RECENT EXPERIENCES IN DEBT CRISIS MANAGEMENT

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RECENT EXPERIENCES IN DEBT CRISIS MANAGEMENT

• Arturo C. Porzecanski, Ph.D.
• Visiting Professor of Economics
• Williams College, MA
• and
• Adjunct Professor of Economics
• Stern School of Business
• New York University, NY

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RECENT EXPERIENCES ARGENTINA VS. DOMINICAN
REPUBLIC

• Argentina (Everything that could go wrong,
  did)
• Default to bondholders was declared, and lasted
  nearly 3½ years
• Case of unwillingness, as well as temporary
  inability, to pay
• Confrontational attitudes prevailed there were
  no direct or indirect negotiations with creditors
• There was no endorsement from the IMF, and no
  prior or parallel deal with the Paris Club of
  official creditors
• Interest arrears for the most part were not
  recognized haircut on principal was without
  precedent for a middle-income country
• Multilateral and domestic creditors were treated
  much better

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RECENT EXPERIENCES ARGENTINA VS. DOMINICAN
REPUBLIC

• Dominican Rep. (Everything that could go right,
  did)
• Default to bondholders was averted
• Case of temporary inability to pay
• Cooperative attitudes prevailed there were
  direct (Paris Club) and indirect (bondholders)
  negotiations with creditors
• There was an endorsement from the IMF, and a
  prior deal with the Paris Club that triggered a
  demand for comparable treatment
• Neither contracted principal nor interest rates
  were reduced
• Multilateral creditors contributed new money, and
  other private creditors also were subjected to a
  rescheduling

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RECENT EXPERIENCES ARGENTINA VS. DOMINICAN
REPUBLIC

• Key indicators prior to restructuring (2004)

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RECENT EXPERIENCES ARGENTINA VS. DOMINICAN
REPUBLIC

• Key indicators after restructuring (2005)

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RECENT EXPERIENCES ARGENTINA VS. DOMINICAN
REPUBLIC

• Lessons to be learned
• 1. The more burdensome the debt (in relation to
  GDP and exports), the greater the risk that a
  portion of it will have to be forgiven to achieve
  fiscal sustainability. In this connection,
  beware debtors with major currency mismatches and
  countries with artificial exchange rate regimes.
• 2. The customary Eurobond documents give
  investors the right to sue for payment, but it
  remains exceedingly difficult to collect from a
  sovereign deadbeat. It is worthy of note that
  only the New York courts proved willing to render
  judgments against Argentina.

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RECENT EXPERIENCES ARGENTINA VS. DOMINICAN
REPUBLIC

• Lessons to be learned
• 3. The attitude of the G-7 governments is
  crucial they were not willing to confront the
  authorities in Argentina, and in fact took
  various steps that encouraged the country to take
  a very hard line with bondholders. Geopolitical
  factors are always important.
• 4. Creditworthiness hinges on willingness, and
  not just ability, to pay. Therefore,
  ideological, personality and other political
  economy factors are always relevant.
• 5. Argentina has set a precedent that will come
  back to haunt the international financial
  community whenever global liquidity conditions
  and commodity prices deteriorate.

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LIKELY DEBT-RESTRUCTURING CASES

• Belize (Debt/GDP 95)
• Government has never defaulted and is current on
  all payments, but may well seek a negotiated
  restructuring that will likely not involve debt
  forgiveness and that will probably be voluntary
  and non-discriminatory.
• Nigeria (Debt/GDP 55)
• Government owes mostly the UK, French, German
  and Japanese aid and export-credit agencies,
  mainly because of long-standing interest arrears,
  penalties and defaults. An eventual debt
  forgiveness deal with the Paris Club would have
  comparable treatment consequences for the
  countrys private creditors.