Uruguay debt reprofiling: lessons from experience.

Georgetown Journal of International Law

| June 22, 2004 | Steneri, Carlos | Copyright

http://www.accessmylibrary.com/article-1G1-132298681/uruguay-debt-reprofiling-lessons.html

ΙNTRODUCTION
From 1992-2001, Uruguay was one of the most successful countries at tapping international capital markets. Clean credentials stemming from its longtime performance as a reliable debtor, together with the implementation of sound macroeconomic policies, allowed Uruguay to tap markets paying low yields and getting long maturities. In 1997, Standard & Poor's, Moody's, and Fitch rated Uruguay's sovereign debt as investment grade. (1) As a result, the country issued a thirty-year maturity bond in dollars that year, with a spread over U.S. Treasury Bills of 136 basic points. Uruguay thus joined the exclusive club of emerging economies who issued investment grade debt; in Latin America, only Chile and El Salvador belonged to this category.
After the Russian default in 1998, a sudden reversal in the mood of the capital markets initiated a chain of regional events that triggered the deepest crisis in Uruguay's recent history. As a result, in mid-2002, nominal GDP in dollars plunged more than 50%, a run on bank deposits accumulated tantamount to more than 50% of GDP, and four banks--30% of the total financial system--went bankrupt. (2) The Central Bank, acting as a lender of last resort, depleted its reserves by more than 80% of its total stock. (3)
The international financial community helped Uruguay regain its lost liquidity with an extraordinary financial package equivalent to nearly 20% of Uruguay's GDP. Unfortunately, over six months, once Uruguayan officials realized they would not be able to fully honor the upcoming debt payments, the proud debtor went to ashes. From that time on, the phantom of default began to emerge in the minds of analysts, official creditor institutions, and the public in general.
In August 2002, Uruguayan authorities looked for a solution by privately discussing a novel idea: relief was necessary, but debt payment alleviation could be achieved through voluntary agreements with creditors. In the beginning, this approach was not palatable to some official institutions and market players. Some investors argued that it was not feasible given the magnitude of the economic, legal, and financial challenges faced. Others reached the same conclusion, adding that no nation had ever successfully used this approach. Both groups based their opinion on the belief that, given the size of the debt, Uruguay had to implement a straightforward approach to recovery. Put simply, Uruguay needed to implement a debt restructuring plan that included a reduction in the nominal bond value.
The International Monetary Fund (IMF) had its own doubts about Uruguay's proposed approach. First, the IMF believed that the size of Uruguay's problem necessitated drastic action more in line with a unilateral debt restructuring, including changes in the nominal value of bonds. Second, the IMF believed the situation should be resolved using a statutory approach. (4) Through such scheme, the IMF believed that a private sector bail-in could be achieved more easily, given creditor dispersion, than through a voluntary debt exchange approach.
In this semi-unfriendly environment, and after several "stop and go" episodes, the final proposal was prepared during the first quarter of 2003 and launched on April 11, 2003. On May 28, Uruguay successfully finalized a voluntary debt exchange with the private creditor community. The exchange provided annual debt relief equivalent to approximately 5% of GDP from 2003-2008, and established that no bonds would mature until 2008.
The positive consequences of this debt exchange were seen through a number of post-exchange indicators. For example, the Uruguayan economy regained a healthy growth trend. First, the debt spreads tightened sharply towards pre-crisis levels. Additionally, and most outstandingly, five months after the exchange, Uruguay was able to tap the capital markets again, paying low yields.

This Paper is organized in the following way:
Section 1 explains the main macroeconomic issues leading to Uruguay's debt crisis.
Section 2 describes the mindset in mid-2002 concerning how to deal with a sovereign debt crisis.
Section 3 then outlines the strategy used by Uruguay which made the voluntary debt exchange feasible. Sections 4, 5, and 6 discuss, respectively, the components of the voluntary debt strategy: the consultative process, the inclusion of collective action clauses and exit consent provisions, and other special regulatory clauses that were needed to facilitate the deal.
Section 7 elaborates on the importance of the right timing to launch the deal.
Section 8 explains the deal's conditions and implementation process.
Section 9 describes the results and effects of the debt exchange on macroeconomic conditions.
Finally, Section 10 summarizes the main conclusions.

I. THE ROAD TO THE DEBT CRISIS

The Russian debt default in August 1998 prompted a reversal of financial flows directed to emerging economies. This had important consequences, particularly for Uruguay's largest regional economic partners. For example, Brazil was obliged to float its currency in January 1999, initiating a sharp contraction in its domestic absorption. As a result, Brazil's demand for regional exports plunged, spreading deflationary pressures to Uruguay and Argentina.

At that time, Uruguay's policymakers believed that the negative external shock from Brazil would be temporary. This analysis was justified by the lack of historical antecedents indicating that a sharp real devaluation of Brazilian currency could last for a long time. Regional economic history showed that sharp nominal exchange rate devaluations were followed by an equivalent increase in domestic inflation. Therefore,
devaluations were followed by an equivalent increase in domestic inflation. Therefore, Uruguayan officials assumed that the real exchange rate after a short period would return to the pre-devaluation level. But this was not the case. The expected surge in inflation did not take place, and substantial real exchange rate devaluation ensued.

Consequently, Uruguayan authorities decided to apply short-term countervailing fiscal policies. As a result, from 1999 to 2001, Uruguay maintained expansionary policies financed mostly with external debt. This action deteriorated the strength of the country's external accounts, a situation worsened by a nascent overvaluation of its exchange rate because of the "new" more depreciated real exchange rate in Brazil and the diminishing size of net capital flows into the region. But given the assumption that the regional deflationary forces were short-term in nature, the Uruguayan administration believed that the situation could be managed and reversed through a process of reducing domestic expenditures. The administration was comforted in this belief by a large cushion of foreign reserves and an assumption that the country would be able to roll over the maturing debt through continuous access to capital markets.

However, the collapse of the Argentinean economy in 2001 triggered a sequence of unexpected events. The inflexibility of Argentina's relative domestic prices-stemming from the Convertibility Law and wage rigidities-together with endemic fiscal imbalances impeded the orderly adjustments necessary to mitigate the negative external shock. The final outcome was a ladder of desperate economic policy changes in Argentina that created more noise than solutions in an already unstable situation. Central to these economic policy missteps were the partial modifications of the exchange rate regime and the implementation of a domestic debt exchange that did not give major cash flow alleviation. These actions were taken without solving two basic problems: the endemic fiscal imbalances and the unsustainable exchange rate appreciation enhanced by the rigidity in the macroeconomic environment.

The inflexibilities of the Argentinean structure lead to a sharp increase in unemployment, a substantial GDP contraction, and a further deterioration of fiscal accounts. And all of this occurred within the context of a sudden stop in the availability of external financing. The Convertibility Law was abandoned in 2001, Argentina's real GDP collapsed (GDP dropped more than 20% between 2000 and 2002), and the currency depreciated in real terms by more than 150%.5

Argentina's financial sector was next to suffer. This important sector experienced a series of inappropriate policies that led to a credit crunch, putting more pressure on the Argentinean economy and simultaneously unleashing forces that further weakened the financial sector. To avoid outright financial bankruptcy, deposits were frozen and general credibility was blown. As a result, these conditions spread throughout the region, with Uruguay as the first casualty.

Uruguay tried to weather the storm by accelerating the devaluation path and drastically reducing public expenditures in real terms, but these actions were not enough to neutralize the negative influence from Argentina. The final factor instigating the Uruguayan crisis was a series of banking malpractices discovered in some private Uruguayan banks during the first quarter of 2002. These factors ignited both the worst financial crisis in Uruguay's recent history and a widespread economic crisis. An unstoppable run on bank deposits began in May 2001, quickly depleting the reserves of the Central Bank (80% of the total stock), which was considered the lender of last resort. In order to protect the scarce remaining foreign reserves, the exchange rate band regime was replaced by a pure float system. As a result, the Uruguayan peso immediately depreciated more than 100% in dollar terms.

To counter the evolving crisis, in June 2002 the international community-through the IMF, the World Bank, and the Inter-American Development Bank-put in place a special financial aid package of $1.8 billion to be disbursed to Uruguay over an eighteen-month period.6 But the nature of the banking crisis and the extreme adverse economic conditions made such a measure futile, and a new strategy was envisaged. Its structure relied on a lump sum loan package of $1.5 billion, the extension of the maturities of public bank time deposits, and the liquidation of four insolvent private banks.

The rapid deterioration of the Uruguayan financial system had a severe impact on credit lending, resulting in a vicious cycle of credit reduction and further economic contraction. Moreover, the depreciation of the Uruguayan currency reduced nominal GDP in dollars by more than 50% (from approximately $23 billion in 2000 to $11 billion in 2003), and Uruguay's debt/GDP ratio nearly surpassed 110%. Moreover, the mutually reinforcing effect of the nominal exchange rate devaluation togetherwith the drop in real GDP (12% in 2002) and the increasing public indebtedness7 led to a sharp deterioration of Uruguay's debt sustainability. All of this is visible in Figures 1-4.

In the end, the once proud creditor's economy unexpectedly went to ashes. The country's ability to honor its debt obligations was drastically impeded. In fact, in 2003 debt maturities presented a challenging payment calendar. The prolonged reversal in financial flows to the emerging economies and the deterioration of Uruguay's terms of trade posed an additional obstacle to solving the problem through conventional means (e.g., debt rollover).

II. THE CHALLENGE AHEAD: To DEFAULT OR NOT To DEFAULT

During good and bad times, Uruguay had built a strong reputation as a trusted creditor. The country had never defaulted on its debt obligations, even during the climax of the regional crisis in the 1980s. The preservation of this valuable reputation-by any means-was deeply rooted in the social fabric of the country.

If small countries are to survive in an increasingly competitive world, it is necessary for them to comply with their contractual obligations. Accordingly, Uruguayan authorities were faced with a twofold challenge: preserve Uruguay's status as a trusted creditor and simultaneously alleviate the country's sizeable debt. The only feasible way to achieve those two apparently opposing objectives was to implement a preventive voluntary debt exchange, which ensured creditors' rights while outlining an external payment calendar that was feasible given Uruguay's economic condition.

IMAGE GRAPH 1

FIGURE 1. Nominal GDP Evolution8

FIGURE 2. Foreign Currency Deposits9

IMAGE GRAPH 2

FIGURE 3. Debt-to-GDP Ratio10

FIGURE 4. Central Bank Reserves11

The preventive modality of this approach means that the debtor, if it is current in its debt payments throughout the process, looks for a modification of the bond clauses in order to seek debt relief before its ability to service the debt disappears. Put simply, the debtor has to avoid an unwilling default or it faces a painful restructuring process. Thus, the voluntary approach is a process in which both creditors and debtors willingly participate to come up with a solution based on potential post-exchange benefits and potential losses suffered by creditors if the debtor is forced to default.

No other nation had previously implemented this type of voluntary strategy. Thus, no international experience was available at the time to guide Uruguayan officials in their actions. Most recent debt exchanges, such as Ukraine, Pakistan, and Ecuador, were involuntary in one sense or another, and their implementation virtually emasculated the respective creditors' rights. In the eyes of Uruguayan authorities, any of the strategies previously used by other nations were unsuitable.

Moreover, at that time the international financial community was not well prepared to offer an alternative compatible with Uruguay's own needs. For example, the IMF was directly involved in all of the recent debt exchanges and supported mechanisms not suitable to Uruguay's needs. The IMF's ideas were connected with the Sovereign Debt Restructuring Mechanism (SDRM), which pursued the implementation of a "statutory" framework containing general and universal rules and new institutional frameworks to address debt problems. The basic building blocks of the SDRM include the following: (1) an agreement between debtors and a special creditors' majority must be in place as a general framework for the authorities to take action; (2) during debt negotiations, debtors receive legal protection, meaning a stop in all payments (i.e., a default on the bonds); (3) there must be uniform negotiating criteria through the creation of an independent forum to pursue the debt negotiation; and (4) the IMF Charter must be modified to allow its engagement in these kinds of procedures. From Uruguay's viewpoint, this alternative was not in line with the principles inherent in a voluntary debt exchange strategy.12

Another option for Uruguay was the "contractual" approach. This approach relied on the utilization, as agreed upon by debtors, of collective action clauses (CACs) and other legal provisions to achieve necessary goals. The basic idea behind this approach was to provide a mechanism for and to regulate the manner through which debtors and creditors could voluntarily modify bond terms using special majority votes.

During most of the strategy-building process, the IMF continued to be self-hijacked by its "statutory" approach. Consequently, Uruguayan authorities had additional challenges to overcome. First, they needed to show that the "voluntary" approach would not only be a workable solution, but would also be better than the suggested alternatives. second, Uruguayan officials had to show that the level of debt relief obtained was enough to ensure the sustainability of external payments. This was not a trivial obstacle, given that the international financial community, particularly the IMF, had played an important role in providing funds to overcome the banking crisis, causing Uruguay's external debt to swell substantially.

Within this framework, and insisting on its own line of thinking, Uruguay relentlessly followed a previously non-traveled road: a preventive voluntary debt exchange in close consultation with market players. In short, this approach involved a sovereign debt rescheduling plan applying a "pure" market approach. Under this innovative approach, Uruguayan officials felt that the most suitable road was to prepare a proposal including collective action clauses and exit consent provisions. The objective was to stimulate bondholder participation while penalizing potential holdouts. In financial terms, this meant the exchange had to create value, but preferably only to participants, thus preventing free-riders from having the chance to benefit from the exchange.

The challenge thus became outlining a course of action in which both creditors and debtors would be better off applying cooperative strategies. The goal was to implement a voluntary exchange through which creditors agreed to provide some sort of debt alleviation, and, as a quid pro quo, Uruguay would generate value for the creditors. This would be achieved by implementing policies to strengthen Uruguay's economic growth, invigorating its debt service capabilities as a result.

If this game was not played in a cooperative way, the country would be forced to default on the debt, and all the parties involved, especially creditors, would suffer additional losses. For instance, before the exchange, the Uruguay debt quotation was around fifty cents on the dollar, the standard level for distressed bonds. If the game of exchange was played cooperatively, a substantial increase in price quotations was expected, between 40-50%. On the other hand, if the country defaulted on the debt, its quotation would plunge to levels close to fifteen to twenty cents on the U.S. dollar. The potential losses from this negative outcome served as a deterrent against maverick bondholder behavior.

However, this plan did not fully remove the temptation of bondholders to hold out during the process and thus benefit by free-riding on the exchange. In fact, the collapse of the deal was an event with non-zero probability. Under these circumstances, consultation with market players became necessary in order to establish rules of the game and thus induce cooperation among participants.

III. THE MAIN ELEMENTS OF THE PROPOSAL

Uruguay's strategy was based on five key components. First, it was necessary to approach market players and convey to them that the problem did not concern solvency, but instead dealt with liquidity and stemmed from extreme adverse regional conditions. second, Uruguay maintained that it was willing, as in the past, to fully honor its debt obligations. Uruguay further explained that its previous ability to honor its obligations was only disrupted by extraordinary events requiring extraordinary actions taken in consultation with creditors.

It was necessary to convey to bondholders that the cost of "default prevention" (or debt alleviation) was cheaper than an aggressive cure, such as unilateral default. This approach showed that Uruguay aimed to continue servicing the debt, while setting aside the option of any unilateral disruption in the flow of debt payments. Central to the approach was showing that willingness to pay was an essential and immutable attitude of the country.

This meant that Uruguay had to present adequate arguments showing that such behavior was credible. Accordingly, the exchange proposal had to provide a waiting period to improve external conditions and to regain economic growth, both necessary preconditions for the alleviation of the liquidity problem. Therefore, the message was that there was a need to reduce external payments only during a certain period. In other words, the draft proposal envisioned some sort of extension of bond maturities, but excluded any outright cut in the nominal bond values.

Third, the success of the strategy was made more likely because most of Uruguay's debt paid low fixed coupons and because short-term maturities were not substantial. Both conditions are quite rare for emerging economies and show Uruguay's good debt management. Because of these conditions, substantial debt alleviation could only be achieved through an extension of bond maturities.

Fourth, from the beginning, during talks with market players, Uruguay announced the equal treatment of domestic bondholders vis--vis foreign creditors. This ensured that each creditor category would be asked for the same amount of sacrifice to help achieve the outcome. Similarly, the financial exchange structure also had to be timeequivalent all along the curve. Then, by definition, the Net Present Value (NPV) of the reduction of the exchange would be equivalent along the entire yield curve (i.e., swap equivalence). In other words, independent of their maturities, all bonds should face the same sacrifice. The fact that the losses in the deal would be distributed evenly among all private creditors, both domestic and foreign, was further reassurance that local political ingredients would not taint the proposal.

Fifth, the inclusion of polemic exit consent provisions was presented as a way to protect participants from potential free-riding, rather than a tool to force the exchange. Finally, the approach's likelihood for success was strengthened by relatively dispersed creditors (most of them international) and the low exposure of the domestic banking system to Uruguay's debt. This fact ensured that the financial sector, already weakened by the crisis, would not suffer additional damage through the exchange.

IV. THE CONSULTATIVE PROCESS

The consultative process occurred prior to the final design of the debt exchange. Its purpose was to convey information to all market players, including multilateral institutions, in order to promote the conditions needed for cooperative behavior among all parties involved. Uruguayan authorities believed that the challenge was to find a way to induce cooperation between Uruguay and its creditors by playing a variation of the prisoner's dilemma game.13

Using one of the known possible outcomes of this traditional game theory, one way to induce cooperative behavior is to provide information to prisoner A, the creditor, about what stance prisoner B, the country, will take if prisoner A agrees to play the game with certain conditions. If prisoner A cooperates, in this case by participating in the exchange and getting new bonds, and prisoner B has the same cooperative attitude, then by paying the new bonds but putting some uncertainty of exit consents on payments to holdouts, both parties will be better off. The non-cooperative solution-a no-participation default-will be more expensive for both parties.

These were the forces that drove the exchange; the challenge was determining how to unleash them. The problem was that Uruguay, as the debtor, had more information about the likelihood of the different alternatives. For example, Uruguay was better able to forecast a number of factors, including future economic policy, treatment of free-riders, NPV equivalence along the curve, equal treatment between domestic and international creditors, and even the likelihood of default. Therefore, it became necessary for Uruguay to both share information with and get feedback from creditors on the various issues to be included in the final proposal.

When the final proposal was informally launched on April 11, 2003, market players showed a mature and deep understanding of the situation, including the factors leading to Uruguay's troubles, the risks involved in lending money to Uruguay, and the potential benefits if the exchange were successful. Creditors understood that a cooperative strategy could cause a large increase in bond market quotations, but that failure could mean additional losses, with bond prices plunging to default levels (i.e., fifteen to twenty cents on the dollar). During this process, creditors immediately articulated a preference for a straight out maturity extension as an alternative to principal or coupon reductions.

Additionally, market players showed concern about the potential liquidity of the new instruments. In order to calm these fears, the proposal provided creditors with a benchmark bond alternative. Also, equality of creditor treatment both in terms of location and length of time (e.g., local versus international and short versus long maturities) was an issue raised several times. Consequently, the preservation of the relative terms structure along the curve through comparable Net Present Value impact on all bonds helped determine the final design of the proposal. The sacrifice demanded of bondholders had to be equivalent across all maturities.

Lastly, collective action clauses were accepted without resistance, despite inclusion of an aggregation provision. Such a provision means that, within each class of bonds, a super majority can modify the bonds in terms of maturity, money, and coupons if a minimum vote is reached in that class. In fact, the aggregation provision gives a sort of insurance against the risk of any future distressful event.

The concept of using a super majority vote to synchronize actions, benefits, and penalties among bondholders who are trying to solve the problem with the debtor is a novel way to treat distressed sovereign bonds. This was perhaps one of the most innovative tools of the proposal because it diminishes the risk of the recurrence of traumatic episodes such as global debt restructures. In the end, the aggregation provision helps ensure a higher sustainability of external flows. In conclusion, the consultative process confirmed most of the initial assumptions envisaged by Uruguayan authorities, laying the ground work for building the exchange proposal.

 V. COLLECTIVE ACTION CLAUSES AND EXIT CONSENT PROVISIONS

The exchange proposal included state-of-the-art legal components that played a crucial role in achieving the goals of the debt exchange. By definition, this type of exchange was a mix of financial engineering and sophisticated legal provisions crafted through an exercise in persuasion, directed towards market players, about the feasibility of actions proposed. Remember, no other nation had implemented this type of voluntary strategy; previous debt exchanges, in Pakistan, Ukraine, and Ecuador for example, were all involuntary in one sense or another.

Since they entered into market practice by corporations in England during the nineteenth century, CACs have been used in certain international bond documentation (e.g., Eurobonds--Japanese jurisdiction). However, even though U.S. law does not prohibit their inclusion, CACs were not used by sovereigns in bonds issued in the United States.

Recently, given the difficulties facing several sovereign bonds, the issue of CACs has become relevant. Many prestigious voices advocated for the inclusion of CACs as a way to facilitate exchanges and to apply market rules to avoid painful defaults. For others, the inclusion of CACs was the verge of a serial bond restructuring which would add more risk and, as a result, would increase the cost of issuing debt.14

The challenge faced by Uruguayan authorities was to set conditions so that all parties would pursue a cooperative strategy during the exchange process. CAC inclusion ensured that, if needed, a cooperative game could be played in the future without a major disruption either from a global exchange or on a bond-by-bond basis. Because of impaired payment flows, this option would promptly wipe out the potential risk of insolvency when a liquidity problem arose. From Uruguay's perspective, CAC inclusion was crucial to ensuring the voluntary participation of creditors in the event of future distress.

Furthermore, the aggregation concept was a way to guarantee that a super majority could modify reserve aspects of the bond15 and provided additional assurance that all creditors would share the burden of a new exchange equally if the debtor situation deteriorated once again. In other words, aggregation meant that while individual creditors may have less control over their individual series, the higher aggregate threshold gives them greater protection, while lower thresholds for each class prevents other creditors from playing upon individual issues.

Uruguay's proposal included CAC voting thresholds based on the aggregate principal outstanding amount. For non-reserve modifications, a vote representing 66.6% was required.16 For reserve modifications, it was necessary to achieve a vote of either 75% of each series or 85% for all bonds and 66.6% of each series.17 In order to avoid the risk that the issuer could manage future voting episodes,18 new bonds issued in contemplation of a vote and owned or controlled directly or indirectly by the issuer were not allowed voting participation.

This was the first time that sovereign bonds included an aggregation clause. Also, the total replacement of most of Uruguay's debt by a new class of securities provided an opportunity to have aggregation immediately applied to a large share of the sovereign debt stock. However, the novelty of the debt exchange mechanism raised some questions. For example, skeptics expressed concern over the legality and capacity of a super majority modifying all bond terms. But the market's acceptance of the exchange mechanism quickly confirmed that including the aggregation clause was the correct thing to do.

In addition to CACs, exit consent provisions were also used as an incentive for cooperative behavior during the exchange. Put simply, penalties and disincentives were included in the exchange mechanism to guard against maverick bondholders. Similar exit consent provisions had been used previously in the Ecuadorian exchange in February 2001 to induce bondholder participation and penalize free-riding.

The exit consent provisions in Uruguay's proposal were more aggressive in some ways than those in Ecuador's plan. For example, Uruguay's formulation allowed the debtor to ( 1 ) carve out the waiver of sovereign immunity from new bond payments, (2) delete the cross-default and cross-accelerations provisions, and (3) remove listing requirements.19 Under these new conditions, the old bonds were automatically subordinated to the new bonds issued through the exchange. The result was that the bonds not exchanged (holdouts) became less liquid and their rights were lowered to the same category as common supplier credit. Exit consent provisions became effective if the exchange was completed and a voting threshold of 50% was obtained in each bond category.

 VI. OTHER DISINCENTIVES FOR HOLDOUTS

To dilute opportunities for holdouts looking for the attachment of flow payments of the new bonds,20 a trust indenture mechanism was introduced to replace the fiscal agent. The problem is that money deposited in the fiscal agent for payment to bondholders might be attached. The trust indenture mechanism overcomes this weakness because this entity belongs to the bondholder community as a whole and, as a result, is placed out of the reach of national influence. Therefore, its assets cannot be attached by third parties to pay out on old bonds.

Additionally, to encourage participation of domestic financial institutions, the proposal included certain regulatory incentives. First, the Superintendent of Banks indicated that the old bonds would become non-tradable securities due to the suspension of stock market quotations. Consequently, the old bonds would become subject to 100% risk-weighting, instead of 0% risk-weighting, in bank capital-adequacy ratios. In addition, when old bonds are used as collateral, provisioning requirements are higher and credit ceilings reduced. At the same time, exchange houses and offshore banks would not be allowed to use the old bonds to meet mandatory deposit requirements at the Central Bank. Finally, the Central Bank would not accept old bonds as collateral for liquidity assistance, and a provisioning requirement higher than 50% would be applied to bonds held on banks' books rated "default" or "selective default," which are the ratings expected for the old bonds.21

VII. TIMING Is NOT TRIVIAL

One crucial factor in the exchange was the determination of when to implement the proposal. Markets are live creatures with changing moods and volatile expectations, and the optimal timing for launching the proposal depended upon several factors. First, after a suitable proposal was in place, there needed to be an accurate prediction of international and regional events that might affect the success of the exchange. In addition, the ultimate timing depended on the availability of cash to continue servicing the debt. With these constraints in mind, Uruguayan authorities tried to set the optimal timing for the launch of the proposal.

According to the authorities, the proposal could not be launched prior to knowing the final outcome of the Brazilian presidential elections of November 2002 and the effects of those elections on international capital markets. If the impact on market expectations was unfavorable, given the weakened situation in Argentina, there would be a good chance that other events-possibly a regional default-would demand future actions. In such a case, it would be very likely that Uruguay's voluntary exchange strategy would be out of scope. Conversely, if international markets improved after the Brazilian presidential inauguration, then a premature launching of the deal would not be optimal. Bad timing meant less debt alleviation and could collapse the deal.

Behind the scenes, there was a scarce availability of resources. In practical terms, this meant that the deal could not be postponed until later than June 2003. The IMF desired a "sooner than later" approach, believing that the last quarter of 2002 was an appropriate time to launch the proposal. However, Uruguay resisted that idea from the outset for the reasons explained above. Moreover, Uruguay wanted to be certain that it had sufficient time to develop a strategy suitable to all parties involved. As a result, the launch was delayed until April 2003.

At that time, Uruguayan officials gambled that two conditions would occur.22 First, Uruguayan officials believed that regional conditions would improve because of the Brazilian presidential elections. second, officials believed that the resilience of the Uruguayan economy would allow it to perform better than expected after the crisis. Both of these conditions would facilitate the exchange, but the strengthening of the financial sector and the dilution of overshooting the exchange rate devaluations were also crucial.

The IMF, of course, worried that Uruguay might be forced to use reserves provided by the IMF to pay private creditors during the process. This fear postponed Uruguay from scheduling the launch.23 The maxim "no public money to bail out private creditors"24 was often mentioned and vigorously enforced.25 In any case, Uruguayan authorities never considered that such an approach was an option. But the mere possibility complicated the preparation of the package because there was little up-front money available to sweeten and facilitate the deal. Additionally, by definition, Uruguay's funding had to come from its own reserves.

VIII. THE IMPLEMENTATION PROCESS

In April 2003, Uruguay's total debt amounted to $10.7 billion, nearly equally divided between the private sector (55%) and multilateral institutions (45%). The exchange entailed three concurrent offers divided according to the national jurisdiction under which the bonds had been issued. Eligible securities included: (1) forty-six domestically issued bonds and Treasury Bills, accounting for $1.6 billion; (2) eighteen international bonds issued under foreign law, accounting for $3.5 billion; and (3) one samurai bond issued in Japan, accounting for about $250 million.26 Domestic law bonds would be exchanged through a custodian or a broker or directly with the Central Bank. Foreign law bonds could be exchanged by submitting an application to a password-protected internet site. Finally, the samurai bond terms were to be changed at a bondholders' meeting held in Tokyo.27

According to the acceptance conditions, Uruguay would complete the exchange if the bonds presented to the exchange were: (1) at least 90% of the total eligible debt and (2) at least 90% of the total eligible debt maturing on or prior to December 31, 2008 (including the samurai bond). These two joint benchmarks ensured that the participation of the short end of the bond curve was adequate to achieve the objectives hoped for. In the event that bond participation was less than 80%, Uruguay would not complete the exchange.28 If participation was between 80-90%, Uruguay reserved the right to accept the transaction depending on the composition of the bonds tendered.29

IX. THE RESULTS OF THE DEBT EXCHANGE

The principal amount tendered was $5.15 billion, amounting to an overall participation of 92.9% across all bond categories.30 The participation breakdown was as follows:

* Domestic, 98.7%;

* International, 89.6%; and

* Samurai solicitation, 100%.31

Bondholder participation was exceptionally high by any standard, and the debt alleviation provided was better than initially expected by authorities. Moreover, participation was very broad-creditors were both institutional and retail, both domestic and international. Domestic retail participation was influenced strongly by brokers and custodians contacting their clients.

On average, international bond participation was also high, but some variance in the participation among instruments took place, especially among certain types of bonds. U.S. dollar global bond participating rates were over 90%, but the euro-denominated bonds had participation rates under 80%. This resulted from several factors, among them the relative lower sophistication of retail and European bondholders, lengthy post-launch registration procedures in Europe, and a lack of information about the characteristics of the exchange.

Brady bond participation was low (60% on average) and the participation of one bond, the New Money bond issued in 1991, reached only 25%; as a result, exit consent did not become effective. Several factors explain why participation was so low. First, banks that participated in the Brady deal held those notes at par value because of regulations in place at the implementation of the original Brady deal in 1991.32 To participate in the exchange meant to mark the new bonds to market value, causing significant accounting losses. second, principal and interest payments (18 months) of par Brady bonds were collateralized, reducing the potential gains from participating in the exchange. Finally, the fact that these bonds were issued by the Central Bank gave creditors the implicit assurance that monetary authorities were quite reluctant to default on their debts, including bonds.33

The NPV reduction was slightly higher for domestic bonds than it was for international bonds. On average, the NPV reduction was around 22%, using a discount rate of 16% (which was close to the implied yields at the settlement date). If the rate used for the calculation were the post-exchange discount rate of 12%, the NPV reduction would be around 13%.

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Αρκετά επεξηγηματικό, θα προσπαθήσω να το φέρω στα δικά μας καθώς όλα δείχνουν ότι αυτή η εμπειρία θα ακουλουθηθεί

http://r0.unctad.org/dmfas/docs/steneri.pdf

Του συγγραφέα (Carlos Steneri - Ministry of Finance-Central Bank of Uruguay) κάποιος θα πρέπει να του πάρει συνέντευξη - το λιγότερο...

http://efipyl-efi.blogspot.com/2011/02/greek-debt-reprofiling.html

http://greece.greekreporter.com/2011/01/31/greece-in-talks-with-euimf-on-a-debt-restructuring-scheme/