“The Argentinean experience on Debt restructuring”

1. “The Argentinean experience on Debt restructuring” Dr. Sergio Chodos

2. 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.

3. Argentina's Sovereign Debt Restructuring Paradigms 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 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.

4. Argentina's Sovereign Debt Restructuring Key features • 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 Total amount to Restructure: US$81.8 bn. (1) 11 New Securities 4 Governing Laws 4 Currencies 152 Eligible Securities 8 Governing Laws 6 Currencies (1) Includes pre-default accrued and unpaid interests as of 31 December 2001 (approx. US$2.1 bn.).

5. Argentina's Sovereign Debt Restructuring Incentives • 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

6. Argentina's Sovereign Debt Restructuring Goals • 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

7. Sovereign Debt -% GDP- 180% 166,4% 160% 138,7% 127% 140% 127,3% Public Debt with Privates 120% Total Public Debt 100% 73,9% 64,0% 80% 56,1% 48,8% 48,8% 60% 45,3% 41,8% 40% 13,5% 20% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: MECON Debt sustainability Sovereign debt with “market risk” to GDP is about 13,5%, 9,4 times low from 2002.

8. Public Debt with privates and Reserves -% GDP- Payments to national income ratio payments: capital +interests 100% 120% Public debt with privates in 96,0% foreign currency 100% 80% Interests Capital International reserves 80% 60% 66,4% 60% 40% 40% 15,9% 14,4% 10,8% 10,0% 29,0% 20% 26,1% 27,4% 12,3% 11,0% 11,8% 20% 9,6% 8,4% 21,9% 6,6% 5,4% 8,0% 0% 0% 2001 2009 2010 2011 2002 2009 2010 2011 04-Aug-12e Source: MECON Source: MECON and BCRA Debt sustainability 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 2011.

9. Restructuring – Financial stability – Crowding-in • 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.

10. The financial system and the public sector times -deposits of the public sector/ bond and credits to the public sector- 2,5 2,2 2,1 2,1 2,1 2,0 The public sector is a net 2,0 1,9 2,0 creditor of the financial system deposits > credits 1,5 1,5 1,3 1,1 1,0 0,7 0,5 0,5 The public sector is a net debtor 0,4 of the financial system 0,2 deposits < credits 0,0 0,1 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Apr 12 Mar 12 Feb 12 May 12 Jan 12 Source: BCRA Crowding-in private spending

11. The growth of lending to private sector -% total assets of the financial system- 60 Credit to Public Sector Credit to Private Sector 50 46,2% 40 30 20 10 9,3% 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Feb-12 Mar-12 May-12 Apr-12 Jan-12 Source: BCRA Note: Credits to Public Sector includes public bonds in bank portfolio. Crowding-in private spending

12. Conclusions • Sovereign debt exchanges were key in the debt reduction process started in 2003. 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.

13. Thank you!