Debt Restructuring: Evidence and Comments on Recent Developments Prepared for the substantive informal session at the United Nations, “Debt crisis prevention and resolution”, Dec 9 th , 2014 New York . Andrew Powell* Research Department, IDB *Strictly my own views, not those of the IDB, its Executive Directors not the countries they represent 1
Plan of the Presentation 1. A Scorecard for the current system 2. Six stylized facts 3. Making sense of the evidence 4. Comments on recent developments 5. Conclusions 2
A “ Scorecard” for the current system Current System 1. Delay between Default and Restructuring A/C 2. Delay before Default C 3. Problems of Creditor Litigation B+ 4. Solving the Underlying Problem C+ The four dimensions are strongly related… 3
2. Six Stylized Facts 4
Fact 1: Delays between default to a final restructuring have been variable (Score A/C) Score C Score A No. of events Years to a final restructuring 5 Source: Cruces and Trebesch database and authors’ calculations (Powell, Sandleris and Tavella).
Fact 2: Growth costs around defaults are large, accentuated by delay before default (Score: C) Growth Growth (GDP % change) (GDP % change ) 4.5 5 4 3.5 4 3 3 2.5 2 2 1.5 Mean Median Mean Median 1 1 0.5 0 0 ‐ 1 Default Restructuring This does not prove that these costs are caused by the default, nor that they are unavoidable, but it seems when there are delays to default and between default and restructuring that costs may grow significantly… Source: ongoing with Guido Sandleris and Pilar Tavella 6
Fact 3: Creditor litigation not a very general problem (to date, Score: B+) No. of Fraction of cases cases per year related to No. of cases related Argentina to Argentina (%) Source: ¿CÓMO RESOLVER EL PROBLEMA DE LOS HOLD ‐ OUTS Y BAJAR EL COSTO DE CAPITAL DE LA ECONOMÍA ARGENTINA? 4 de diciembre de 2014, Juan José Cruces, mimeo, UTDT, Buenos Aires. 7
Fact 4: Haircuts Appear to be Bimodal On the “bipolar view” see “Debt Restructuring: Lessons from Latin America”, Powell, VOX ‐ LACEA http://vox.lacea.org/?q=debt ‐ lessons ‐ LAC .015 • Most restructurings have limited haircuts • Some have much deeper haircuts .01 • A principal haircut is Density associated with deeper haircuts .005 0 -50 0 50 100 SZ Haircut, in percentage points SZ here refers to the Sturzenegger and Zettelmeyer method to 8 calculate the present value haircut, data from Cruces and Trebesch
Fact 5: There are frequent cases of multiple restructurings + 5 Years Year of first Restructuring 9 Source: ongoing work with Guido Sandleris and Pilar Tavella
Fact 5: There are frequent cases of multiple restructurings + 5 Years Year of first Restructuring There are 63 cases of a single restructuring since 1979 10 Source: ongoing work with Guido Sandleris and Pilar Tavella
Fact 5: There are frequent cases of multiple restructurings + 5 Years Year of first At least one more Restructuring restructuring in this window 11 Source: ongoing work with Guido Sandleris and Pilar Tavella
Fact 4: There are frequent cases of multiple restructurings + 5 Years Year of first At least one more Restructuring restructuring in this window There are 40 cases of multiple restructurings in a five year window after the year of a first restructuring 12 Source: ongoing work with Guido Sandleris and Pilar Tavella
Fact 6: There is a greater likelihood of a re ‐ restructuring if the haircut is low Conditional probabilities of a second restructuring within 6 years First restructuring First restructuring haircut < average haircut > average 50% 21% Solving the Underlying Problem: Score: C+ 13 Source: ongoing work with Guido Sandleris and Pilar Tavella
A “ Scorecard” for the current system Current System 1. Delay between Default and Restructuring A/C 2. Delay before Default C 3. Problems of Creditor Litigation B+ 4. Solving the Underlying Problem C+ The lack of creditor litigation is precisely because countries may tend to do too little and then need to restructure multiple times 14
3. Making sense of these facts 15
Unfortunate countries that need to restructure face a choice… • A very market friendly approach : • Likely, a zero principal haircut (small PV haircut) • Very high creditor participation, no litigation • But that risks not solving the problem • Higher likelihood of another restructuring • Or, A deeper restructuring: • More likely to solve the problem • But more likely perceived as less market friendly • Risks lower participation, and creditor litigation • Most countries opt for the former and for some it works but many have needed multiple attempts See also Powell, in VOX ‐ Lacea and ongoing work with Mariscal, Sandleris & Tavella 16
The rows of the scorecard are interconnected .015 Little reason to think countries’ underlying problems are not “normal”…. .01 Density .005 0 -50 0 50 100 SZ Haircut, in percentage points The current “system” produces bimodal haircuts, “too little too late” , multiple restructurings and delays… 17
4. On recent developments 18
On proposals for a new Pari Pasu and “Super CAC” clauses (ICMA Aug 2014, IMF Oct 2014) • These are a very welcome set of proposals • A new Pari Pasu clause was certainly required! • The “Super CAC” is a welcome innovation • Its been a very impressive joint effort between the official and the private sector 19
Pre ‐ Argentina vs NML Sovereigns uniquely vulnerable but uniquely protected Lee Buchheit “Sovereign Debt Management”, Lastra and Buchheit eds., OUP January 2014 20
Post Argentina vs NML Sovereigns Sovereigns uniquely uniquely vulnerable vulnerable and not so but uniquely protected protected 21
Post the new Pari Pasu and “Super CAC” Sovereigns Sovereigns Sovereigns uniquely not so uniquely vulnerable vulnerable vulnerable and not so but not so but uniquely protected protected protected 22
What will be the next move? • This is a process, it is unlikely this is check ‐ mate • And its hard to predict the next move • Hold ‐ out type creditors may react, we don’t know exactly how It’s a cat and mouse (chess) game! 23
Pending Issues.. • The current stock (of almost US$ 1 trillion) • Small countries with a few bond issues • Other types of liabilities • I am skeptical that we will have new jurisprudence to indicate clearly the limits to the Argentina case • Countries may be put off any deeper restructuring, or may settle with hold ‐ outs 24
Other approaches worth evaluating? • Revising the IMF’s Articles of Agreement, Article VIII 2 (a), (See Buchheit et al 2013) • Anti ‐ vulture legislation (UK in relation to HIPIC) • Additional contractual proposals: stand ‐ stills, sovereign CoCo’s etc. • More institutionalized suggestions (Debt Forum, “Resolvency” procedures analogous to a WTO process). • And a final underlying question is how to get greater ex ante risk sharing in bond contracts to reduce the need for restructurings 25
6. Conclusions 26
Conclusions • No straight “A” for the system of debt restructuring • I do think there are unnecessary (deadweight) costs • Argentina vs NML and the new contractual innovations have changed the legal landscape, its hard to predict the outcome • Several pending issues remain • We should continue to think how we may improve the system 27
Thank you!
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