## 082906

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### Introduction and objective
- Overarching objective in unavoidable sovereign debt restructuring: restore the country’s debt to a sustainable path—i.e., enable the borrower to continue servicing debt without an unrealistically large correction to income and expenditure.
- Paper focus: experience since 1998 with restructurings involving private creditors (non-HIPC middle-income cases) — Argentina (2001 and 2005), Dominican Republic (2005), Ecuador (1999), Moldova (2002 and 2004), Pakistan (1999), Russia (1998–2000), Ukraine (1998–2000), and Uruguay (2003).
- Assessment framework:
  - Early Warning System (EWS) for current debt levels and vulnerabilities.
  - Liquidity indicators for short-term pressures.
  - Debt Sustainability Analyses (DSAs) with stress tests for medium-term resilience.
- Data basis: staff reports issued through October 2005.

### Cross-country overview and initial conditions
- Two years prior to restructuring, total public debt as share of GDP:
  - Range: 30 percent (Ukraine) to 99 percent (Moldova).
  - Average: 62 percent.
- Foreign-currency denominated debt shares in restructuring year (“t”):
  - Above 95 percent: Argentina, Ecuador, Russia.
  - 91 percent: Uruguay.
  - Below 85 percent: Dominican Republic, Moldova, Ukraine, Pakistan.

### Debt dynamics prior to restructuring (drivers and exceptions)
- Common drivers of rising debt and servicing difficulties:
  - High and increasing public interest obligations (Ecuador, Uruguay).
  - Rapid currency depreciation (Dominican Republic, Ecuador, Russia, Ukraine, Uruguay).
  - Declining economic activity (Ecuador, Russia, Ukraine, Uruguay).
  - Fiscal cost of supporting troubled financial sector (Dominican Republic, Ecuador, Uruguay).
- Exceptions:
  - Argentina’s and Pakistan’s debt levels did not increase much before the crisis.
  - Moldova’s debt ratio was in decline prior to its restructuring episode.

### Selected country liquidity and debt-service indicators (selected exact figures)
- Russia:
  - Gross reserves fell to 15 percent of short-term debt in 1998, compared with 39 percent in 1996.
- Ukraine:
  - Debt level 42 percent of GDP in 1998.
  - Gross reserves fell to 14 percent of short-term debt at end-1998, compared with 148 percent in 1996.
- Ecuador:
  - Public sector debt service rose from 8.3 percent of GDP in 1998 to 18.1 percent of GDP in the first quarter of 2000.
  - Gross reserves declined from 50 percent of short-term debt (1996) to 30 percent in 2000.
- Pakistan:
  - External debt-service as share of export receipts rose from 26 percent in 1992 to 34 percent in 1998.
  - By June 1998 gross reserves dropped to below 10 percent of short-term debt, compared with 27 percent in June 1996.
- Argentina:
  - Public sector debt service increased from 38 percent of exports in 1998 to 66 percent in 2001.
  - Gross reserves declined to 31 percent of short-term debt at end–2001, compared with 48 percent in 1999.
- Moldova:
  - External debt-service obligations increased from 17 percent of exports in 1998 to 23 percent in 2002.
  - Gross reserves as share of short-term debt were 39 percent in 2002.
- Uruguay:
  - External debt-service obligations rose from 36 percent of exports in 2000 to 56 percent in 2002.
  - Gross reserves coverage of short-term debt fell from 34 percent in 2000 to 16 percent in 2002.
- Dominican Republic:
  - Gross reserves fell from 151 percent of short-term debt to 31 percent in 2003.
  - Public debt peaked at 56 percent of GDP in 2003.

### Scope and outcomes of sovereign debt restructurings (NPV and principal changes; preserved exactly)
- Pre-emptive restructurings generally: extension of maturity, limited coupon reduction; NPV reductions generally small (no more than 8 percent at 10 percent discount except Argentina (2001)).
- Argentina (megaswap, Jun 2001): NPV change +28 percent.
- Argentina (Phase I, Nov-Dec 2001): NPV change -32 percent.
- Argentina (joint 2001 restructurings): NPV change -10 percent.
- Ecuador (Aug 2000 Brady and Eurobond restructuring): NPV change -25 percent.
- Russia (aggregate measures): NPV change -44 percent.
- Moldova (Apr 2004 Gazprom agreement): NPV change -58 percent.
- Argentina (2005 Global Debt Exchange): NPV change -75 percent.
- Nominal principal reductions and selected figures:
  - Moldova (2002 exchange): principal reduction US$2.6 million (6.4 percent of restructured debt); upfront cash US$3.97 million (10 percent of restructured debt); NPV haircut 6 percent.
  - Uruguay (2003 exchange): nominal reduction US$49 million (1.0 percent of exchanged bonds); NPV reduction about 8 percent.
  - Dominican Republic (2005 bond exchange): no principal reduction; bond exchange NPV reduction 1 percent; commercial banks NPV reduction 2 percent.
  - Ecuador (1999–2000 external restructuring): principal reduction nearly 40 percent (equivalent to 18 percent of GDP); NPV reduction 25 percent.
  - Russia (London Club): principal reduction approximately 17 percent of total restructured debt (equivalent to 4.1 percent of GDP); NPV reduction 44 percent (10 percent discount).
  - Moldova (2004 Gazprom): close to 60 percent reduction in principal and NPV.
  - Argentina (2005 global exchange): principal reduction 56 percent (equivalent to 37 percent of GDP); participation rate 76 percent; almost US$20 billion remain in arrears.
- Case-specific scope highlights:
  - Ukraine: private sector restructuring covered 21 percent of public debt; comprehensive exchange covered principal outstanding of US$3.3 billion; NPV reduction for Apr 2000 restructuring 5 percent of restructured debt (estimate).
  - Pakistan: Eurobonds face value US$608 million (about 1 percent of GDP) restructured; NPV reduction reported 8 percent (10 percent discount).
  - Dominican Republic: restructuring covered US$1.4 billion (12 percent of total debt) in two external bonds and US$175 million to commercial banks; operations focused on liquidity relief.

### Pre-emptive versus post-default: macroeconomic outcomes (exact averages)
- Average peak contraction (year t, year of lowest growth):
  - Pre-emptive cases: real GDP contracted by 3.6 percent on average.
  - Post-default cases: real GDP contracted by 7.5 percent on average.
- Average rebound (year following the trough):
  - Post-default cases: real GDP grew by 6 percent on average.
  - Pre-emptive cases: real GDP grew by 1 percent on average.
- Observations:
  - Pre-emptive restructurings: less debt reduction, smaller output declines.
  - Post-default restructurings: larger debt relief, deeper contractions, stronger rebounds.

### Methodology: EWS, liquidity indicators, and DSA stress tests
- EWS:
  - Model calibrated from Manasse, Roubini, and Schimmelpfennig (2003); correctly predicts 62 percent of in-sample crisis entries; false alarms in 12 percent of cases.
  - Vulnerability scores estimated in October 2005 based on actual 2004 data and 2005 projections.
  - EWS signal threshold 24.8 / 24.8 (2005 / 2006 columns).
  - Example EWS vulnerability scores (2005 / 2006):
    - Ukraine 0.1 / 1.6
    - Pakistan /13.2 / 1.9
    - Moldova 4.6 / 4.3
    - Uruguay 54.6 / 55.4
    - Dominican Republic 3.0 / 8.3
    - Ecuador 16.9 / 13.4
    - Russia 1.1 / 1.5
    - Argentina 55.4 / 26.6
- Liquidity indicators:
  - Reserves/ST debt: ratio of gross international reserves to short-term external debt at remaining maturity (ratio below one implies severe pressure if market access lost for one year).
  - Financing need: overall fiscal deficit plus amortization of medium- and long-term debt plus short-term debt at end of previous period.
  - External liquidity vulnerabilities: Ecuador, Uruguay, and Argentina show substantial vulnerability; Pakistan, Russia, Ukraine comfortable.
  - Fiscal financing needs: highest in Uruguay; medium in Dominican Republic, Ecuador, Moldova, Pakistan, Ukraine, Argentina; relatively low in Russia.
- DSA approach (standardized stress tests):
  - Baseline projections, alternative scenarios using 10-year historical averages, and stress tests applying two-standard deviation shocks in turn to real GDP growth, real interest rate, primary balance.
  - Additional tests: combined one-standard-deviation shock; one-time 30 percent real depreciation; 10 percent of GDP increase in debt from contingent liabilities.
  - Caveats: stress tests require judgment; 10-year historical shocks may be unduly harsh for countries emerging from transition or recent crises.

### Medium-term DSA aggregate projections (exact table entries)
- Table 11 public debt; 2004 / Baseline / Mean 2/ / STD 2/ (percent of GDP):
  - Ukraine: 27.1 / 16.4 / 26.0 / 15.4
  - Pakistan 3/: 67.9 / 45.6 / 49.8 / 5.2
  - Moldova 4/: 53.6 / 20.0 / 24.3 / 8.7
  - Uruguay: 92.5 / 53.6 / 70.7 / 14.3
  - Dominican Republic: 54.1 / 37.6 / 44.7 / 6.1
  - Ecuador: 47.2 / 41.7 / 57.4 / 13.8
  - Russia: 21.7 / 7.3 / 19.5 / 9.8
  - Argentina: 129.4 / 56.9 / 80.9 / 18.9
- Summary: baseline projections generally below 2004 levels; mean of scenarios below current level in seven of eight cases; Ecuador’s mean considerably above 2004 level; dispersion of projected debt levels substantial.

### Country-specific medium-term DSA findings (selected exact projections and caveats)
- Ukraine:
  - Baseline: decline from 27 percent in 2004 to 16 percent by 2009.
  - Only one scenario implies steadily increasing debt; other scenarios peak at most 39 percent.
- Pakistan:
  - Baseline: decline from 68 percent in 2003/04 (equivalent to 59 percent NPV) to 46 percent (2009/10).
  - Assumes average primary deficits of 0.4 percent of GDP; adverse scenario (one-time 30 percent real depreciation in 2005/06) leads temporarily to 69 percent then decline to 60 percent by 2009/10.
- Moldova:
  - Baseline: decline from 54 percent in 2004 to 26 percent by 2010 (DSA in NPV terms).
  - One-time 30 percent real depreciation in 2005 would temporarily raise debt ratio above 60 percent.
- Uruguay:
  - Baseline: decline from 93 percent in 2004 to 54 percent by 2010, contingent on sustained primary surpluses of 3.5–4 percent of GDP.
  - One-time 30 percent real depreciation would raise debt ratio to 104 percent by end–2006.
  - Fiscal contingent liabilities from bank restructuring could add up to 5 percentage points by 2010.
- Dominican Republic:
  - Baseline: decline from 54 percent in 2004 to 38 percent in 2010 assuming primary surpluses 0.8–2.5 percent of GDP.
  - Some stress tests push debt temporarily above 55 percent.
- Ecuador:
  - Baseline: decline from 53 percent in 2003 to 42 percent by 2010 assuming primary surpluses 2–5 percent.
  - Stress tests: debt could stabilize around 70 percent under a number of tests; shock to GDP growth would lead to sharply rising debt path.
- Russia:
  - Baseline: decline from 22 percent in 2004 to 7 percent in 2010 conditional on primary surpluses 5–9 percent and favorable oil prices.
  - Stress tests: a marked fall in oil prices could raise debt to 34 percent by 2010; other shocks can push debt above 40 percent short-term.
- Argentina:
  - Baseline: decline from 78 percent in 2005 to 57 percent by 2010 assuming full participation in 2005 exchange and federal primary surpluses 3.3–3.7 percent (consolidated 4–4.5 percent).
  - Stress tests indicate remaining risks; projections do not yet incorporate early repurchase of Fund obligations in January 2006.

### Post-restructuring debt dynamics and drivers (decomposition findings; preserved examples)
- In a majority of selected post-restructuring cases (Pakistan, Russia, Ukraine, Uruguay) actual debt dynamics were better than staff projections.
- Decomposition attributes changes to:
  - Primary balance, interest-growth differential, exchange rates, identified debt-creating flows, and other residuals.
- Selected cumulative contributions (Post vs Latest as reported):
  - Uruguay aggregate change in debt/GDP: Post -15.0 / Latest -39.6.
  - Ecuador: Post -5.2 / Latest -15.9.
  - Russia: Post -8.0 / Latest -12.1.
  - Pakistan: Post -63.9 / Latest -44.2.
  - Ukraine: Post -28.1 / Latest -35.9.
- Drivers:
  - Primary balance outperformance: Russia and Uruguay; Russia driven by higher oil revenues; Uruguay by expenditure restraint.
  - Exchange rate: smaller-than-expected debt-increasing exchange rate effect in Pakistan, Ukraine, Uruguay; Russia slightly higher-than-expected exchange-rate contribution; Ecuador no exchange rate effect due to dollarization.
  - Interest-growth differential: more favorable than expected in Pakistan, Russia, Ukraine (higher growth and/or lower real interest rates).

### Debt shock and sensitivity scenarios (examples preserved)
- GDP shock scenario: real GDP growth in 2006 and 2007 at ten-year historical average less two standard deviations; implies increase in debt to more than 100 percent by 2007.
- Joint shock scenario: real interest rates at historical averages plus one standard deviation, and real GDP growth and the primary balance at historical averages minus one standard deviation in 2006 and 2007.
- Additional scenario elements:
  - Real interest rate at historical average plus two st. dev. in 2006 and 2007.
  - Real GDP growth at historical average minus two st. dev. in 2006 and 2007.
  - Primary balance at historical average minus two st. dev. in 2006 and 2007.
  - One-time 30 percent real depreciation in 2006.
  - 10 percent of GDP increase in other debt-creating flows in 2006.
- Outcome summary: large GDP shock plus joint shocks would imply debt increasing to more than 100 percent by 2007; some historical-average scenarios and GDP shock scenario imply continuously rising debt ratios through 2010.

### Market developments and credit ratings (selected exact figures)
- EMBI Global spread fell from 1000 basis points in late 2001 to below 240 basis points in December 2005.
- Moody’s assigned B3 to Argentina’s foreign-currency long-term debt and applied to newly issued bonds.
- Standard and Poor’s upgraded Uruguay in 2004 to B and raised outlook to positive in early 2006.
- Standard and Poor’s downgraded Ecuador in 2005 to CCC+; assigned B to Dominican Republic after its bond exchange.
- Investment-grade ratings: only Russia at Baa2 among the cases.

### Conclusions on restructuring outcomes and comparative insights
- Evaluation criteria: (i) debt profile and EWS; (ii) liquidity vulnerabilities; (iii) medium-term DSA vulnerabilities.
- Pre-emptive restructurings:
  - Often targeted liquidity, limited NPV reductions, associated with smaller output declines (e.g., Ukraine durable exit; Dominican Republic still faces risks).
  - Where solvency problems existed, outcomes mixed (Argentina, Uruguay).
- Post-default restructurings:
  - Delivered sizeable nominal and NPV reductions (e.g., Russia, Ecuador, Argentina 2005) but associated with deeper contractions and stronger rebounds.
  - Argentina: medium vulnerability persists due to large stock of debt in arrears after 2005 exchange; addressing nonparticipating creditors critical.
- Comparative insight: disentangling role of default decisions from broader macroeconomic circumstances is difficult; timing influences negotiation incentives and economic outcomes.

### Role of the Fund during restructurings (selected program details preserved)
- All eight countries had Fund arrangements when they restructured; several programs were off-track at times.
- Only Uruguay and the Dominican Republic had Fund-supported programs on-track during the entire restructuring process.
- Selected program highlights:
  - Ukraine: three-year EFF Sep 1998 (SDR 1.6 billion, 165 percent of quota), augmented May 1999 by SDR 274 million (20 percent of quota); program went off-track after Aug 1999 review.
  - Pakistan: three-year combined PRGF and EFF Oct 1997 (SDR 1.1 billion, 110 percent of quota); program went off-track July 1999.
  - Argentina: SBAs and augmentations; augmentation Sep 2001 to about US$22 billion (US$3 billion usable for voluntary market-based operation); programs went off-track in 2001.
  - Uruguay: March 2002 two–year SBA (SDR 0.6 billion, 194 percent of quota), augmented to SDR 2.1 billion (694 percent of quota).
  - Dominican Republic: 28-month SBA (SDR 437.8 million; 200 percent of quota) in January 2005.
  - Ecuador: SBA April 2000 (SDR 227 million, 75 percent of quota) after domestic debt rescheduling.

### Annex IV — Probabilities of debt crisis (empirical model and key coefficients preserved)
- Sample: unbalanced panel of 55 low- and middle-income countries, 1971–2002.
- Pooled probit model (lagged variables):
  - C: Coefficient -1.1984; Std. Error 0.0779; Prob. 0.0000
  - DEBT1: Coefficient 0.0145; Std. Error 0.0011; Prob. 0.0000
  - GGDP1: Coefficient -0.0641; Std. Error 0.0075; Prob. 0.0000
  - ST_EXTDEBT_GDP1: Coefficient 0.0040; Std. Error 0.0021; Prob. 0.0598
- Fit and sample:
  - McFadden R-squared 0.17
  - Observations: 1509
- Key substantive findings:
  - Higher lagged public debt ratio (DEBT1) raises probability of public debt crisis (positive coefficient 0.0145).
  - Higher lagged GDP growth (GGDP1) reduces probability of crisis (negative coefficient -0.0641).
  - Higher lagged short-term external debt to GDP (ST_EXTDEBT_GDP1) increases crisis probability (coefficient 0.0040; weaker significance).
- Polynomial mapping from inferred crisis probabilities to DEBT1 fitted with adjusted R-squared 0.76 (Table IV.2 coefficients preserved).

*Source: IMF staff report content as presented in the provided PDF chapter/section.*

### 1. Public Debt in Recent Cases of Sovereign Debt Restructuring .......................................... 5

### 1. Public Debt in Recent Cases of Sovereign Debt Restructuring

### Introduction
- Overarching objective in unavoidable sovereign debt restructuring: restore the country’s debt to a sustainable path—i.e., enable the borrower to continue servicing debt without an unrealistically large correction to income and expenditure.
- Assessment of restored debt sustainability requires evaluation of the nature of the crisis (solvency vs. liquidity) and complex judgments on whether restructuring is sufficient to enable durable exit and regain market access.
- Paper focus: experience since 1998 with restructurings involving private creditors (non-HIPC middle-income cases), assessing whether debt sustainability was restored.
- Countries reviewed: Argentina (2001 and 2005), Dominican Republic (2005), Ecuador (1999), Moldova (2002 and 2004), Pakistan (1999), Russia (1998–2000), Ukraine (1998–2000), and Uruguay (2003).
- Assessment framework: (i) current level of debt and related vulnerabilities via an early warning system (EWS); (ii) liquidity vulnerabilities; (iii) medium-term vulnerabilities via debt sustainability analyses (DSAs) including stress tests.
- Data basis: staff reports issued through October 2005. Sample size is acknowledged as too small for firm generalizations.

### Cross-Country Overview and Initial Conditions
- Two years prior to restructuring, total public debt as a share of GDP:
  - Range: 30 percent (Ukraine) to 99 percent (Moldova).
  - Average: 62 percent.
- In pre-emptive restructurings, debt ratios ranged between 30 percent and 99 percent; in post-default cases Ecuador and Russia had debt ratios of 66 percent.
- Foreign-currency denominated debt shares in the central restructuring year (“t”):
  - Above 95 percent: Argentina, Ecuador, Russia.
  - 91 percent: Uruguay.
  - Below 85 percent: Dominican Republic, Moldova, Ukraine, Pakistan.

### Debt Dynamics Prior to Restructuring
- Majority of countries experienced sharp increases in debt ratios in the run-up to restructuring, notably: Dominican Republic, Ecuador, Russia, Ukraine, and Uruguay.
- Key contributing factors to rising debt and debt-servicing difficulties:
  - High and increasing public interest obligations (Ecuador, Uruguay).
  - Rapid currency depreciation (Dominican Republic, Ecuador, Russia, Ukraine, Uruguay).
  - Declining economic activity (Ecuador, Russia, Ukraine, Uruguay).
  - Fiscal cost of supporting a troubled financial sector (Dominican Republic, Ecuador, Uruguay).
- Exceptions: Argentina’s and Pakistan’s debt levels did not increase much before the crisis; Moldova’s debt ratio was in decline prior to its restructuring episode.

### Country-Specific Findings (selected liquidity and debt-service indicators)
- Russia
  - Market confidence declined in 1998 amid low petroleum prices and weakened policy credibility.
  - Gross reserves fell to 15 percent of short-term debt in 1998, compared with 39 percent in 1996.
  - Default events: t-bill obligations in August 1998; restructured loans (PRINs) in December 1998; MinFin-3 bond in May 1999; interest arrears notes (IANs) in June 1999.
- Ukraine
  - Pulled into crisis partly by Russia; at debt level of 42 percent of GDP in 1998, solvency concerns were limited but liquidity tightened.
  - Gross reserves fell to 14 percent of short-term debt at end-1998, compared with 148 percent in 1996.
  - Remained current on private creditor obligations but incurred arrears to official bilateral creditors from 2000.
- Ecuador
  - Affected by low oil prices and a banking crisis; defaulted in August/September 1999 on Brady and Eurobond debt, on domestic public debt maturing until end-2000, and on external credit lines in closed banks.
  - Public sector debt service rose from 8.3 percent of GDP in 1998 to 18.1 percent of GDP in the first quarter of 2000.
  - Gross reserves declined from 50 percent of short-term debt (1996) to 30 percent in 2000.
- Pakistan
  - External debt-service as share of export receipts rose from 26 percent in 1992 to 34 percent in 1998.
  - Entered liquidity crisis after 1998 nuclear tests and sanctions; by June 1998 gross reserves dropped to below 10 percent of short-term debt, compared with 27 percent in June 1996.
  - Debt-servicing payments to official bilateral creditors were suspended in 1998; remained current to private creditors.
- Argentina
  - Three years of recession and fiscal difficulties led to confidence crisis; sovereign spreads soared and convertibility regime sustainability questioned.
  - Public sector debt service increased from 38 percent of exports in 1998 to 66 percent in 2001.
  - Gross reserves declined to 31 percent of short-term debt at end–2001, compared with 48 percent in 1999.
  - Defaulted on government debt to private and official bilateral creditors in December 2001 after two prior debt operations.
- Moldova
  - Public debt rose in late 1990s due to sustained fiscal deficits, negative GDP growth, and sharp depreciation of the leu after the Russian crisis.
  - External debt-service obligations increased from 17 percent of exports in 1998 to 23 percent in 2002.
  - Gross reserves as share of short-term debt were 39 percent in 2002.
  - Incurred arrears to Paris Club and Gazprom; remained current on Eurobond obligations.
- Uruguay
  - Long recession since 1999, persistent fiscal deficits, and banking system weaknesses culminated in debt and debt-service problems after 2002 banking crisis.
  - External debt-service obligations rose from 36 percent of exports in 2000 to 56 percent in 2002.
  - Gross reserves coverage of short-term debt fell from 34 percent in 2000 to 16 percent in 2002.
  - Did not default on commercial or official debt service obligations.
- Dominican Republic
  - Banking fraud and losses triggered crisis in 2002/03; capital flight, high inflation, peso depreciation, and rising public debt followed.
  - Gross reserves fell from 151 percent of short-term debt to 31 percent in 2003.
  - Debt ratio more than doubled between 2002 and 2003.

### Analytical and Methodological Notes
- The paper emphasizes three analytical lenses to judge whether sustainability was restored after restructurings:
  - Early Warning System (EWS) to estimate current debt levels and vulnerabilities.
  - Liquidity indicators to identify short-term pressures.
  - Debt Sustainability Analyses (DSAs) with stress tests to assess medium-term resilience to shocks.
- The focus is on restructurings involving private creditors in near-crisis circumstances since 1998; some cases (e.g., Moldova) included both pre-emptive exchanges and later arrears episodes, and are treated according to the nature of each exchange for DSA purposes.
- Historical observations: past experience indicates that approximately 40 (60) percent of entries into sovereign debt crises occurred when debt levels in the last year before crisis had been above 59 (39) percent of GDP.

### Organization of the Paper (contents relevant to analysis)
- Section II: cross-country overview of economic conditions, composition and dynamics of sovereign debt prior to operations, scope and outcomes of restructurings.
- Section III: analysis of debt profile, liquidity position, DSAs and stress tests, and an EWS to assess restoration of sustainability in each country.
- Section IV: conclusions.

*Prepared by a team led by Mauro Mecagni and consisting of Harald Finger (main contributor), Julie Kozack, Krishna Srinivasan, and Gabriel Sterne; Ivetta Hakobyan provided research assistance.*

### 11.6 percent of goods exports in 2001 to 21.5 percent in 2005 (before restructuring).

### _082906 - 11.6 percent of goods exports in 2001 to 21.5 percent in 2005 (before restructuring).

### Background and context
- External arrears began accruing to the Paris Club (since 2003) and commercial banks (2004), while the Dominican Republic remained current on its external bond obligations.
- Public debt peaked at 56 percent of GDP in 2003.
- The debt restructuring primarily addressed liquidity rather than solvency concerns, resolving the bunching of debt service payments falling due.

### Scope and outcome of sovereign debt restructuring with the private sector
- Scope of restructuring depended on the share of debt owed to private creditors.
  - Argentina (2001 and 2005), Ecuador, and Uruguay each restructured approximately half of their public debt.
  - Where debt was largely owed to official creditors, scope for private sector restructuring was more limited.
- Pre-emptive restructurings:
  - Largely provided extension of maturity with limited reduction in coupon payments.
  - NPV reductions were generally small: with the exception of Argentina (2001), pre-emptive cases received NPV reductions of no more than 8 percent when evaluated at a common discount rate of 10 percent.
  - Argentina’s megaswap increased NPV by 28 percent; the subsequent Phase I restructuring had an NPV reduction of 32 percent. Jointly, the two restructurings resulted in an NPV reduction of 10 percent.
- Post-default restructurings:
  - Four post-default cases received NPV reductions of 25 percent (Ecuador), 44 percent (Russia), 58 percent (Moldova), and 75 percent (Argentina’s 2005 global debt exchange).

### Quantitative findings and comparisons
- NPV reductions (common discount rate of 10 percent) — selected cases:
  - Argentina (megaswap, Jun 2001): NPV change +28 percent
  - Argentina (Phase I, Nov-Dec 2001): NPV change -32 percent
  - Argentina (joint 2001 restructurings): NPV change -10 percent
  - Ecuador (Aug 2000 Brady and Eurobond restructuring): NPV change -25 percent
  - Russia (aggregate measures): NPV change -44 percent
  - Moldova (Apr 2004 Gazprom agreement): NPV change -58 percent
  - Argentina (2005 Global Debt Exchange): NPV change -75 percent
- Nominal principal reductions (selected cases):
  - Moldova (2002 exchange): principal reduction US$2.6 million (6.4 percent of restructured debt) and upfront cash US$3.97 million (10 percent of restructured debt); NPV haircut 6 percent.
  - Uruguay (2003 exchange): nominal reduction US$49 million (1.0 percent of exchanged bonds); NPV reduction about 8 percent.
  - Dominican Republic (2005 bond exchange): no principal reduction; bond exchange NPV reduction 1 percent; commercial banks NPV reduction 2 percent.
  - Ecuador (1999–2000 external restructuring): principal reduction nearly 40 percent (equivalent to 18 percent of GDP); NPV reduction 25 percent.
  - Russia (London Club): principal reduction approximately 17 percent of total restructured debt (equivalent to 4.1 percent of GDP); NPV reduction 44 percent (10 percent discount).
  - Moldova (2004 Gazprom): close to 60 percent reduction in principal and NPV.
  - Argentina (2005 global exchange): principal reduction 56 percent (equivalent to 37 percent of GDP); participation rate 76 percent; almost US$20 billion remain in arrears.

### Pre-emptive versus post-default: economic outcomes
- Average peak contraction (year t, year of lowest growth):
  - Pre-emptive restructuring cases: real GDP contracted by 3.6 percent on average.
  - Post-default cases: real GDP contracted by 7.5 percent on average.
- Average rebound (year following the trough):
  - Post-default cases: real GDP grew by 6 percent on average.
  - Pre-emptive cases: real GDP grew by 1 percent on average.
- Observations:
  - Pre-emptive restructurings generally delivered less debt reduction but were associated with smaller output declines.
  - Post-default restructurings delivered larger debt relief but were associated with deeper contractions and, on average, stronger rebounds.

### Case-level summaries (selected)
- Ukraine:
  - Private sector restructuring covered 21 percent of public debt; comprehensive exchange covered principal outstanding of US$3.3 billion.
  - NPV reduction for the Apr 2000 Eurobond and Gazprom bond restructuring: 5 percent of restructured debt (estimate available only for 2000).
- Pakistan:
  - Eurobonds with face value US$608 million (about 1 percent of GDP) restructured; overall scope small due to heavy official creditor share.
  - NPV reduction reported as 8 percent for the exchange (evaluated at 10 percent discount).
- Argentina:
  - Pre-default 2001 megaswap covered debt equivalent to 11 percent of GDP; Phase I covered 19 percent of GDP. Megaswap increased NPV by 28 percent; Phase I yielded NPV reduction 32 percent; joint net NPV reduction ~10 percent.
  - 2005 global debt exchange offered to exchange securities with face value equivalent to 60 percent of GDP; principal reduction 56 percent; NPV reduction 75 percent; participation rate 76 percent; almost US$20 billion remain in arrears.
- Uruguay:
  - 2003 exchange restructured nearly 50 percent of GDP including US$3.6 billion Eurobonds; nominal principal reduction US$49 million; NPV reduction about 8 percent.
- Dominican Republic:
  - Restructuring covered majority of privately-held external debt: US$1.4 billion (12 percent of total debt) in two external bonds and US$175 million to commercial banks.
  - Operations reflected liquidity rather than solvency relief; negligible NPV reductions (1 percent bond exchange; 2 percent commercial banks).
- Ecuador:
  - Post-default comprehensive restructuring included debt almost 50 percent of GDP; external Brady and Eurobond face value US$6.5 billion.
  - External debt principal reduction nearly 40 percent (equivalent to 18 percent of GDP); NPV reduction 25 percent.
- Russia:
  - Post-1998 restructuring covered 24 percent of GDP; London Club operation yielded principal reduction ~17 percent of restructured debt (4.1 percent of GDP) and NPV reduction 44 percent (10 percent discount).
- Moldova:
  - Piecemeal strategy: 2002 Eurobond US$39.7 million (3 percent of total debt); 2004 Gazprom settlement face value US$111.1 million (9 percent of total debt).
  - 2004 Gazprom agreement led to close to 60 percent reduction in principal and NPV.

### Key analytical insights
- The extent of private sector involvement in restructurings was constrained where official creditors dominated external debt.
- Pre-emptive restructurings emphasize maturity extension and limited coupon reduction, producing modest NPV gains but potentially avoiding deeper output losses.
- Post-default restructurings achieve larger nominal and NPV haircuts but are associated with more severe immediate economic contractions and larger subsequent rebounds.
- Negotiation incentives differ by timing: pre-emptive restructurings may leave debtors accepting terms insufficient to restore sustainability due to reputational, political, and economic costs of failing to reach agreement and default risk.

*Source: IMF staff report excerpt.*

### 10.      Debt dynamics around the time of restructuring were characterized by increases in

### 10.      Debt dynamics around the time of restructuring were characterized by increases in

### Debt dynamics around restructuring episodes
- Debt built up through the crisis in each case; in most countries (Argentina, Ecuador, Moldova, Pakistan, Russia, Ukraine, and Uruguay) public debt-GDP ratios fell considerably following the crisis.
- The Dominican Republic’s debt ratio has also started to decline following its recent crisis.
- Figures 2 and 3 compare actual debt ratios to pre-restructuring, post-restructuring, and most recent projections for pre-emptive and post-default cases respectively, showing the build-up and subsequent decline in public debt-GDP ratios.

### Post-restructuring outcomes versus projections
- Where sufficient time has passed, actual post-restructuring debt dynamics can be compared to staff projections made in staff reports following the restructurings.
- Figure 4 compares changes in debt-to-GDP ratios in the post-restructuring periods (evolution from the respective central year of restructuring until 2004) for Ecuador, Pakistan, Russia, Ukraine, and Uruguay.
- In a majority of cases (Pakistan, Russia, Ukraine, and Uruguay), debt dynamics were better than anticipated at the time of restructuring.

### Factors explaining post-restructuring debt dynamics
- Debt dynamics since the restructuring can be attributed to:
  - Fiscal performance (primary balances).
  - Economic growth.
  - Real interest rates.
  - Exchange rates.
- A decomposition based on the public sector debt sustainability template for middle-income countries explains the impact attributable to changes in the primary balance, the exchange rates, and the interest-growth differential.

### Decomposition and specific case findings
- Two countries outperformed the primary fiscal path projected by staff following the restructurings: Russia and Uruguay.
- Three countries experienced firmer exchange rates than implicit in Fund projections, helping contain the debt-GDP ratio more quickly than anticipated: Pakistan, Ukraine, and Uruguay.
- In three cases the real interest-growth differential turned out more favorable than expected: Pakistan, Russia, and Ukraine.
- Overall, these factors contributed to better debt dynamics than anticipated in four out of the five cases analyzed in Figure 4.

### Criteria for assessing debt sustainability
- Debt sustainability defined: borrower expected to continue servicing debt without an unrealistically large correction to income and expenditure; encompasses solvency and liquidity.
- Three sets of criteria applied to classify debt sustainability:
  - The current debt level and vulnerabilities as estimated by an Early-Warning System (EWS).
  - Vulnerabilities stemming from the liquidity position (large financing needs and small available resources increase risk).
  - Medium-term debt-related vulnerabilities assessed via debt sustainability analysis, using projections for key macroeconomic variables and stress tests/alternative scenarios.
- Practical considerations: political implementation capacity and risks to sound economic policies.

### Current debt levels and related vulnerabilities (empirical observations)
- From a pooled sample of 55 low- and middle-income countries (1971–2002), a 50 percent probability of being in debt crisis is associated with a debt-to-GDP ratio of 80 percent in the previous year (standard deviation 18 percentage points).
- A debt level of 100 percent is associated with a probability of 63 percent; a debt level of 40 percent corresponds to a probability of 20 percent in the sample.
- 40 percent of entries into crisis occurred when debt levels in the last year before crisis had been above 59 percent of GDP; 60 percent occurred at debt levels above 39 percent of GDP.
- No clear-cut threshold levels for safe debt-to-GDP ratios; crises have occurred across a wide range of debt ratios.

### Country debt ratios and EWS vulnerability scores (selected reported figures)
- Public Debt Ratios, 2004 (in percent of GDP):
  - Ukraine 27.1
  - Pakistan 67.9 (NPV)59.0
  - Moldova 48.3 (NPV)53.6
  - Uruguay 92.5
  - Dominican Republic 54.1
  - Ecuador 47.2
  - Russia 21.7
  - Argentina 129.4
- EWS Vulnerability Scores (in percent):
  - 2005 / 2006 (columns refer to FY 2004/05 and 2005/06 respectively):
    - Ukraine 0.1 / 1.6
    - Pakistan /13.2 / 1.9
    - Moldova 4.6 / 4.3
    - Uruguay 54.6 / 55.4
    - Dominican Republic 3.0 / 8.3
    - Ecuador 16.9 / 13.4
    - Russia 1.1 / 1.5
    - Argentina 55.4 / 26.6
  - Memorandum Item: EWS signal threshold 24.8 / 24.8

*Source: IMF staff reports and staff calculations (text and figures as provided in the source content).*

### 21.      EWS can be used to supplement the

### _082906 - 21.      EWS can be used to supplement the

### Early warning models and vulnerability scoring
- Table 9 reports estimated vulnerability scores based on a model applied by Manasse, Roubini, and Schimmelpfennig (2003) and Schimmelpfennig (2003) (see Box 2 for a description of the methodology).
- Model performance and caveats:
  - The model correctly predicts 62 percent of in-sample crisis entries.
  - The model sends false alarms in 12 percent of the cases (Type II errors).
  - Conclusion: results should be interpreted carefully and in conjunction with a menu of other indicators.
- Country-level result highlights:
  - The results would assign significant vulnerability scores to Argentina and Uruguay.
  - Argentina’s score drops considerably in 2006, as the post-exchange debt ratio enters into the projection.
- Note on estimation timing and data:
  - Vulnerability scores were estimated in October 2005 based on actual data for 2004 and projections for 2005 from the WEO database and latest staff reports.
  - Projections were made on the basis of the model as calibrated in 2003.
  - The model’s original sample did not include Ukraine and Moldova.
  - Argentina’s 2006 vulnerability score was calculated using external debt projections at face value, based on the assumption of full creditor participation in the global debt exchange.

### Liquidity vulnerabilities: reserves and gross financing needs
- Conceptual framing:
  - Liquidity risks can stem from a country’s external situation and from its fiscal position.
  - Ratio of foreign exchange reserves to short-term external debt at remaining maturity:
    - A ratio below one implies that complete lack of market access for one year would put pressures on the balance of payments.
  - Gross financing needs projections show the amount of resources a sovereign needs to secure in addition to projected revenues to execute planned expenditures.
- Cross-country liquidity findings (summary of Table 10):
  - External liquidity vulnerabilities:
    - Ecuador, Uruguay, and to a smaller extent Argentina show substantial degrees of vulnerability in their external liquidity positions.
    - Risks are somewhat smaller in the Dominican Republic and Moldova.
    - Pakistan, Russia, and Ukraine maintain rather comfortable levels of reserves.
  - Fiscal financing needs:
    - Risks are highest among the group in Uruguay, although with significant bond issuance in early 2006, Uruguay’s near-term risks have decreased.
    - Financing needs are in a medium range in the Dominican Republic, Ecuador, Moldova, Pakistan, Ukraine, and Argentina (the latter reduced considerably with the full prepayment of Fund resources in early 2006).
    - Financing needs are relatively low in Russia.
- Table 10 notes and definitions:
  - Reserves/ST debt 1/: Ratio of gross international reserves to short-term external debt at remaining maturity.
  - Financing need 2/: Defined as the overall fiscal deficit, plus amortization of medium- and long-term debt, plus short-term debt at end of previous period.
  - 2005 and 2006 columns refer to FY 2004/05 and 2005/06, respectively.
  - Financing need projections exclude debt buybacks.
  - Gross fiscal financing need is defined as federal overall cash balance plus federal amortization due.

### The Fund’s methodology for debt sustainability analysis (Box 3)
- Approach:
  - Based on medium-term projections for a country’s macroeconomic framework, a baseline debt dynamics projection is produced.
  - A set of standardized alternative scenarios and stress tests are calculated to provide sensitivity analysis broadly comparable across countries.
- Standard sensitivity tests:
  - Alternative scenario uses historical averages of key variables (real GDP growth, real interest rate, primary balance), normally over a period of 10 years.
  - Stress tests apply a two-standard deviation shock to each of these variables in turn, leaving the remaining variables as under the baseline scenario.
- Additional stress tests:
  - Combined shock to all three variables of one standard deviation.
  - One-time 30 percent depreciation of the real exchange rate.
  - 10 percent of GDP increase in debt on account of events such as realization of contingent liabilities from a financial sector restructuring.
- More recently added alternative scenarios:
  - Primary balance forecast assuming unchanged policies.
  - Scenario based on forecasts for key variables obtained from the financial markets.
  - Country-specific shock.
- Key caveats:
  - Debt sustainability analysis requires considerable judgment because central projections and alternative scenarios depend on projections for GDP growth, real interest rates, exchange rates, and the primary fiscal balance.
  - Stress tests are normally based on 10–year historical averages and standard deviations, implying rather harsh shocks for countries emerging from transition or having undergone large crises during that time.
  - Given the relatively small number of stress tests and their degree of dispersion (see Table 9), the empirical value of such stress tests in determining whether a case is sustainable is limited.
- Footnote on framework updates:
  - Based on the framework adapted in 2003 (See IMF (2003b)). In July 2005, certain changes were made to the framework, including the application of less severe shocks in the bound tests (see IMF (2005)).

### Medium-term debt-related vulnerabilities: aggregate projections (Table 11)
- Summary statement:
  - In all eight country cases, medium-term baseline projections tend to be somewhat below 2004 levels.
  - However, the mean of the projected debt levels of different scenarios and stress tests for each country at the end of the projection horizon is lower than the current level only in seven cases.
  - For Ecuador, the mean of the projections is considerably above the 2004 level.
  - The dispersion of projected debt levels is substantial (see last column of Table 11).
- Table 11 highlights (Public Debt; 2004, Baseline, Mean 2/, STD 2/; percent of GDP):
  - Ukraine: 27.1 / 16.4 / 26.0 / 15.4
  - Pakistan 3/: 67.9 / 45.6 / 49.8 / 5.2
  - Moldova 4/: 53.6 / 20.0 / 24.3 / 8.7
  - Uruguay: 92.5 / 53.6 / 70.7 / 14.3
  - Dominican Republic: 54.1 / 37.6 / 44.7 / 6.1
  - Ecuador: 47.2 / 41.7 / 57.4 / 13.8
  - Russia: 21.7 / 7.3 / 19.5 / 9.8
  - Argentina: 129.4 / 56.9 / 80.9 / 18.9
- Table 11 notes:
  - Projections generally for 2010, except Ukraine (2009) and Pakistan (2009/10).
  - Data is based on 2003 DSA framework, except for Pakistan, Russia, and Uruguay, which use the 2005 framework.
  - Mean and standard deviation (STD) refer to scenarios and bound tests.
  - Moldova’s DSA is expressed in terms of net present value.
  - Public debt in 2004 refers to 2003/04.

### Country-by-country medium-term assessments and stress-test findings
- Ukraine:
  - Baseline: debt projected to decline from 27 percent of GDP in 2004 to 16 percent by 2009.
  - Alternative scenarios and bound tests: some vulnerabilities remain; only one scenario (combining a shock to GDP growth with a relaxation of the primary balance) implies a steadily increasing debt ratio.
  - All other scenarios see the debt ratio temporarily increasing to at most 39 percent.
- Pakistan:
  - Baseline: debt projected to decline from 68 percent in 2003/04 (equivalent to 59 percent in terms of net present value) to 46 percent (projection horizon 2009/10).
  - Projection assumes average primary deficits of 0.4 percent of GDP over the projection horizon (2009/10), substantially below the average primary surplus over the preceding four years (1.7 percent).
  - Stress tests: applied shocks would not lead to explosive debt paths; the most adverse scenario (one-time 30 percent real depreciation in 2005/06) leads to a temporary increase to 69 percent, then to a steady decline to 60 percent by 2009/10.
- Moldova:
  - Baseline: debt projected to decline from 54 percent in 2004 to 26 percent by 2010.
  - Projection is based on assumed primary deficits in the order of ½ percent of GDP, implying a loosening compared to a 2001–04 average surplus of 2.2 percent.
  - Alternative scenarios and bound tests: limited risks; 2010 projected debt substantially below 2004 levels in all simulations.
  - One bound test (one-time 30 percent real depreciation in 2005) would lead to a temporary increase in the debt ratio to above 60 percent.
  - Note: Moldovan DSA expressed in net present values; face value debt to GDP projected to decline from 48 percent in 2004 to 39 percent in 2010. Bound tests based on one standard deviation shocks rather than two.
- Uruguay:
  - Baseline: debt projected to fall from 93 percent in 2004 to 54 percent by 2010, contingent on sustained primary surpluses of 3.5–4 percent of GDP.
  - Historical context: 2004 outcome primary surplus 3.8 percent; 2000–03 average 0.1 percent.
  - Fiscal contingent liabilities from restructuring public banks could add up to 5 percentage points to the debt ratio by 2010.
  - Stress tests: significant vulnerabilities remain—one-time 30 percent real depreciation would raise the debt ratio to 104 percent by end–2006, then slow recovery; a scenario based on 10–year historical averages would set debt on a steadily increasing path.
  - Vulnerabilities mitigated by reduced rollover risk from lengthening maturities in debt restructuring and restored access to private financial markets soon after restructuring.
- Dominican Republic:
  - Baseline: public debt projected to fall from 54 percent in 2004 to 38 percent in 2010.
  - Baseline conditional on achievement of primary surpluses between 0.8 percent and 2.5 percent of GDP (contrast: 2001–04 average primary deficit of 1.8 percent).
  - Sensitivity tests: two scenarios (one-time 30 percent real depreciation and 10 percent increase in other debt-creating flows) would temporarily push the debt ratio above 55 percent; most other scenarios project roughly steady or slightly falling debt ratios.
- Ecuador:
  - Baseline: debt ratio would decline from 53 percent in 2003 to 42 percent by 2010, based on continuation of sizeable primary surpluses (2–5 percent range).
  - Sensitivity tests: vulnerabilities pronounced; under a number of standardized stress tests debt would stabilize only at around 70 percent.
  - A shock to GDP growth would lead to a sharply rising debt path.
  - Note: DSA based on a passive scenario assuming limited success in pushing through substantial policy initiatives.
- Russia:
  - Baseline: debt projected to fall from 22 percent in 2004 to 7 percent in 2010, conditional on primary surpluses in the 5–9 percent range, facilitated by favorable petroleum prices (2001–04 average primary surplus 4.3 percent).
  - Stress tests: limited vulnerabilities overall, but a marked fall in oil prices (as assumed under one stress test) would yield steadily increasing debt ratios reaching 34 percent by 2010.
  - Two other shocks each lead to debt-to-GDP ratios above 40 percent by end–2006, then gradual decline.
  - Caveat: stress tests use 10–year historical averages and standard deviations, which include difficult transition years and imply unusually harsh shocks (e.g., an annual decline in real GDP of 8.1 percent for two consecutive years).
- Argentina:
  - Baseline: debt-to-GDP ratio projected to decline from 78 percent in 2005 to 57 percent by 2010.
  - Projections do not yet factor in favorable effects of the early repurchase of all outstanding Fund obligations in January 2006 on debt service obligations.
  - Projections based on staff’s reform scenario, assuming full participation in the 2005 debt exchange and anchored on federal primary surpluses between 3.3 percent and 3.7 percent in 2005–10 (consolidated primary surpluses over this period range from 4 percent to 4.5 percent).
  - Historical context: 2004 outcome primary surplus 3.9 percent; historical average in 2002–03 was 1.6 percent, implying sustained policy effort will be necessary.
  - Stress tests indicate remaining risks to debt sustainability.
  - Note: standardized calibration method of DSA stress tests (10-year historical averages and standard deviations) may simulate very large shocks for Argentina given high growth volatility and severe contraction in 2001/02.

*Source: IMF staff report content as presented in the supplied PDF chapter/section.*

### 12.3 percent in 2006 and 2007, compared to robust growth projections in the baseline

### 082906 - 12.3 percent in 2006 and 2007, compared to robust growth projections in the baseline

### Debt shock scenarios and key sensitivity tests
- The GDP shock scenario assumes real GDP growth in 2006 and 2007 at its ten-year historical average less two standard deviations; this scenario implies an increase in debt to more than 100 percent by 2007.
- The joint shock scenario assumes real interest rates at historical averages plus one standard deviation, and real GDP growth and the primary balance at historical averages minus one standard deviation, in 2006 and 2007.
- Scenario elements shown in the DSA figure include:
  - Public sector debt: baseline scenario
  - Key variables at their historical averages in 2006-10
  - Real interest rate at historical average plus two st. dev. in 2006 and 2007
  - Real GDP growth at historical average minus two st. dev. in 2006 and 2007
  - Primary balance at historical average minus two st. dev. in 2006 and 2007
  - Combination of real interest rate, real GDP growth, primary balance using one st. dev. shocks
  - One time 30 percent real depreciation in 2006
  - 10 percent of GDP increase in other debt-creating flows in 2006

### Projected debt dynamics and scenario outcomes
- A large GDP shock (real GDP growth reduced as above) together with pronounced joint shocks on the interest rate, GDP and the primary balance would imply an increase in debt to more than 100 percent by 2007.
- A scenario based on historical averages as well as the GDP shock scenario would imply continuously rising debt ratios through 2010.

### Assessment of vulnerabilities across eight countries
- Medium-term vulnerabilities classifications:
  - Low: Pakistan, Russia, Ukraine
  - Medium: Argentina, Dominican Republic, Ecuador, Moldova
  - High: Uruguay
- Country-specific observations:
  - Russia and Ukraine: relatively low debt levels and EWS vulnerability scores; comfortable reserve coverage; manageable financing needs; favorable DSA projections — overall low solvency and liquidity crisis vulnerabilities.
  - Pakistan: despite a substantially higher debt level than Russia or Ukraine, debt composition (only a small fraction owed to commercial creditors), low EWS vulnerability scores, and favorable liquidity indicators yield an overall low crisis vulnerability.
  - Argentina, Dominican Republic, Ecuador, Moldova: higher debt levels, higher EWS vulnerability scores, higher financing needs, and lower reserve coverage — vulnerabilities are in the medium range. In Argentina, nonparticipating creditor claims remain in arrears.
  - Uruguay: while short-term risks have been significantly lessened, considerable vulnerabilities remain — debt level remains high and liquidity indicators point to remaining challenges; near-term risks have been reduced by favorable external financing conditions and the Fund arrangement remaining on track.
- Note: post-restructuring debt level for Argentina is noted as 78.2 percent (end-2005 projection based on assumption of full creditor participation in the debt exchange).
- Note: net present value of debt-to-GDP ratio in 2003/04 for Pakistan: 59 percent.

### Developments in sovereign debt markets and credit ratings
- Liquidity conditions in international bond markets improved markedly: the overall EMBI Global spread fell from 1000 basis points (bps) in late 2001 to below 240 bps in December 2005.
- Spreads and market confidence:
  - Spreads on sovereign debt issuance by Russia, Ukraine, and Pakistan fell below the EMBI Global, indicating returned market confidence following crisis resolution.
  - Spreads in the Dominican Republic and Uruguay have fallen considerably since the height of their crises.
  - Improvements in sovereign spreads have been less systematic in Ecuador.
  - Argentina’s sovereign debt spread remained extraordinarily high until mid-2005, fell to below 500 bp shortly after the Global Debt Exchange, and declined further since then.
- Credit rating actions:
  - Moody’s assigned a B3 rating to Argentina’s foreign-currency long-term debt and applied this rating to the newly issued bonds.
  - Moody’s ratings improved in Argentina, Moldova, Pakistan, Russia, and Ukraine; improvements in Ecuador were less pronounced.
  - Standard and Poor’s upgraded Uruguay in 2004 to B and raised the outlook from stable to positive in early 2006.
  - Standard and Poor’s downgraded Ecuador in 2005 to CCC+, and assigned a B rating to the Dominican Republic after its recent bond exchange.
  - Except for Russia (Baa2), none of the cases was rated as investment grade since the respective debt operations.

### Conclusions on restructuring outcomes
- Evaluation criteria applied: (i) debt profile and EWS vulnerability scores; (ii) liquidity vulnerabilities as signaled by financing needs and international reserves; (iii) medium-term debt-related vulnerabilities from DSA sensitivity analyses.
- Pre-emptive restructurings:
  - Ukraine and the Dominican Republic: liquidity rather than solvency was the main issue; focus on debt service relief rather than principal reduction. Ukraine (low vulnerability) achieved a durable exit; Dominican Republic (medium vulnerability) still faces liquidity and debt dynamic risks.
  - Pakistan and Moldova: scope of private-sector restructuring too limited to affect sustainability significantly; Pakistan benefited substantially from official creditor reschedulings leading to low vulnerability, while vulnerabilities persist in Moldova (medium).
  - Argentina and Uruguay: evidence of solvency problems; insufficient debt relief secured. Argentina defaulted shortly thereafter; Uruguay retains considerable vulnerabilities despite some reduction in short-term risk.
- Post-default restructurings:
  - Russia: favorable external conditions and now classified as low vulnerability.
  - Ecuador: medium vulnerability due to setbacks in domestic policy implementation despite high oil prices.
  - Argentina: medium vulnerability persists due to large stock of debt in arrears remaining after the 2005 debt exchange; addressing nonparticipating creditors is key to reducing debt burden and sustaining market access.
- Comparative insights:
  - Post-default restructurings yielded sizeable reductions in principal payments and NPV of debt, but disentangling the role of default decisions from broader economic circumstances is difficult.
  - Pre-emptive restructurings delivered smaller NPV reductions and were often targeted at liquidity; where solvency problems existed, outcomes were mixed (e.g., persistent vulnerabilities in Uruguay, reoccurrence of crisis in Argentina).

### Role of the Fund during restructurings
- All eight countries had Fund arrangements when they restructured public debt to external private creditors; several programs were off-track at times.
- Only Uruguay and the Dominican Republic had Fund-supported programs on-track during the entire restructuring process.
- Fund documentation and program frameworks varied in the degree of medium-term macroeconomic and balance of payments specification provided to support private-sector restructuring discussions.
- Examples of program timing and publication practices:
  - Ukraine: three-year EFF in September 1998 (SDR 1.6 billion, 165 percent of quota), augmented May 1999 by SDR 274 million, or 20 percent of quota; program went off-track after the August 1999 review.
  - Pakistan: three–year combined PRGF and EFF in October 1997 (SDR 1.1 billion, 110 percent of quota); program went off-track in July 1999.
  - Argentina: multiple SBAs and augmentations; an augmentation in September 2001 to about US$22 billion (with US$3 billion usable to support a voluntary market-based operation); programs went off-track in 2001.
  - Moldova: PRGF approved December 21, 2000 (SDR 110 million, 89 percent of quota); no further disbursements under the PRGF after initial reviews.
  - Uruguay: March 2002 two–year SBA with medium-term projections and staff support for exchange participation.
  - Dominican Republic: 2005 restructuring—MEFP contained projections through 2006; staff report contained projections through 2007 and 2009 respectively.
  - Russia: 17–month SBA in 1999; staff reporting and program status varied during PRINs and IANs restructuring.
  - Ecuador: 12–month SBA approved April 2000 after domestic debt rescheduling but before external exchange offer of July/August 2000; MEFP published but staff report not published.

*Source: Excerpts from "Argentina--Staff Report for the 2005 Article IV Consultation" and related staff reports and DSAs as presented in the provided chapter.*

### 2003. Following consultations with investors, the debt exchange offer was launched on April 10, 2003 and completed on Ma

### _082906 - 2003. Following consultations with investors, the debt exchange offer was launched on April 10, 2003 and completed on Ma

### Restructuring episodes and Fund arrangements (selected cases)
- Uruguay
  - Bond exchange: launched April 10, 2003 and completed May 22, 2003.
  - Amount involved: US$5 billion in outstanding debt.
  - Exchange options:
    - Option 1: exchange each existing bond for a new obligation carrying a similar coupon and a longer maturity (five years, generally, blended in some cases with a 30–year bond).
    - Option 2: longer-dated benchmark bonds (more liquid), in some cases blended with 30–year bonds.
  - Principal reduction: US$49 million, equivalent to 1.0 percent of the exchanged bonds.
  - Fund involvement: Uruguay entered a two–year (later extended by one year) SBA (SDR 0.6 billion, 194 percent of quota) in March 2002, augmented in June and August 2002 to SDR 2.1 billion (694 percent of quota). Program reviews were delayed in the second half of 2002; reviews were completed in March and July 2003. Program track remained uneven after the July 2003 review, and the subsequent review was not completed until February 2004.

- Dominican Republic
  - Debt exchange: executed in April/May 2005 for US$1.4 billion in two outstanding bonds into two new amortizing bonds with maturities 2007–11 and 2013–18.
  - No principal reduction; NPV reduction marginally 1 percent.
  - London Club rescheduling: October 2005 rescheduled US$125 million in principal falling due in 2005–06; maturity five years, grace period three years; average interest rate reduced by 2 percentage points.
  - Dutch bank agreement: October 2005 restructured US$50 million on similar terms.
  - Fund involvement: entered a 28-month SBA (SDR 437.8 million; 200 percent of quota) in January 2005. First and second reviews completed in October 2005 after delays.

- Ecuador
  - Domestic debt (earning about 10.4 percent interest before restructuring) rolled over without principal reduction into seven-year bonds with two years grace, paying LIBOR plus two percent.
  - Defaulted external bonds swapped into a single global US$-denominated 30-year step-up bond: initial 4 percent interest, increasing by one percentage point per year to a maximum of 10 percent.
  - Principal reductions: between 0 percent and 60 percent on different types of bonds; aggregate principal reduction on defaulted external bonds nearly 40 percent.
  - Optional conversion: bondholders could convert the 30-year step-up into a 12-year US$ bond with 12 percent interest by accepting a further principal reduction of 35 percent.
  - Brady bonds: cash payment of overdue interest obligations included.
  - Fund involvement: after an SBA in 1994–95, Ecuador did not have an arrangement prior to the financial crisis. During restructuring phase, Ecuador entered a SBA in April 2000 (SDR 227 million, or 75 percent of quota).

- Russia
  - Restructuring (August 1998–August 2000) included t-bills, MinFin bond, and Soviet-era London Club debt.
  - Fund arrangements: existing EFF since 1996 augmented in July 1998 under CFF and SRF to SDR 13.2 billion (222 percent of quota) and went off-track the following month. July 1999: new 18–month SBA (SDR 3.3 billion, 56 percent of quota); program went off-track before first review completed. No Fund program since then.
  - Domestic ruble debt restructuring (May 1999): discounting of outstanding claims using a 50 percent discount rate. New asset menu: 10 percent in cash/short T-bills, 70 percent into 4– and 5–year bonds with coupons yielding 30 percent per annum in first year declining to 10 percent final year, and 20 percent in government paper for tax arrears or enterprise investment.
  - MinFin-3 bonds: exchange into combination of foreign-currency eight–year bonds and four–year ruble bonds at 15 percent first year, 10 percent thereafter.
  - London Club Soviet-era debt (US$29 billion PRINs and IANs) exchanged into US$21.2 billion new 30-year Eurobonds with seven years grace; interest initially 2.3 percent increasing to 7.6 percent. Past due interest capitalized into a ten-year Eurobond with six years grace, coupons 8.25 percent. Operation included up-front cash element.
  - Overall principal reduction: approximately 4.1 percent of GDP from restructuring operations.

- Argentina
  - Two rounds of restructuring June–December 2001; third round January/February 2005.
  - Pre-default Fund arrangements: existing SBA since March 2000 augmented Jan and Sept 2001 to SDR 16.9 billion (800 percent of quota). After Sept 2001 no reviews completed. Transitional SBA Jan–Aug 2003 (SDR 2.2 billion, 103 percent of quota); three-year SBA approved Sept 2003 (SDR 9 billion, 424 percent of quota). No reviews under SBA completed since the 2005 restructuring.
  - June 2001 megaswap: about US$30 billion in outstanding government bonds; reduced near-term service but increased later liabilities and involved a small increase in principal.
  - Phase I (December 2001): exchanged approx. US$41 billion sovereign and US$9 billion provincial debt into new government-guaranteed loans: interest rates reduced to 70 percent of contractual level (up to max 7 percent), 17–month grace on interest, three-year maturity extension for claims maturing up to 2010; no principal reduction. Default in late December 2001 interrupted Phase II.
  - January–February 2005 global exchange: eligible 152 securities totaling US$81.8 billion including US$2.1 billion past due interest through end-2001; past due interest since 2002 (~US$20 billion) not recognized. Eleven new securities offered with detachable GDP warrant. New securities: par bonds (no haircut), quasi par bonds (principal haircut 30 percent), discount bonds (principal reduction 66 percent). Repayment structures: grace periods 21–33 years, maturity 30–42 years; coupon structures include step-up on par and discount bonds, fixed 5.57 percent on quasi par bonds; interest capitalization provisions and cash sweeteners designed to yield approximately equal NPV reductions.

- Ukraine
  - 1998–2000: piecemeal restructurings of t-bills and commercial claims in 1998–1999; comprehensive restructuring February 2000 involving Eurobonds and Gazprom bonds face value US$3.3 billion (including recognition of past due interest), coupons 8.5 percent to 16.75 percent.
  - Investor options: convert claims into EUR–denominated Eurobond with 10 percent coupon or US$–denominated Eurobond with 11 percent coupon; both seven-year maturity and one-year grace. Operation included up-front cash payment.
  - No principal reductions in Ukrainian debt treatments described.

- Pakistan
  - 1998/99 restructuring of US$929 million commercial loans: US$777 million rolling over of trade finance facilities annually for three years.
  - November 1999 Eurobond exchange: US$608 million into US$-denominated six-year Eurobond with three years grace and 10 percent coupon. Restructuring involved nominal increase in principal outstanding.

- Moldova
  - Piecemeal restructurings 2000–2004 including cancellations, reschedulings, promissory notes, debt-equity swap, and Eurobond exchange.
  - Eurobond exchange covered US$39.7 million outstanding principal of a single Eurobond; 78 percent held by a single asset management company.
  - Agreement effective October 2002: US$2.55 million principal reduction and upfront cash payment US$3.97 million; restructured into 6½–year amortizing U.S. dollar bond with back-loaded principal payments; bond paid U.S. dollar six-month LIBOR plus 426.5 bp.
  - September 2003: Dresdner Bank rescheduling of called guarantee EUR 2.3 million; principal payments stretched over three years; NPV reduction 3 percent (discounted at 10 percent).
  - April 2004: Gazprom notes face value US$111 million settled for cash US$47 million; NPV reduction 58 percent (discounted at 10 percent).
  - June 2004: Hewlett-Packard refinanced lease payments US$11.1 million settled in cash; NPV reduction 55 percent (discounted at 10 percent).

### Post-restructuring outcomes and debt dynamics (Annex III analysis)
- Case selection for post-restructuring comparison: Ecuador, Pakistan, Russia, Ukraine, and Uruguay (restructurings completed prior to 2004).
- Aggregate findings (change in debt/GDP ratio, post-restructuring period through 2004):
  - Uruguay: Post-Latest aggregate change in debt/GDP ratio entries shown in Table III.1: e.g., Post -15.0; Latest -39.6 (table context).
  - Russia, Pakistan, Ukraine, Uruguay: in a majority of cases (Pakistan, Russia, Ukraine, and Uruguay) debt dynamics fared better than anticipated in staff projections; Ecuador declined by less than anticipated.
- Decomposition approach: contributions to change in debt/GDP ratio attributed to primary balance, interest-growth differential, exchange rate, identified debt-creating flows, and other residuals.
- Key quantitative contributions (cumulative contributions from year after restructuring until 2004, Post vs Latest as reported in Table III.1 excerpts):
  - Aggregate change in debt/GDP ratio examples (Post-Latest entries):
    - Uruguay: -15.0 / -39.6
    - Ecuador: -5.2 / -15.9
    - Russia: -8.0 / -12.1
    - Pakistan: -63.9 / -44.2
    - Ukraine: -28.1 / -35.9
  - Contribution by Primary balance (Post-Latest examples):
    - Uruguay: -4.6 / -1.9
    - Ecuador: -10.2 / -9.0
    - Russia: -3.2 / -3.8
    - Pakistan: -24.0 / -18.6
    - Ukraine: -10.1 / -17.1
  - Contribution by Interest-growth differential (Post-Latest examples):
    - Uruguay: -27.7 / -29.2
    - Ecuador: -9.2 / -9.7
    - Russia: -14.1 / -11.6
    - Pakistan: -39.9 / -26.5
    - Ukraine: -19.7 / -23.4
  - Contribution by Exchange rate (Post-Latest examples):
    - Uruguay: 17.3 / 1.1
    - Ecuador: 14.2 / 6.3
    - Russia: 9.3 / 1.5
    - Pakistan: 0.0 / 0.0
    - Ukraine: 1.7 / 1.8
  - Identified debt-creating flows and Other (including residual) show small values or required assumptions in several cases (e.g., identified flows Post-Latest entries include 0.0 / -4.2; Other Post-Latest entries include 0.0 / -5.3 and other small numbers).
- Assumptions and reported averages (table excerpts; values reported as in source):
  - Average primary balance examples: 0.9 / 0.4 / 2.6 / 2.3 / 3.2 / 3.8 / 6.0 / 4.7 / 2.5 / 4.3 (table shows country-specific averages).
  - Average real GDP growth (in percent) examples: 4.3 / 8.4 / 5.2 / 4.1 / 4.5 / 12.3 / 2.9 / 4.1 / 4.1 / 6.1.
  - GDP deflator (average annual percent change) examples: 14.0 / 10.9 / 4.6 / 5.6 / 16.5 / 7.0 / 14.6 / 11.6 / 9.8 / 16.0.
  - Average nominal interest rate on public debt (in percent) examples: 5.9 / 4.7 / 7.3 / 6.4 / 5.4 / 6.8 / 6.6 / 6.3 / 5.2 / 5.9.
  - Average nominal depreciation (in percent) examples: 11.9 / 0.4 / 6.7 / 2.9 / 10.5 / 1.8 / 0.0 / 0.0 / 1.1 / -0.4.
  - Memorandum items: Average real interest rate and Average real interest-growth differential shown with negative and positive values as reported (e.g., Average real interest rate examples: -8.1 / -6.2 / 2.7 / 0.8 / -11.1 / -0.2 / -8.0 / -5.3 / -4.6 / -10.1).
- Interpretation of drivers (textual findings):
  - Primary balance performance:
    - Russia and Uruguay outperformed post-restructuring staff projections on the primary balance.
      - Russia: rapid improvements due largely to higher-than-projected revenue from favorable developments in oil prices.
      - Uruguay: 2004 primary surplus 3.8 percent of GDP was higher-than-anticipated, largely due to expenditure restraint — lower spending on social security benefits and wages, and lower capital expenditure.
    - Pakistan and Ukraine: primary balance was worse than projected to varying extents.
    - Ecuador: underperformance relative to projections by the widest margin despite posting substantial primary surpluses; causes include inability to capitalize on higher oil prices, large increases in the wage bill and social security benefits, discretionary tax cuts, and rapid decline in oil output due to inefficiencies at the state oil company.
  - Exchange rate contributions:
    - In most cases (Pakistan, Ukraine, Uruguay) the exchange rate contribution to debt dynamics was smaller-than-expected (programs generally anticipated a debt-increasing exchange rate effect).
    - Russia recorded a slightly higher-than-expected exchange rate contribution.
    - Ecuador: no exchange rate effect due to full dollarization.
  - Interest-growth differential:
    - In Pakistan, Russia, and Ukraine the real interest-growth differential was more favorable than assumed, driven by higher-than-expected growth (Russia and Ukraine) and lower-than-expected real interest rates (Pakistan and Russia).

### Quantitative examples of specific restructurings (selected figures preserved exactly)
- Uruguay bond exchange: US$5 billion outstanding; principal reduction US$49 million (1.0 percent).
- Dominican Republic exchange April/May 2005: US$1.4 billion exchanged; NPV reduction marginally 1 percent; London Club rescheduling US$125 million; Dutch bank US$50 million.
- Ecuador external bond principal reduction: between 0 percent and 60 percent by bond type; nearly 40 percent aggregate reduction on defaulted external bonds; domestic debt previously earning about 10.4 percent rolled into seven-year bonds paying LIBOR plus two percent.
- Russia overall principal reduction from restructuring operations: approximately 4.1 percent of GDP.
- Argentina global exchange January–February 2005: eligible securities 152, total US$81.8 billion including US$2.1 billion past due interest through end-2001; past due interest since 2002 ~US$20 billion not recognized; par/quasi par/discount principal haircuts: 0 percent / 30 percent / 66 percent; quasi par coupon 5.57 percent.
- Moldova Eurobond exchange: US$39.7 million outstanding principal; principal reduction US$2.55 million; upfront cash payment US$3.97 million; bond paid U.S. dollar six-month LIBOR plus 426.5 bp; Gazprom cash settlement: face value US$111 million settled for US$47 million (NPV reduction 58 percent discounted at 10 percent).

*Italic: Content derived from the IMF PDF content provided above.*

### Annex IV. Public Debt Ratios and Probabilities of Debt Crisis

### Annex IV. Public Debt Ratios and Probabilities of Debt Crisis

### Sample and data
- Unbalanced panel of 55 low- and middle-income countries over the period 1971–2002.
- Countries: Algeria, Argentina, Bangladesh, Bolivia, Brazil, Burkina Faso, Cameroon, Chile, Colombia, Costa Rica, Côte d'Ivoire, Czech Republic, Dominican Republic, Ecuador, Egypt, El Salvador, Ethiopia, Gabon, Ghana, Guatemala, Haiti, Honduras, Hungary, India, Indonesia, Jamaica, Jordan, Kenya, Korea, Malaysia, Mexico, Morocco, Nepal, Nicaragua, Niger, Nigeria, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Russia, South Africa, Senegal, Sri Lanka, Tanzania, Thailand, Togo, Tunisia, Turkey, Ukraine, Uruguay, Venezuela, and Zimbabwe.
- Binary dependent variable (CRISIS): equals 1 when a country is classified as in default by Standard and Poor’s.

### Model specification and variables
- Pooled probit model estimated on the sample.
- Independent variables (lagged):
  - DEBT1: ratio of public debt to GDP.
  - GGDP1: GDP growth.
  - ST_EXTDEBT_GDP1: ratio of short-term external debt to GDP.
- All coefficients reported to have the expected sign.

### Probit estimation results (Table IV.1)
- Estimated coefficients, standard errors, and probabilities:
  - C: Coefficient -1.1984; Std. Error 0.0779; Prob. 0.0000
  - DEBT1: Coefficient 0.0145; Std. Error 0.0011; Prob. 0.0000
  - GGDP1: Coefficient -0.0641; Std. Error 0.0075; Prob. 0.0000
  - ST_EXTDEBT_GDP1: Coefficient 0.0040; Std. Error 0.0021; Prob. 0.0598
- Goodness of fit and sample size:
  - McFadden R-squared 0.17
  - S.E. of regression 0.41
  - Observations: 1509
- Statistical significance:
  - DEBT1 and GGDP1 are significant at the one percent level.
  - ST_EXTDEBT_GDP1 is significant at the 10 percent level.

### In-sample forecasts and fitted probability–debt relationship
- In-sample forecasts from the probit equation produce predicted crisis probabilities for sample data points.
- To associate a single probability with any given level of debt, a polynomial is fitted through the inferred crisis probabilities versus lagged debt ratios.

### Polynomial fit through in-sample forecasts (Table IV.2)
- Dependent Variable: DEBT1
- Coefficients, standard errors, t-Statistics, and probabilities:
  - C: Coefficient 1.2804; Std. Error 2.5895; t-Statistic 0.4945; Prob. 0.6210
  - CRISIS_FIT^2: Coefficient -325.3811; Std. Error 101.5895; t-Statistic -3.2029; Prob. 0.0014
  - CRISIS_FIT: Coefficient 251.2821; Std. Error 32.0361; t-Statistic 7.8437; Prob. 0.0000
  - CRISIS_FIT^3: Coefficient 277.2418; Std. Error 87.7342; t-Statistic 3.1600; Prob. 0.0016
- Fit statistics:
  - Adjusted R-squared 0.76
  - S.E. of regression 17.91

### Key substantive findings
- Higher lagged public debt ratio (DEBT1) is associated with higher probability of public debt crisis (positive coefficient 0.0145, Prob. 0.0000).
- Higher lagged GDP growth (GGDP1) is associated with lower probability of public debt crisis (negative coefficient -0.0641, Prob. 0.0000).
- Greater lagged short-term external debt to GDP (ST_EXTDEBT_GDP1) is associated with higher crisis probability (positive coefficient 0.0040, Prob. 0.0598), with weaker statistical significance.
- McFadden R-squared is 0.17, described as fairly low but not untypical for pooled probit regressions of this type.
- The polynomial fit maps inferred crisis probabilities to DEBT1 with an adjusted R-squared of 0.76, enabling association of a single predicted crisis probability with given debt levels.

*Source: IMF staff calculations, Annex IV. Public Debt Ratios and Probabilities of Debt Crisis.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2006/_082906.pdf_