“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 Argentina Effective payment capacity Creditor - Debtor Absence of IMF support Demonstrate 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 consensus Market acceptability Issuer - Holder IMF 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 Securities 8 Governing Laws 6 Currencies 11 New Securities 4 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 Debt sustainability 56,1% 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% 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% Aug-12e Source: MECON and BCRA Public debt with privates in foreign 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 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% Source: MECON InterestsCapital

Public debt sustainability favored financial system stability It 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 spending Public 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

Sovereign debt exchanges were key in the debt reduction process started in 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

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