“The Argentinean experience on
Debt restructuring”
Dr. Sergio Chodos
Context
• Capital markets have grown sharply in the last twenty years, particularly since
the beginning of the new century. New instruments arose, new mechanisms,
new engineering.
• This “disorderly and huge” development of the international financial system
led to transform creditors into holders, and debtors into issuers.
• Meantime, backstop of multilateral organizations remain moderate. They
became small related to financial market hugeness:
• IMF quota subscriptions is almost 0,7% of GDP
• Global financial assets to GDP are roughly 360%
• Cross-border capital inflows represent 8% of GDP
• In this sense, “disorderly and huge” capital markets would hardly admit an
“orderly” debt restructuring mechanism.
Argentina's Sovereign Debt Restructuring
Paradigms
Argentina
Market consensus
Effective payment capacity
Market acceptability
Creditor - Debtor
Issuer - Holder
Absence of IMF support
IMF support
Demonstrate good faith to
creditors since the repayment
capacity is linked to growth.
Participation and acceptance
of the market as the main
criteria
Consistent with economic
growth and stability.
Market dealers are the major
beneficiaries
Consistent with a trend of
sustainable debt.
Repayment capacity not a key
driver
Argentina's Sovereign Debt Restructuring
Key features
• Exchange of defaulted debt to performing debt (defaulted debt was almost 45%
of the total debt in 2004)
• Acceleration to par
• No minimum acceptance threshold
• Securities were entitled to GDP-linked warrants
• Rights upon future offers
Total amount to Restructure: US$81.8 bn. (1)
152 Eligible Securities
8 Governing Laws
6 Currencies
11 New Securities
4 Governing Laws
4 Currencies
(1) Includes pre-default accrued and unpaid interests as of 31 December 2001 (approx. US$2.1 bn.).
Argentina's Sovereign Debt Restructuring
Incentives
•
Recognition of interest in cash at settlement
•
Benefits from better than expected growth
• GDP-linked security
• Repurchase of New Securities
•
Early tender allocation of Par Bonds
•
Most Favored Lender Clause
•
Open market debt repurchases with unused capacity
The Law
•
The law restricts the government's maneuvering capacity regarding claims of nonparticipating creditors, thus ensuring no further exchange offer.
•
Was rapidly passed by Congress. Received widespread support.
•
The law was the milestone to ensure credibility.
Argentina's Sovereign Debt Restructuring
Goals
Debt Sustainability
• Minimizing debt burden
• Achieve a trend of sustainable debt
• Enhance Debt to GDP and Debt payments to Income ratios
• Promote a debt profile consistent with the payment capacity framework.
Economic growth
• To ensure payment capacity
•
To regain sovereignty
Result to date: 91% of the defaulted debt has been restructured
Debt sustainability
Sovereign debt with “market risk” to GDP is about 13,5%, 9,4 times low
from 2002.
Sovereign Debt
180%
160%
140%
-% GDP-
166,4%
138,7%
127%
127,3%
Public Debt with Privates
120%
Total Public Debt
100%
73,9%
80%
64,0%
56,1%
60%
48,8%
48,8%
45,3%
41,8%
40%
13,5%
20%
0%
2002
Source: MECON
2003
2004
2005
2006
2007
2008
2009
2010
2011
Debt sustainability
After BODEN 2012 payment: public debt with “market risk” in foreign
currency to GDP is about 8,4%.
Debt payments to Income ratio was reduced from roughly 90% to one third
in 2011.
100%
Payments to national income ratio
payments: capital +interests
80%
60%
Interests
120%
100%
Capital
66,4%
International reserves
60%
40%
21,9%
0%
Source: MECON
Public debt with privates in
foreign currency
96,0%
80%
40%
20%
Public Debt with privates and Reserves
-% GDP-
2001
29,0%
27,4%
26,1%
8,0%
5,4%
6,6%
2009
2010
2011
20%
15,9%
11,0% 12,3%
14,4%
11,8%
10,8%
9,6%
10,0%
8,4%
2010
2011
04-Aug-12e
0%
2002
Source: MECON and BCRA
2009
Restructuring – Financial stability – Crowding-in
• Public debt sustainability favored financial system stability
It reduces vulnerability to external shocks.
It broadens economic policy space to promote economic growth and stability.
Moreover, considering historical experience: debt crisis become financial crisis
(1982 and 2001) in the last 30 years.
• Crowding-in private spending
Public deposits exceed public sector financing.
Public sector constitute a funding source for the financial system. Furthermore,
most of the public savings are allocated to privates.
The State doesn't compete with privates for new funds, it crowds-in private
spending instead.
Crowding-in private spending
The financial system and the public sector
times
-deposits of the public sector/ bond and credits to the public sector-
2,5
2,0
2,0
2,0
2,1
2,2
2,1
2,1
The public sector is a net
creditor of the financial
system
deposits > credits
1,9
1,5
1,5
1,3
1,1
1,0
0,7
0,5
0,4
The public sector is a net debtor
of the financial system
deposits < credits
Source: BCRA
May 12
Apr 12
Mar 12
Feb 12
Jan 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
0,2
Dec 03
0,1
Dec 02
0,0
0,5
Crowding-in private spending
The growth of lending to private sector
-% total assets of the financial system60
Credit to Public Sector
Credit to Private Sector
50
46,2%
40
30
20
10
9,3%
Source: BCRA
May-12
Apr-12
Mar-12
Feb-12
Jan-12
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
Note: Credits to Public Sector includes public bonds in bank portfolio.
Conclusions
• Sovereign debt exchanges were key in the debt reduction process started in
2003. The burden of debt with "market risk" has fallen sharply and thus debt
payments.
• The capacity of payment paradigm ensured the success of the restructuring
proposal. Credibility of creditors was recovered.
• The enhancement of debt sustainability led to crowding-in private spending.
• The State policy space has rebounded. It has regained sovereignty over
economic policies. No more conditionality of fiscal and monetary policy to the
interests of creditors and international organizations.
• Less vulnerability to external shocks favored financial stability.
• Double causality between growth and debt sustainability.
Thank you!