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“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. .

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“The Argentinean experience on Debt restructuring”






Presentation on theme: "“The Argentinean experience on Debt restructuring”"— Presentation transcript:

Slide1

“The Argentinean experience on Debt restructuring”

Dr. Sergio ChodosSlide2

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.Slide3

Argentina's Sovereign Debt Restructuring Paradigms

ArgentinaEffective payment capacity

Creditor - Debtor

Absence of IMF support

Demonstrate good faith to creditors since the repayment capacity is linked to growth.

Consistent with economic growth and stability.

Consistent with a trend of sustainable debt.

Market consensus

Market acceptability

Issuer - Holder

IMF support

Participation and acceptance of the market as the main criteria

Market dealers are the major beneficiaries

Repayment capacity not a key driverSlide4

(1) Includes pre-default accrued and unpaid interests as of 31 December 2001 (approx. US$2.1 bn.).

Total amount to Restructure: US$81.8 bn.

(1)

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

152 Eligible Securities

8 Governing Laws6 Currencies

11 New Securities4 Governing Laws4 Currencies

Argentina's Sovereign Debt Restructuring Key featuresSlide5

Recognition of interest in cash at settlement

Benefits from better than expected growthGDP-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 restricts the government's maneuvering capacity regarding claims of non-participating creditors, thus ensuring no further exchange offer.

Was rapidly passed by Congress. Received widespread support.

The law was the milestone to ensure credibility.

The Law

Argentina's Sovereign Debt Restructuring IncentivesSlide6

Debt Sustainability

Minimizing debt burdenAchieve 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

Argentina's Sovereign Debt Restructuring GoalsSlide7

Sovereign debt with “market risk” to GDP is about 13,5%, 9,4 times low from 2002.

Debt sustainability

56,1%

48,8%

48,8%

45,3%

41,8%

64,0%

73,9%

127,3%

138,7%

166,4%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Public Debt with Privates

Total Public Debt

Sovereign Debt

-% GDP-

Source: MECON

127%

13,5%Slide8

Public Debt with privates and Reserves

-% GDP-

96,0%

8,4%

9,6%

11,8%

12,3%

10,0%

10,8%

14,4%

15,9%

11,0%

0%

20%

40%

60%

80%

100%

120%

2002

2009

2010

2011

04-Aug-12e

Source: MECON and BCRA

Public debt with privates in

foreign currency

International reserves

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.

Debt sustainability

Payments to national income ratio

payments: capital +interests

21,9%

66,4%

29,0%

27,4%

26,1%

8,0%

5,4%

6,6%

0%

20%

40%

60%

80%

100%

2001

2009

2010

2011

Source: MECON

Interests

CapitalSlide9

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.

Restructuring – Financial stability – Crowding-in Slide10

Crowding-in

private spending

The financial system and the public sector

-deposits of the public sector/ bond and credits to the public sector-

0,1

0,2

0,4

0,5

0,7

1,1

1,5

1,3

2,0

2,0

1,9

2,1

2,2

2,1

2,1

0,0

0,5

1,0

1,5

2,0

2,5

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Jan 12

Feb 12

Mar 12

Apr 12

May 12

Source: BCRA

The public sector is a net

creditor of the financial

system

deposits

>

credits

The public sector is a net debtor

of the financial system

deposits < credits

timesSlide11

Crowding-in

private spending

The growth of lending

to

private sector

-% total assets of the financial system-

0

10

20

30

40

50

60

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Source: BCRA

Credit to Public Sector

Credit to Private Sector

9,3%

46,2%

Note: Credits to Public Sector includes public bonds in bank portfolio.Slide12

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.

ConclusionsSlide13

Thank you!