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Lessons from a Decade of
Sovereign Debt Crises
Jeromin Zettelmeyer, IMF*
Based on Debt Defaults and Lessons from a Decade of Crises,
MIT Press 2007 (with Federico Sturzenegger)
Presentation at The World Bank, July 11, 2007
*The views expressed in this presentation are the authors’ only and do not
necessarily represent those of the IMF or IMF policy.
It’s hard to summarize a decade of crises!
Strategy for this presentation:
 A quick reminder of what happened (2 slides!)
 Key issues/lession, along 4 dimensions
How did investors fare?
How did countries fare?
How well did existing debt restructuring mechanisms work?
Are there reforms of the international financial architecture
that could put an end to costly debt crises?
What happened
Since 1998, 15-20 sovereign debt crises and
restructurings involving private creditors:
Russia (1998-2000), Ukraine (1998-2000), Pakistan (1999),
Ecuador (1999-2000), Argentina (2001-2005), Gabon
(1999, 2002), Seychelles (2002), Moldova (2002), Uruguay
(2003), Paraguay (2003), Dominica (2004), Dominican
Republic (2005), Grenada (2005), Belize (2006-07),
Antigua (since 2006).
Here: focus on 6 crises: Russia, Ukraine, Pakistan,
Ecuador, Argentina, Uruguay
made history and/or were big in terms of Debt/GDP
differ in complexity: from small and simple (Pakistan: 3 old
instruments, 1 new instrument) to the complicated and
huge (Argentina 2005: 156 old instruments).
Some facts
Recent crises/restructurings focused on bonds (though
sometimes holders were banks). A first since the 1930s.
Involved both domestic and foreign debt (according to
place of issue, or currency denomination, or both).
“Take it or leave it” exchange offers involving face value
reductions and/or maturity extensions. Generally no formal
negotiations with creditors (unlike 1980s; exception: Russia)
See both “post default” restructurings (Russia, Ecuador,
Argentina 2005) and “pre-default” restructurings (preemptive): Pakistan, Ukraine, Uruguay, Argentina “Phase 1”.
Seniority of bonds disappears over time: Pakistan
(1999): first Eurobond restructuring; Ecuador (2000): first
Brady bond restructuring
How did investors fare?
Ex post, in actual restructurings for the 1998-2005
period: wide range of outcomes
haircuts: high in Argentina 2005 (75%) and Russia 19992000 (50-60%); low in Uruguay (13%); rest 25-40%.
In the long run (e.g. 19th century,1970-2001 period
as a whole): modest positive excess returns on
average (between 0 and a few percentage points)
The period from 1990 until today is an outlier, with
very good ex post returns (except for Argentina).
a consequence of high ex ante spreads, good luck, and—
perhaps—a different financial architecture?
How did countries fare?
Crises generally very costly in terms of output loss
and “economic dislocation”
Typically “twin”, or even “triple crises”: currency,
debt, banking. Links in all directions.
Exceptions: Pakistan, Ukraine
Hence, it is very difficult to isolate the output cost of the
default per se. Not attempted in our book.
Countries that avoided banking crises appear to have
suffered less costly crises.
In most cases, countries recovered, and their
debt/GDP continued to fall after the restructurings.
Very different from the 1980s!
Main exception: Ukraine 1998-99.
Obvious caveat: some dose of good luck (after 2002).
How well did debt restructurings work?
Reasonably quick
High participation everywhere
Argentina 2005 lowest, at 76%.
“Holdout creditors” did not block any restructuring.
except for Russia,1998-2000, and Argentina, 2001-2005.
They tried only in Argentina (but were unsuccessful).
“Take it or leave it offers” of the 1998-2005 period
did not lead to higher creditor losses than BACnegotiated deals.
Official sector (including IMF) played a constructive
role in several cases, though it was less involved
than in BAC-led debt restructurings.
Thoughts on financial architecture
1. Debt crises might involve “deadweight losses” for
two reasons:
Imperfect institutions/contracts/legal frameworks, due to
history and inertia to change.
Deep incentive problems and “incomplete contracts” imply
a trade-off between incentives and insurance.
2. In principle, one can imagine international
institutions that could eliminate these losses.
They usually involve a combination of a lot of insurance
with prequalification (i.e. separate bad luck from bad
debtor country policies)
(The SDRM did neither. It’s weakness was probably not that it went too
far but that it focused on second order problems like creditor
coordination and free riding and did not address the first order ones-output costs, reputational costs of debt crises, and “secondary runs”).
Thoughts on financial architecture (cont.)
3. First best international institutions are mostly
politically unfeasible. They are too ambitious.
A possible exception: Tying large scale IMF crisis lending
to good ex ante policies/institutions.
4. However, there may be scope for “completing
contracts” directly, through financial innovation.
Local currency instruments: a form of indexation
“Real indexation” of debt service (equity like instruments)
“Negative convenants”
“Contingent reserves” (e.g. conditioned on the VIX)
5. In addition, some deep incentives problems could
be addressed through reforms at the country level
Example: changes that made possible local currency debt
Currency/place of issue of restructured bonds
currency of issue
Ukraine 1998-99 (Chase; ING)
Pakistan 1999 Eurobond
Ukraine 2000 Eurobonds
place external Russia 2000 PRINs/IANs
Ecuador 2000
Argentina 2001 "Phase 1"
Uruguay 2003 external
Argentina 2005 exchange
domestic Russia 2000 MinFin
Uruguay 2003 domestic
Argentina 2002 pesification
Ukraine 1998 OVDP domestic
Ukraine 1998 OVDP foreigners
Russia 1999 GKO
Thoughts on domestic policy-making
Crisis prevention: largely conventional views
“Crisis preparation”: A new angle? Firewalls idea.
When to stop fighting. Non-PC views (for fighting):
Fight even if chance of avoiding crisis is small: difference in
costs between crisis and non-crisis is much larger than the
difference in costs between crisis now and crisis later).
Crisis management (both before and after default):
Make it more difficult for a crisis in one sector (e.g.,
currency, or debt) to spread to another (banking).
largely conventional views; some tolerance for heterodoxy
Working out a debt deal: why not front load more?
Puzzle: exit yields far higher than usual EM borrowing rates