Gold Magazine February - March 2013, Issue 23 | Page 93

WHAT IS DEBT
RESTRUCTURING?

W

hile there is no universally
accepted definition, a sovereign
debt restructuring may be defined
as “an exchange of outstanding
sovereign debt instruments, such as loans
or bonds, for new debt instruments or cash
through a legal process”. Sovereign debt, here,
refers to debt issued or guaranteed by the
government of a sovereign state.
One can generally distinguish two main
elements in a debt restructuring:
• Debt rescheduling, which can be defined as
a lengthening of maturities of the old debt,
possibly involving lower interest rates. Debt
rescheduling imply debt relief, as it shifts
contractual payments into the future; and
• Debt reduction, which can be defined as a
reduction in the face (nominal) value of the old
instruments (e.g., from US$100 to US$80).
Deals with outright face-value reductions
are not very common. Since the 1950s, only
57 restructurings with private creditors have
implied a face-value reduction, while 129 were
pure rescheduling deals and thus limited to an
extension of maturities. However, both types
of debt operations can involve a “haircut”,
i.e. a loss in the present value of creditor
claims. A further category of restructurings
are debt buybacks, in which outstanding debt
instruments are exchanged against cash,
often at a discount. Since the 1950s, however,
debt reduction via buybacks has remained the
exception in the debt crisis context, with a total
of only 26 cases recorded. Distressed debt
restructurings usually imply some form of debt
reduction in present value terms.

RUSSIA 1998–2000

In 1997 and early 1998, oil prices fell and the
Russian government faced a substantial decrease in export revenues, resulting in increased
domestic borrowing. By mid-July 1998, debt
service payments exceeded US$1 billion and
interest rates in domestic GKO (Government
Short-Term Commitments) bond markets
had been steadily increasing. Under mounting
financial pressure, the authorities launched
a voluntary exchange programme to convert
short-term rouble-denominated debt into
longer-term foreign currency denominated
bonds. The exchange programme, however,
was ineffective and achieved only low creditor
participation. In addition, the adjustment programme agreed with the IMF went off track.
With reserves at precarious levels and a loss of
access to IMF funds, the authorities declared
a unilateral moratorium on deb B6W'f