Recent experiences in debt crisis management 61
Summary of panel discussion
Moderator: Mr. Emmanuel Moulin, Secretary General, the Paris Club
Panellists: Mr. Sinan Al Shabibi, Governor, Central Bank of Iraq Mr. Andres de la Cruz, Cleary, Gottlieb, Steen and Hamilton
Mr. Norberto Lopez Isnardi, General Director, National Debt Office, Argentina Mr. Arturo Porzecanski, Stern School of Business, New York University
The panel looked at some recent examples of how countries faced with debt crises were dealing with such situations, principally in terms of restructuring. In particular, the panel discussed the extraordinary cases of Iraq, which had recently undertaken major debt restructurings, and of Argentina, which had just completed one of the largest sovereign debt restructurings in history.
Mr. Al Shabibi described the origins of the $120 billion Iraqi debt that his country had contracted since the early 1970s. He explained that it had first been built up through military expenditure, mainly during the Iran-Iraq war in the 1980s, and then through penalties after the Government had stopped servicing its foreign debt at the beginning of the 1990s, after the first Gulf War. He said that most of Iraq’s debt was odious debt and had been contracted to destroy rather than to develop the country. He said that today, the Government of Iraq was conducting its debt restructuring negotiations with development as the objective and in order to bring the country back into the international community after years of isolation. Although Iraq could still be considered as a rich oil-exporting country, the reality on the ground, he said, was very different, and the oil industry’s infrastructure was in desperate need of fresh investment. Through the debt restructuring, the new Government aims to create an enabling environment to attract the necessary funds to upgrade its oil-producing capacities. He explained that after having reached an agreement with IMF under its Emergency Post-Conflict Assistance Programme, a satisfactory deal had been obtained with the Paris Club creditors in November 2004. The $40 billion that it owed to those creditors would be reduced by 80 per cent in three stages: 30 per cent with immediate effect, 30 per cent after obtaining a standby agreement with IMF and the remaining 20 per cent after a successful implementation of the standby agreement. Iraq was currently negotiating the conclusion of the bilateral agreements with the Paris Club creditors and it hoped that additional relief on top of the 80 per cent would be granted by at least some of those creditors. He said that negotiations with non–Paris Club creditors were also ongoing but initial signs showed that they were not as reluctant to grant a similar reduction as that of the Paris Club creditors. He added that there was hope, however, that the debt owed to the Gulf countries, amounting to $50 billion, would be restructured according to the same terms as those obtained in the Paris Club. Regarding private debt, he said that this was marginal but would take time to restructure.
Mr. Isnardi explained the case of Argentina. His country had defaulted at the end of 2001 after a deep political, social and economic crisis, which had been among the deepest crises in its history. The major objective of the subsequent sovereign restructuring, which had taken place through a debt exchange offer, had been to ensure that the country’s debt servicing remained within the country’s payment capacities and to reduce the country’s vulnerability to further external shocks. The offer had been mainly limited to bond debt, which represented the most significant portion of the defaulted debt, and which in itself represented a volume of approximately $81 billion, both domestic and external. It included the exchange of some 152 bond issues for new instruments, at par, quasi-par and discounted value, all with a GDP-linked security. The offer also concerned a very diverse set of investors (including local investors, individuals, pension funds, insurance companies, retail), which meant that different types of legislation had been involved in the restructuring process. Because of the swap, he said, overall debt sustainability indicators had improved, the total external debt had been significantly reduced and the debt’s exposure to exchange rate variation had been reduced as the share of the public debt in domestic currency had greatly increased.
62 Fifth Inter-regional Debt Management Conference
Mr. de la Cruz commented on the Iraqi and Argentine cases and the questions such restructurings raised, particularly in terms of litigation claims. He stressed the fact that the terms of the Iraqi debt restructuring obtained in the Paris Club would probably remain unique, due to the particular circumstances of the country. Regarding litigation from private creditors, he mentioned that certain Iraqi assets held in the European Union and the United States had been shielded from seizure as a measure to force private creditors to enter into restructuring agreements with the Government of Iraq. In the case of Argentina, he said, anticipation of litigation claims had been an important element of the debt restructuring, and the “now or never” exchange offer made had been conceived to discourage holdout creditors. The fairness of the offer, nevertheless, raised certain questions, and did not exclude possible future creditor-sponsored backlash. It also raised the question of whether private investors, faced with what they perceived as unsatisfactory sovereign rescheduling deals, would resort to taking a modern “gunboat approach” to recuperate their investments. As an example, the case of Italy was mentioned, where private creditors exercised strong pressure on the Government of Italy to purchase the Argentinean debt held by Italian private creditors and to negotiate on their behalf.
Mr. Porzecanski also commented on the case of Argentina’s restructuring, comparing it to another example of sovereign restructuring – that of the Dominican Republic. In his opinion, Argentina had no reason to go into default in the first place. The default was still not settled, and it took place at a time when the country still had ample reserves available to cover debt service payments and neither endorsement nor negotiations had been sought with the IMF or the Paris Club creditor countries. In addition, he warned, a creditor backlash in the foreseeable future could not be excluded. Mr. Porzecanski commended the successful restructuring that had been conducted by the Dominican Republic. He said that in the latter country case, the country had been faced with a real liquidity crisis, which had been solved by avoiding default, obtaining IMF endorsement and by seeking a negotiated settlement with the Paris Club creditor countries. Therefore, multilateral creditors had provided fresh funds, 94 per cent of bondholders had participated in the restructuring and future lawsuits could be reasonably excluded.