Debt Restructuring: Evidence and Comments on Recent Developments - - PowerPoint PPT Presentation

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Debt Restructuring: Evidence and Comments on Recent Developments

Prepared for the substantive informal session at the United Nations, “Debt crisis prevention and resolution”, Dec 9th, 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

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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

A “Scorecard” for the current system

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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…

• 2. Six Stylized Facts

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Fact 1: Delays between default to a final restructuring have been variable (Score A/C)

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Source: Cruces and Trebesch database and authors’ calculations (Powell, Sandleris and Tavella).

Years to a final restructuring

• No. of

events Score A Score C

Fact 2: Growth costs around defaults are large, accentuated by delay before default (Score: C)

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‐1 1 2 3 4 5

Growth

(GDP % change) Mean Median

Source: ongoing with Guido Sandleris and Pilar Tavella

0.5 1 1.5 2 2.5 3 3.5 4 4.5

Growth

(GDP % change) Mean Median

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…

Fact 3: Creditor litigation not a very general problem (to date, Score: B+)

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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.

• No. of

cases per year Fraction of cases related to Argentina (%)

• No. of cases related

to Argentina

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

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.005 .01 .015 Density

• 50

50 100 SZ Haircut, in percentage points

• Most restructurings

have limited haircuts

• Some have much

deeper haircuts

• A principal haircut is

associated with deeper haircuts

SZ here refers to the Sturzenegger and Zettelmeyer method to calculate the present value haircut, data from Cruces and Trebesch

Fact 5: There are frequent cases of multiple restructurings

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Source: ongoing work with Guido Sandleris and Pilar Tavella Year of first Restructuring + 5 Years

Fact 5: There are frequent cases of multiple restructurings

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Source: ongoing work with Guido Sandleris and Pilar Tavella Year of first Restructuring + 5 Years There are 63 cases of a single restructuring since 1979

Fact 5: There are frequent cases of multiple restructurings

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Source: ongoing work with Guido Sandleris and Pilar Tavella Year of first Restructuring + 5 Years At least one more restructuring in this window

Fact 4: There are frequent cases of multiple restructurings

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There are 40 cases of multiple restructurings in a five year window after the year of a first restructuring

Source: ongoing work with Guido Sandleris and Pilar Tavella Year of first Restructuring + 5 Years At least one more restructuring in this window

Fact 6: There is a greater likelihood of a re‐restructuring if the haircut is low

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Conditional probabilities of a second restructuring within 6 years

First restructuring haircut < average First restructuring haircut > average

50% 21%

Source: ongoing work with Guido Sandleris and Pilar Tavella

Solving the Underlying Problem: Score: C+

A “Scorecard” for the current system

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The lack of creditor litigation is precisely because countries may tend to do too little and then need to restructure multiple times 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+

• 3. Making sense of these facts

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Unfortunate countries that need to restructure face a choice…

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• 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

The rows of the scorecard are interconnected

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Little reason to think countries’ underlying problems are not “normal”….

.005 .01 .015 Density

• 50

50 100 SZ Haircut, in percentage points

The current “system” produces bimodal haircuts, “too little too late” , multiple restructurings and delays…

• 4. On recent developments

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On proposals for a new Pari Pasu and “Super CAC” clauses (ICMA Aug 2014, IMF Oct 2014)

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• 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

Pre ‐ Argentina vs NML

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Sovereigns uniquely vulnerable but uniquely protected

Lee Buchheit “Sovereign Debt Management”, Lastra and Buchheit eds., OUP January 2014

Post Argentina vs NML

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Sovereigns uniquely vulnerable but uniquely protected Sovereigns uniquely vulnerable and not so protected

Post the new Pari Pasu and “Super CAC”

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Sovereigns uniquely vulnerable but uniquely protected Sovereigns uniquely vulnerable and not so protected Sovereigns not so vulnerable but not so protected

What will be the next move?

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• 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!

Pending Issues..

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• 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

Other approaches worth evaluating?

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• 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

• 6. Conclusions

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Conclusions

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• 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

Thank you!