Debt Restructuring – Uruguay vs. Argentina

By Win Thin

With markets now contemplating some sort of debt “re-profiling” by Greece, we thought it would be helpful to summarize the two most recent major debt restructurings by an EM borrower for some guidance on what such a move could imply for ratings, debt trajectories, and triggering CDS events. To us, it is clear that “re-profiling” is a euro zone euphemism for a soft debt restructuring that extend maturities and lowers rates, while “restructuring” now refers to a hard one that involves principal haircuts as well as potentially adjusting maturities and coupons too.

Uruguay Gets It Right

Uruguay underwent a voluntary debt exchange in 2003, lengthening maturities by 5 years while keeping coupons and principal constant. The process was widely viewed as a collaborative exercise between Uruguay and its creditors. The exchange offer was announced April 10, and was completed on May 29 with 93% participation. $5.0 bln out of a total $5.4 bln of eligible bonds were exchanged, while the IMF estimates that Net Present Value (NPV) dropped 20%. Incredibly, Uruguay was able to access international credit markets later that year, reflecting that the voluntary, “friendly” approach most likely leads to a quicker return. Uruguay is a fallen angel, getting investment grade ratings back in 1997 from all three agencies before losing them all in 2002. However, it has been steadily upgraded and stands on the cusp of investment grade. Indeed, our rating model puts Uruguay at an implied rating of BBB+/Baa1/BBB+ and so actual ratings of BB+/Ba1/BB are subject to upgrades.

Although Credit Default Swaps (CDS) have been around since the 1990s, they were not widely used back in 2003 and so there was no debate about whether the Uruguay debt exchange would trigger a CDS event. However, we note that the rating agencies considered it a default, with S&P downgrading Uruguay to SD (Selective Default) and Fitch downgrading to DDD in 2003. Uruguay inserted a Collective Action Clause (CAC) in the new bonds as well, which many believe would trigger a CDS event because it changes the underlying structure of the debt. CACs began to be used widely in 2003 by EM issuers to foster orderly crisis resolution by allowing a supermajority of bondholders to agree to a debt restructuring that is binding for all. This seeks to minimize the risk of holdouts in a restructuring.

Argentina Takes A Different Approach

Uruguay’s approach stands in stark contrast to that taken by neighboring Argentina. In December 2001, Argentina halted all debt payments to both domestic and foreign bondholders. Earlier that year, it took on an IMF loan to try to stop the bleeding and also did a bond swap to extend maturities, but to no avail. Close to $100 bln in debt had to be restructured, but a restructuring deal was not proposed until 2004 and was not completed until 2005. Then, Argentine officials basically rammed the restructuring down the throats of its bondholders with a take it or leave it offer. Only 75% chose to participate in a deal that saw effective haircuts of close to 65% (through maturity extension, principal haircuts, and lower coupon rates).

Due to the absence of CACs, the standoff between Argentina and the 25% holdouts continued until 2010, when the country struck a similar deal with them to get 70% participation as investors basically capitulated to Argentina’s hardball deal. However, Argentina still cannot return to the markets until it has settled $7.5 bln owed to the Paris Club countries. In the Argentine case, there is of course no doubt that a CDS event would have been triggered. S&P downgraded Argentina to SD (Selective Default) and Fitch downgraded to DD in 2001.

CDS Event Or Not?

With regards to triggering a CDS event in Greece, we note that the answer will depend on how the new bonds are structured. To us, it would appear that a maturity extension (even a voluntary one) that cuts NPV without haircuts on principal would trigger a CDS event. In Uruguay’s case, it did everything right and the rating agencies still moved it to SD. The case for a CDS event is not determined by the rating agencies, however. Instead, the International Swaps and Derivatives Association (ISDA) relies on panels called Determinations Committees that are made up of sell-side and buy-side firms to decide if an event should trigger a CDS event. These Determinations Committees were created in March 2009, when ISDA sought to standardize many CDS market conventions, including the way the contracts would trade and pay out. These Committees make binding decisions on whether a CDS event is triggered, as well as which debt instruments should receive CDS payouts. Who would have thought five years ago that the next major CDS event might likely come from the Developed Markets and not the Emerging Markets?

Did It Work For Uruguay And Argentina?

After its restructuring, the Uruguayan economy rebounded quickly and averaged 8% real GDP growth from 2004-2008. Part of that ironically was that Argentina was rebounding too, boosted by high commodity prices. During that same period, Argentina growth averaged 8.5% and the economy has continued to perform well despite ongoing economic mismanagement and no access to global capital markets. Due to the strong trade and financial ties between the two countries then, the synchronized recessions and recoveries were not unusual. Both countries were simply extremely lucky to be able to bounce back to such high rates of growth quickly, and making moot the point of what type of debt restructuring they used. Still, that brings us back to the view that peripheral euro zone cannot count on EM rates of growth to help debt ratios, and so a Uruguay-type “soft” restructuring would not be a lasting solution for the periphery. We would view it as another stop-gap measure until euro zone banks have strengthened their balance sheets enough to undertake a “hard” restructuring that involves significant principal haircuts. Whether that eventual hard restructuring is “friendly” likely Uruguay or “unfriendly” like Argentina will have a big bearing on how markets react to what we see as the inevitable end-game for Greece.

Baker Plan or Brady Plan?

Lastly, markets must also be prepared for other countries to follow suit. If Greece can restructure and lower its debt burden, why shouldn’t Portugal and Ireland also line up for the same treatment? As we have seen in the past, the stigma of defaulting/restructuring can sometimes wear off quickly, depending on the treatment of creditors. If the periphery can obtain significant debt relief AND undertake significant economic reforms (the often forgotten part of the Brady Plan that was just as important as the debt relief), then a path to long-term prosperity can be imagined. The Brady Plan of 1989 with its combination of debt relief and IMF/World Bank structural reforms is why much of Latin America is now investment grade and prosperous. The less-known Baker Plan, which in large part relied on extended maturities and lower interest rates coupled with austerity, cost Latin America its Lost Decade. Let’s hope the euro zone makes the right choice.

Win Thin

Global Head of Emerging Markets Strategy

18 Comments
  1. DavidLazarusUK says

    I do not have any faith that they will offer Greece Ireland or Portugal a solution that will not lead to a lost decade in austerity. I think that the populace will rise up and force defaults. Spain looks like they will have to default if they fall into that position. With the public starting to Puerta del Sol Square in Madrid.  https://www.bbc.co.uk/news/world-europe-13437819 then Spain might not have an option to renegotiate. It might be default is the only option that their voters will tolerate. That will cause panic in the markets. The issue of contagion is nonsense. Every country is already infected significantly. It is just a matter of time and confidence whether they collapse. 

    1. Anonymous says

       As in the article says, the persistent problem are European banks. They need to be recapitalised, or they are going under causing CDS-tsunami flooding all over the continent, and probably this devastating effect will reach every part of developed countries.

      The pain starts with Greece. Most Greek bonds are held by Greek banks, so should there be reprofilation or simply default the shocking events take place in Greece first. Depending on the outcome it just could mean Greece needs to get budget in balance immediately. As current decifit numbers indicate it won’t happen and institutions like schools, police etc. will either be shut down or accepting IOU’s, which I doubt. Moreover, Greece’s foreign creditors, mainly European banking giants and ECB would suffer the losses. Maybe the crediting governments can fill the gap caused by this, but then this idea of reprofiling debt or defaulting it may just be done in the name of fairness on other countries.

      If e.g. Portugal enters into this new game plan of debt-restructuring there will be a lot of trouble in Spanish banks. They are holding already questionable assets by tons, mostly property with face values hugely overestimated. If they need to start selling these for capital the numbers will come into living daylight and we notice yet another collapse.

      Now, EFSF most likely can handle these three already-in-crisis-countries, at least now when the effective lending capability will be risen to €440 bn. It most likely holds the AAA rate and it can provide troubled countries with the time they so desperately need. On the other hand, this delaying means also that the liabilities are transferred from reckless banks, which kept lending countries that had alarming debt levels, to the taxpayers.

      So, if we could jump into the orbit and look down Europe from there we would see its countries are tightly tied to each others. The debt is their glue.

      1. DavidLazarusUK says

        Yes that was why I said that every country had been infected. The banks still have not been recapitalised properly. The CDS market would not be an issue if the banks were separated. If a small investment bank had be wiped out by a CDS claim then not such a problem. Though once they have savers deposits they become a systemic risk. The core nations banks are in that position. So even if they are recapitalised the risks from the CDS market is so large that they will be wiped out. What is need as well is serious reform. 

        It will be tough for Greece to balance their budget immediately. Spain and Portugal banks have big property lossses on their books. In reality many banks and caja’s are insolvent. I agree that the delays allow the reckless banks to shift their liabillities onto the tax payers. It would be better to push the banks that are in trouble into insolvency and restructuring. 

        1. Anonymous says

           Naturally, if we had here any trust, faith or co-operation left, the plan using EFSF as “bridge over troubled water” wouldn’t be gathering much critic. However, as the situation is, the new loans made by EFSF go mainly into honouring maturing debts. No one can enforce these banks to stick out there until we can claim this mess cleared. They shouldn’t do that either. Taxpayer would feel things fair if banks write down these haircuts. The big problem is still there as you said it: they are not separated but a fire bursting in one location causes explosions on somewhere else. The trust between banks would have vanished and lending would freeze. There is no doubt of it. This would cause euribor rates to rise alarmingly and even though ECB has been very reluctant providing infinite capital to other banks in region it will most likely continue this interesting profession past June the 12th.

          If euribor rates reach double-digit numbers I can claim a housing bubble burst here in Finland. Approximately 19 mortgages of 20 available are tied ratewise to 12 month euribor (or shorter euribors.) That would mean losing another AAA-country making the ends meet. But the bigger picture of banks not trusting each others would also mean there will be another cataclysm. There have been speculations of “another Lehman”, but I think it’s just too optimist analysis. Looking at the overall debt levels (including households, private companies and public debt) we look at Portugal debt levels over 300% of annual GDP.

          Can the EFSF then hold up until ESM, and does the ESM provide us with the answers many European so desperately is seeking? The basic principle is not changing. The heavily indebted countries keep paying their existing debt plus interest with new loans. EFSF collects its money from several nations, and having countries with good credit is necessary. So, from whom does EFSF borrow? Mainly the same institutions that are refusing to lend directly to these troubled countries. They think there will be debt-restructurings and it’s risky business. EFSF does not have a choice there. It borrows money from market, and then flushes it into troubled countries, which within hours transfer it back to creditors. This whole cycle has only put EFSF in danger and it faces the same threats of losing a lot of face value of these loans. I think it will be near 60-70% in case of Greece already. A year ago, when the Greece was promised its first bailout of €110 bn and if you make estimations how this “investment” has been doing during this year it would most likely receive the trophy of worst possible investment.

          So, I think it’s fair to say there are significant risks on EFSF. The losses would be on countries that agreed to bailout e.g. Greece. These are the same countries that are in trouble already. In eurozone, there are only 2 countries within the Maastrich’t limits: Finland and Luxembourgh. Estonia would include there too, but its membership has been but five months. Close to that agreement are the Netherlands and Austria. Every other country, including Germany, are in huge risks, but as the economic scale of Germany is huge, so is its credit.

          I cannot see there any hope with EFSF and ESM working. If the risks are due then there is little matter who has got the risk. In perfect world EFSF would take temporary risk and banks should give them their gratitude and support more growth. However, this only can mean give out loans easier and this reckless lending is the prime reason we are in this mess in first place. Therefore I see the solution will be there for these banks I have been calling reckless: they go bust and give room for more healthy companies, which are agreed not to grow too big.

          If you had the opportunity to see HSBC failing in the UK or BNP Paribas in France you would immediately recgognise the severity of this problem. Then again, you may well have this opportunity.

          1. DavidLazarusUK says

            I do think that one of the reasons why the EFSF is going to be in trouble because the banks would rather lend to the EFSF rather than Greece or any other nation. The EFSF should impose a haircut on any such deposits. The reason that the banks are going along with this is to get effectively their funds guaranteed by the EFSF backing nations. If they could not get a Greek bailout they would be looking at significant losses. 

            I actually want the euro to succeed but with the way they are running it they will cause it to implode. The problem is that austerity will drive Greece out of the Euro imposing heavyu losses on all holders of its debt. Ireland will have to default as well, but will not leave the EU or eurozone. If they did much of their FDI would move to another country within the eurozone. 

            Germany and France are the two to watch. I feel that a bank crisis will hit both hard. The core nations banks are still not scaling back lending so are still over extended and will fail when the defaults start to come through. 

          2. Anonymous says

             Quick answer, the Greece’s trouble is that we need to consider net exports. If every country wishes to get out of recession via export then we need to ask, where the planet will export?

            The bare debt-restructuring isn’t enough, but can Greece, Portugal etc find a route out of the storm by enstrengthening growth? I think it will not happen.

          3. DavidLazarusUK says

            The problems are that as you say if they try and export they will struggle. The WTO will stop any nation from trying to discourage imports. Any changes that a country need to do will take time and privatisation is not a great way to encourage growth. The UK now finds itself in the embarassing position that it pays its rents to tax havens so does not even get tax on those rents. The plans to sell off all the greek islands will have the same impact. Austerity will mean that Greece will become much poorer and will lead to mass exodus of its population to elsewhere in Europe for jobs, much like the baltic nations and Ireland. 

          4. Anonymous says

             About WTO: EU has now agreed to start protectionsim regarding paper. According to EU officials the Chinese just pay too much subbies to the labour. Meanwhile, in China truckers go on strike severly. This all means that the trend is to have more expensive labour. So, the companies transfer their production to e.g. Thailand.

            No one asks how much solvent is the bum on the street in New York, London or Helsinki. He is sacked due to rising salaries, but how much he can keep the economy running with bare welfare?

            How many TV-sets and home appliances like stoves a year he will purchase without having a home? Ten? Twenty? Just for the sake of keeping economy running?

          5. DavidLazarusUK says

            Paper does not have to be imported from outside the EU. There are plenty of recyled paper options and   even recycled paper needs fresh raw pulp every now and then. We have Sweden and Finland that can supply new pulp. The issue is that it creates an enviroment where unless your jobs are in high tech industries, there is a race to the bottom and every job competes with a chinese workers pay rates. I completely agree that homeless or unemployed people cannot help the economy, especially if governments slash benefits. What is needed is a steady increase in minimum wage rates so that even working on minimum wages is beneficial. The problem is that governments now tolerate far higher levels of unemployment that they did twenty years ago. 

  2. Anonymous says

    I do not have any faith that they will offer Greece Ireland or Portugal a solution that will not lead to a lost decade in austerity. I think that the populace will rise up and force defaults. Spain looks like they will have to default if they fall into that position. With the public starting to Puerta del Sol Square in Madrid.  https://www.bbc.co.uk/news/world-europe-13437819 then Spain might not have an option to renegotiate. It might be default is the only option that their voters will tolerate. That will cause panic in the markets. The issue of contagion is nonsense. Every country is already infected significantly. It is just a matter of time and confidence whether they collapse. 

    1. Anonymous says

       As in the article says, the persistent problem are European banks. They need to be recapitalised, or they are going under causing CDS-tsunami flooding all over the continent, and probably this devastating effect will reach every part of developed countries.

      The pain starts with Greece. Most Greek bonds are held by Greek banks, so should there be reprofilation or simply default the shocking events take place in Greece first. Depending on the outcome it just could mean Greece needs to get budget in balance immediately. As current decifit numbers indicate it won’t happen and institutions like schools, police etc. will either be shut down or accepting IOU’s, which I doubt. Moreover, Greece’s foreign creditors, mainly European banking giants and ECB would suffer the losses. Maybe the crediting governments can fill the gap caused by this, but then this idea of reprofiling debt or defaulting it may just be done in the name of fairness on other countries.

      If e.g. Portugal enters into this new game plan of debt-restructuring there will be a lot of trouble in Spanish banks. They are holding already questionable assets by tons, mostly property with face values hugely overestimated. If they need to start selling these for capital the numbers will come into living daylight and we notice yet another collapse.

      Now, EFSF most likely can handle these three already-in-crisis-countries, at least now when the effective lending capability will be risen to €440 bn. It most likely holds the AAA rate and it can provide troubled countries with the time they so desperately need. On the other hand, this delaying means also that the liabilities are transferred from reckless banks, which kept lending countries that had alarming debt levels, to the taxpayers.

      So, if we could jump into the orbit and look down Europe from there we would see its countries are tightly tied to each others. The debt is their glue.

      1. Anonymous says

        Yes that was why I said that every country had been infected. The banks still have not been recapitalised properly. The CDS market would not be an issue if the banks were separated. If a small investment bank had be wiped out by a CDS claim then not such a problem. Though once they have savers deposits they become a systemic risk. The core nations banks are in that position. So even if they are recapitalised the risks from the CDS market is so large that they will be wiped out. What is need as well is serious reform. 

        It will be tough for Greece to balance their budget immediately. Spain and Portugal banks have big property lossses on their books. In reality many banks and caja’s are insolvent. I agree that the delays allow the reckless banks to shift their liabillities onto the tax payers. It would be better to push the banks that are in trouble into insolvency and restructuring. 

        1. Anonymous says

           Naturally, if we had here any trust, faith or co-operation left, the plan using EFSF as “bridge over troubled water” wouldn’t be gathering much critic. However, as the situation is, the new loans made by EFSF go mainly into honouring maturing debts. No one can enforce these banks to stick out there until we can claim this mess cleared. They shouldn’t do that either. Taxpayer would feel things fair if banks write down these haircuts. The big problem is still there as you said it: they are not separated but a fire bursting in one location causes explosions on somewhere else. The trust between banks would have vanished and lending would freeze. There is no doubt of it. This would cause euribor rates to rise alarmingly and even though ECB has been very reluctant providing infinite capital to other banks in region it will most likely continue this interesting profession past June the 12th.

          If euribor rates reach double-digit numbers I can claim a housing bubble burst here in Finland. Approximately 19 mortgages of 20 available are tied ratewise to 12 month euribor (or shorter euribors.) That would mean losing another AAA-country making the ends meet. But the bigger picture of banks not trusting each others would also mean there will be another cataclysm. There have been speculations of “another Lehman”, but I think it’s just too optimist analysis. Looking at the overall debt levels (including households, private companies and public debt) we look at Portugal debt levels over 300% of annual GDP.

          Can the EFSF then hold up until ESM, and does the ESM provide us with the answers many European so desperately is seeking? The basic principle is not changing. The heavily indebted countries keep paying their existing debt plus interest with new loans. EFSF collects its money from several nations, and having countries with good credit is necessary. So, from whom does EFSF borrow? Mainly the same institutions that are refusing to lend directly to these troubled countries. They think there will be debt-restructurings and it’s risky business. EFSF does not have a choice there. It borrows money from market, and then flushes it into troubled countries, which within hours transfer it back to creditors. This whole cycle has only put EFSF in danger and it faces the same threats of losing a lot of face value of these loans. I think it will be near 60-70% in case of Greece already. A year ago, when the Greece was promised its first bailout of €110 bn and if you make estimations how this “investment” has been doing during this year it would most likely receive the trophy of worst possible investment.

          So, I think it’s fair to say there are significant risks on EFSF. The losses would be on countries that agreed to bailout e.g. Greece. These are the same countries that are in trouble already. In eurozone, there are only 2 countries within the Maastrich’t limits: Finland and Luxembourgh. Estonia would include there too, but its membership has been but five months. Close to that agreement are the Netherlands and Austria. Every other country, including Germany, are in huge risks, but as the economic scale of Germany is huge, so is its credit.

          I cannot see there any hope with EFSF and ESM working. If the risks are due then there is little matter who has got the risk. In perfect world EFSF would take temporary risk and banks should give them their gratitude and support more growth. However, this only can mean give out loans easier and this reckless lending is the prime reason we are in this mess in first place. Therefore I see the solution will be there for these banks I have been calling reckless: they go bust and give room for more healthy companies, which are agreed not to grow too big.

          If you had the opportunity to see HSBC failing in the UK or BNP Paribas in France you would immediately recgognise the severity of this problem. Then again, you may well have this opportunity.

          1. Anonymous says

            I do think that one of the reasons why the EFSF is going to be in trouble because the banks would rather lend to the EFSF rather than Greece or any other nation. The EFSF should impose a haircut on any such deposits. The reason that the banks are going along with this is to get effectively their funds guaranteed by the EFSF backing nations. If they could not get a Greek bailout they would be looking at significant losses. 

            I actually want the euro to succeed but with the way they are running it they will cause it to implode. The problem is that austerity will drive Greece out of the Euro imposing heavyu losses on all holders of its debt. Ireland will have to default as well, but will not leave the EU or eurozone. If they did much of their FDI would move to another country within the eurozone. 

            Germany and France are the two to watch. I feel that a bank crisis will hit both hard. The core nations banks are still not scaling back lending so are still over extended and will fail when the defaults start to come through. 

          2. Anonymous says

            Quick answer, the Greece’s trouble is that we need to consider net exports. If every country wishes to get out of recession via export then we need to ask, where is the planet we will export?

            The bare debt-restructuring isn’t enough, but can Greece, Portugal etc find a route out of the storm by enstrengthening growth? I think it will not happen.

            EDIT: some grammar, English is not my 1st language.

          3. Anonymous says

            The problems are that as you say if they try and export they will struggle. The WTO will stop any nation from trying to discourage imports. Any changes that a country need to do will take time and privatisation is not a great way to encourage growth. The UK now finds itself in the embarassing position that it pays its rents to tax havens so does not even get tax on those rents. The plans to sell off all the greek islands will have the same impact. Austerity will mean that Greece will become much poorer and will lead to mass exodus of its population to elsewhere in Europe for jobs, much like the baltic nations and Ireland. 

          4. Anonymous says

             About WTO: EU has now agreed to start protectionsim regarding paper. According to EU officials the Chinese just pay too much subbies to the labour. Meanwhile, in China truckers go on strike severly. This all means that the trend is to have more expensive labour. So, the companies transfer their production to e.g. Thailand.

            No one asks how much solvent is the bum on the street in New York, London or Helsinki. He is sacked due to rising salaries, but how much he can keep the economy running with bare welfare?

            How many TV-sets and home appliances like stoves a year he will purchase without having a home? Ten? Twenty? Just for the sake of keeping economy running?

          5. Anonymous says

            Paper does not have to be imported from outside the EU. There are plenty of recyled paper options and   even recycled paper needs fresh raw pulp every now and then. We have Sweden and Finland that can supply new pulp. The issue is that it creates an enviroment where unless your jobs are in high tech industries, there is a race to the bottom and every job competes with a chinese workers pay rates. I completely agree that homeless or unemployed people cannot help the economy, especially if governments slash benefits. What is needed is a steady increase in minimum wage rates so that even working on minimum wages is beneficial. The problem is that governments now tolerate far higher levels of unemployment that they did twenty years ago. 

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