Sovereign Debt Restructuring in the New Financial World Richard Segal March 2007 Sovereign Debt Restructuring in the New Financial World Richard Segal March 2007

Belize: State of Denial Ecuador: Drowning in Shallow Water Zambia: A Rogue by any Other Name Sovereign Debt Restructuring Frameworks Investor Relations Programs Paris Club-Private Sector Issues Multilateral Development Bank Issues Table of Contents 2

External debt climbed unsustainably The Government overlooked negative signals for two years The Government resisted an IMF program Authorities were wary of disturbing the BZD/USD currency peg Officials eventually “came to their senses” The restructuring was successful and valuable lessons were learned Conclusion: It’s never too late to make amends Belize: State of Denial 3

Belize: Willing but unable – Ecuador: Able but “unwilling” Presidential campaign focused on debt issues Politicians did not understand the economic repercussions of “tough talk” “Tough love” from foreign investors could hurt the economy: eg, capital flight, fewer trade lines Competing priorities imply delay in debt decision Conclusion: Policy stubbornness can damage economic prospects Ecuador: Drowning in Shallow Water 4

DAI, a US company, purchased Romanian claims against Zambia in the late 1990s Negotiations lasted about seven years but ultimately failed Reasons: DAI’s tactics, Zambia’s internal politics DAI ultimately litigated and received a favorable court judgment Debt relief campaigners are aghast Some facts: GDP in USD terms has more than doubled in four years, private investment is 20% of GDP, external debt is less than 15% of GDP Conclusion: Rogueness is in the eye of the beholder Zambia v DAI: A Rogue by any Other Name 5

Sovereign Debt Restructuring Mechanism (IMF) Collective Action Clauses (various private sector umbrella organizations) Two-stage process (JP Morgan) “Muddle Through” (pre-existing) Sovereign Debt Restructuring Frameworks 6

IRPs arose in the wake of the Mexican peso crisis Data transparency has improved tremendously Best practices/league tables for both are published Data transparency is essential for any capital market participant The value of IRPs is overstated Investor Relations Programs (IRPs) 7

“Comparability” should be revisited Better/more creditor coordination is advisable Paris Club accounting practices are opaque The Paris Club’s mission may need to evolve further The Paris Club should take more items in-house The Paris Club should not subsidize new borrowing Paris Club-Private Sector Issues 8

Private Sector Involvement (PSI) is heavy handed and lacks accountability The IMF’s signalling approach should be debated Evidence of new initiatives is mixed (FSI v GDDS) The IMF/World Bank preferred creditor status should be reviewed Restructuring processes suffer from the lack of an information clearing house Multilateral Development Bank Issues FSI: Financial Soundness Indicators 9 GDDS: General Data Dissemination System

Debt restructuring frameworks have improved Borrowers and creditors have become more transparent Information asymmetries still exist, and creditor coordination is still imperfect The roles of the IMF, World Bank and Paris Club should be further reviewed The system is not broken, but complacency is a risk Conclusions: 10