“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

ArgentinaEffective payment

capacityCreditor - Debtor

Absence of IMF supportDemonstrate 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 consensusMarket acceptability

Issuer - HolderIMF support

Participation and acceptance of the

market as the main criteria

Market dealers are the major beneficiaries

Repayment capacity not a key driver

(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 Securities8 Governing Laws

6 Currencies

11 New Securities4 Governing Laws

4 Currencies

Argentina's Sovereign Debt Restructuring Key features

• 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 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 Incentives

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

Argentina's Sovereign Debt Restructuring Goals

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%

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-12eSource: MECON and BCRA

Public debt with privates inforeign 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 2011Source: MECON

Interests Capital

• Public debt sustainability favored financial system stabilityIt 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 spendingPublic 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

Crowding-in private spending

The financial system and the public sector -deposits of the public sector/ bond and credits to the public sector-

0,10,2

0,4 0,5

0,7

1,1

1,5

1,3

2,0 2,01,9

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

times

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-

12Fe

b-12

Mar

-12

Apr-1

2M

ay-1

2

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.

• 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.

Conclusions

Thank you!