Gold Magazine February - March 2013, Issue 23 | Page 92

debt

{economy}

Restructuring

Sovereign

Debt
SOVEREIGN DEBT
RESTRUCTURING
HAS BEEN QUITE A
POPULAR PROCESS
OVER THE YEARS

By Kyproula Papachristodoulou

T

he largest sovereign debt restructuring deal ever – that of
Greece – is the reason why,
according to figures revealed
by Thomson Reuters, the
total value of completed
distressed debt and bankruptcy restructuring activity in 2012 was US$422.6 billion, a
102.5% increase over the US$208.6 billion
accrued during 2011.
Sovereign debt restructuring, understandably condemned in Cyprus these days because
of the extremely negative effect it had on the
island’s two largest banking groups (representing a loss of around 30% of GDP), has
been quite a popular process over the years.
An IMF paper (Sovereign Debt Restructurings Between the Years 1950–2010 by
Udaibir S. Das, Michael G. Papaioannou,
and Christoph Trebesch) illustrates the
extent of the practice over the last 60 years.
There have been 600 cases of sovereign debt

restructurings in 95 countries, of which 186
debt exchanges were with private creditors
(foreign banks and bondholders) while 447
agreements restructured bilateral debt with
the Paris Club. It is noteworthy that there has
been no distressed sovereign debt restructuring in an advanced economy since 1950,
since all restructurings occurred in developing or emerging market economies. Some
governments of developing countries have
implemented more than a dozen debt restructurings in the last few decades, and these have
often been preceded by defaults and debt
arrears. By contrast, advanced economies such
as the United States, Japan or the countries
of the European Monetary Union (with
the exception of Greece in 2012), have not
undertaken any restructurings since World
War II. Most debt restructurings since the
1950s occurred post-default, as they were
implemented only after the government went
into arrears on all or part of the debt owed

90 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

to private creditors. 109 cases occurred postdefault, while 77 were pre-emptive.
Sovereign restructuring can be costly for
both the government and its creditors, as well
as for the private sector of a debtor country.
As noted in the IMF paper, defaults and
restructurings may have adverse consequences
for the debtor government’s access to capital
post-crisis, leading to higher interest premiums and exclusion from capital markets. It
has been shown that sovereign debt crises are
associated with a notable decline in trade and
output while the restructuring of sovereign
debt can be costly from an administrative point
of view. Finally, there has been considerable
debate regarding the degree to which sovereign
restructurings affect banks and domestic investors, possibly endangering financial stability.
The following experiences of countries
that have decided to restructure provide
evidence of the complications and predicaments that can arise: