential to the early restoration of external confidence and the resumption of spontaneous financing flows at levels consistent with balance of payments and external debt management prospects.