## _wp12203 — Appendix / Chapter summary

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### I. Dataset, purpose, and stylized facts
- Purpose: provide a comprehensive survey using the most complete dataset available covering external debt restructurings since the 1950s; address limited empirical evidence on sovereign debt restructurings.
- Dataset coverage and headline figures:
  - Sovereign debt restructurings: more than 600 cases in 95 countries.
  - Paris Club bilateral agreements: 447.
  - Debt exchanges with private creditors (foreign banks and bondholders): 186.
  - Of the 186 private-creditor exchanges:
    - No distressed sovereign debt restructuring in an advanced economy since 1950; all restructurings occurred in developing or emerging market economies.
    - 18 were sovereign bond restructurings.
    - 168 affected bank loans.
    - 57 involved a cut in face value.
    - 129 implied only a lengthening of maturities (debt rescheduling).
    - 109 cases occurred post-default.
    - 77 were preemptive.
    - Only 26 involved cash buybacks (discounts of 80 percent or more in many poor-country buybacks).
- Historical patterns and trends:
  - Restructurings increased sharply in the 1980s, rose again between 1998 and 2004, and have been relatively rare since 2006 (less than 10 per year overall).
  - Since 1998 there have been 17 distressed sovereign bond exchanges with foreign bondholders in 13 countries.
  - Restructuring duration has fallen over time: restructurings in the 1980s/1990s averaged 31 months, while restructurings since 1998 averaged 17 months; bond exchanges since 1998 averaged 13 months (label: 13.1), bank debt restructurings in 1980s/1990s averaged 30.9 months.

### II. Key definitions, measurement of relief, and haircut concepts
- Core definitions:
  - Debt rescheduling: lengthening of maturities, possibly lower rates.
  - Debt reduction: reduction in face (nominal) value (example given: US$ 100 to US$ 80).
  - Debt buybacks: exchange of outstanding debt for cash (historically rare).
  - Distressed debt exchanges: restructurings at terms less favorable than original terms.
  - Default: failure to make principal or interest payment on time; post-default vs preemptive restructurings distinguished.
- Two present-value haircut measures (preserved methodology):
  - H1: compare PV of new instruments (plus cash) with face value of old outstanding debt (including past due interest).
  - H2: compare PV of new instruments with PV of old instruments (discounting both at same rate).
  - Practical discounting: exit yields preferred; alternatives include constant 10 percent rate or imputing exit yields.
- Stylized numerical example (preserved figures):
  - Total outstanding principal before restructuring: 4.5 billion US$ reduced to 3 billion US$ in January 2010.
  - Nominal debt reduction: 33 percent (1-3/4.5).
  - At a 10 percent discount rate and 7 percent interest rate:
    - Haircut H1 (eq. (1)) = 44 percent.
    - Haircut H2 (eq. (2)) = 37 percent.
  - Observation: present value haircut (37 percent) exceeds nominal face value loss (33 percent) in the example.
- Country vs creditor perspective:
  - Countries may discount using lower, risk-free rates; country-perceived debt relief can therefore be lower than investor haircuts.

### III. The restructuring process and creditor-specific procedures
- Stylized timeline and recommended steps:
  - Trigger (default or restructuring announcement) → prepare verification of claims and DSA → prepare restructuring scenarios and final proposal with legal/financial advisors → present exchange offer and obtain creditor participation threshold → post-exchange assessment and follow-up if distress persists.
  - Recommended verification checklist (face/market value, amortization schedule, interest features, currency, enhancements, legal clauses including CACs and non-default clauses).
- Creditor-specific vehicles and practices:
  - Paris Club (bilateral): informal forum; members listed (19 permanent members: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russian Federation, Spain, Sweden, Switzerland, United Kingdom, United States of America). Paris Club agreements often require comparability of treatment with private creditors; evolution of concessionality cited (Toronto 33%, Naples 67%, Lyons up to 80%, Cologne up to 90%).
  - London Club / Bank Advisory Committees (commercial banks): ad-hoc BACs representing 5–20 banks typically; historical issues with holdouts and committee representativeness (BACs in 1980s–1990s often represented 25–35 percent of total bank debt).
  - Sovereign bond exchanges: use financial and legal advisors; verification, targeting bondholders, design “carrot” (sweeteners) and “stick” (exit consents) features, participation thresholds commonly 75–85 percent.
- Empirical operational statistics (selected cases preserved):
  - Pakistan (Bank Loans): Total Duration (Months) 11; Debt Exchanged 777 m US$; Cut in Face Value 0.0%; Haircut Estimate 11.6%; Discount Rate 0.132.
  - Pakistan (Ext. Bonds): Total Duration 4; Debt Exchanged 610 m US$; Cut in Face Value 0.0%; Haircut Estimate 15.0%; Discount Rate 0.146.
  - Ecuador (Ext. Bonds, 2000): Total Duration 25; Debt Exchanged 6700 m US$; Cut in Face Value 33.9%; Haircut Estimate 38.3%; Discount Rate 0.173.
  - Russia (Bank Loans, 1998–2000): Total Duration 23; Debt Exchanged 31943 m US$; Cut in Face Value 36.4%; Haircut Estimate 50.8%; Discount Rate 0.125.
  - Argentina (Ext. Bonds, 2005): Total Duration 42; Debt Exchanged 43736 m US$; Cut in Face Value 29.4%; Haircut Estimate 76.8%; Discount Rate 0.104.
  - Iraq (Bank/Commercial Loans): Total Duration 20; Debt Exchanged 17710 m US$; Cut in Face Value 81.5%; Haircut Estimate 89.4%; Discount Rate 0.123.
  - Ecuador (Bond buy-back, 2009): Total Duration 12; Debt Exchanged 3190 m US$; Cut in Face Value 68.6%; Haircut Estimate 67.7%; Discount Rate 0.130.
  - Moldova (Ext. Bonds): Total Duration 4; Debt Exchanged 40 m US$; Cut in Face Value 0.0%; Haircut Estimate 36.9%; Discount Rate 0.193.
  - Uruguay (Ext. Bonds): Total Duration 2; Debt Exchanged 3127 m US$; Cut in Face Value 0.0%; Haircut Estimate 9.8%; Discount Rate 0.090.
  - Belize (Bonds/Loans): Total Duration 6; Debt Exchanged 516 m US$; Cut in Face Value 0.0%; Haircut Estimate 23.7%; Discount Rate 0.096.
  - Seychelles (Ext. Bonds): Total Duration 19; Debt Exchanged 320 m US$; Cut in Face Value 50.0%; Haircut Estimate 56.2%; Discount Rate 0.107.
- Participation and creditor dispersion examples:
  - Argentina 2005: 76% overall participation; approx 600,000 retail investors.
  - Belize 2007: 98% participation.
  - Moldova 2002: 100% participation (one creditor held 78%).
  - Pakistan 1999: 99% participation.
  - Uruguay 2003: 93% participation.
  - Minimum participation thresholds in practice: between 75 percent and 85 percent of outstanding bonds in most exchanges.

### IV. Legal features, governing law, CACs, exit consents, and litigation
- Governing law patterns:
  - New York law and English law are the most popular governing laws for international bond issues; domestic bonds usually under domestic law.
  - Data snapshot (as presented for outstanding issues in 43 countries as of March 2009 — preserved table headings and entries): New York 272 (bn US$); English 117 (bn US$); German 148 (bn US$); Japan 41 (bn US$); By number of issuances: New York 435; English 140; German 282; Japan 8631 (table entries preserved as shown).
- Collective Action Clauses (CACs):
  - Two broad categories: “majority restructuring” provisions and “majority enforcement” provisions.
  - Historical diffusion: CACs were largely absent in New York-law bonds prior to 2003; first New York bond with CACs: Mexico, Feb 2003. Since then inclusion in New York bonds became the norm.
  - Evidence on effectiveness and borrowing costs: mixed; some case successes (Ukraine 2000, Moldova 2002, Uruguay 2003), but CACs do not guarantee rapid or undisputed restructurings (e.g., Argentina 2005).
  - Empirical finding: little indication that including CACs significantly affects borrowing costs in emerging markets; design details matter.
- Exit consents, acceleration, cross-default, aggregation clauses:
  - Exit consents used to make old bonds unattractive; have been used under New York law and generally withstood legal challenge in U.S. courts.
  - Acceleration typically allows creditors to accelerate principal upon default; often requires a minority vote (e.g., 25 percent).
  - Aggregation clauses (permit aggregate voting across series) are rare and have not been invoked in recent sovereign workouts.
- Creditor litigation trends:
  - Litigation filings (default-related) increasing since 1980s; between 1980 and 2010, 109 cases filed in US and UK jurisdictions related to default on sovereign bonds or loans (only US/UK jurisdictions considered).
  - “Vulture” litigation strategy described; litigation volume against HIPCs exceeded US$2 billion in one finding.

### V. Costs, macro-financial effects, and empirical evidence
- Borrowing costs and market access:
  - Mixed empirical evidence: many studies find default premia negligible beyond the first two years; others find significant effect of haircut size.
  - Cruces and Trebesch (2011): a one standard deviation increase in the haircut (20 percentage points) → post-restructuring bond spreads 170 basis points higher (year 1), effect persists (50 basis points) in years six and seven; one standard deviation increase in haircut associated with 50 percent lower likelihood of re-accessing international capital markets in any year after restructuring.
- Output and trade effects:
  - Debt crisis years associated with GDP drops between 2 and 5 percent per year (Box 5 synthesis).
  - Rose (2005): bilateral trade falls about 7 percent per year after a Paris Club restructuring, for about 15 years on average.
  - Trade and output declines often precede restructurings; defaults tend to follow, not precede, output contractions in many studies.
- Financial sector effects:
  - Restructurings can damage banks, pension funds, insurers, trigger funding cost increases, runs, and bank failures (examples: Russia 1998, Ecuador 1998–2000).
  - Historical bank exposure example: U.S. banks’ exposure to developing country debt in 1982 was 182 percent of aggregate capital; reductions followed in subsequent years.
  - Arezki et al. (2011) and others document spillovers from sovereign downgrades to bank and corporate markets.
- FDI and private sector credit:
  - Fuentes and Saravia (2010): restructuring associated with FDI reductions up to 2 percent of GDP per year.
  - Das, Papaioannou and Trebesch (2010, 2011): private sector external borrowing drops up to 40 percent relative to counterfactual after sovereign defaults to private creditors.
- Negotiation and advisory costs:
  - Debtors typically bear legal and financial advisory fees; 1980s restructuring fees ranged from 0.25 percent to 2.25 percent of amounts restructured; fees tended to decline after 1989.

### VI. Debt sustainability analysis (DSA), illustrative haircut computation, and risk indicators
- Static solvency / illustrative formula:
  - d* = s / (i - g) (steady-state debt-stabilizing primary balance).
  - Illustrative parameterization preserved:
    - Permanent primary surplus = 2 percent of GDP; real growth g = 1 percent; nominal interest rate i = 5 percent → d* = 2 / (0.05 - 0.01) = 50.5 percent.
    - If actual debt-to-GDP = 120 percent → required haircut = 1 - (50.5/120) = 57.9 percent.
- Table of required haircuts (selected preserved entries):
  - For i = 5%, growth = 1%, permanent surplus = 2% => Max. Debt/GDP ratio = 50.5%.
  - Selected required haircuts (i=5% column):
    - Actual Debt/GDP 60% => 15.8%
    - 70% => 27.9%
    - 80% => 36.9%
    - 90% => 43.9%
    - 100% => 49.5%
    - 110% => 54.1%
    - 120% => 57.9%
    - 130% => 61.2%
    - 140% => 63.9%
    - 150% => 66.3%
- Market- and ratings-based benchmarks:
  - Standard & Poor’s recovery ratings: 1 (90–100% recovery) to 6 (0–30% recovery).
  - Historical mean present value haircut (Cruces and Trebesch (2011)): 37 percent (1978–2010).
  - Roubini (2010): offers that match or exceed traded price of old instruments have higher participation likelihood.
- Risk indicators and “danger zones” (preserved thresholds from Manasse and Roubini and others):
  - External debt to GDP: > 50 percent.
  - Short-term debt to reserves: > 130 percent.
  - Public debt to revenues: > 215 percent.
  - Inflation: > 10.5 percent.
  - Growth: < - 5.5 percent.
  - Bond spreads exceeding 1,000 basis points categorized as severe debt distress (Pescatori and Sy, 2007).
- Limitations of static DSA:
  - Does not account for maturity structure, currency composition, uncertainty, contingent liabilities, or political feasibility of adjustment.
  - Advanced DSA practices include stress tests (one-time 30 percent depreciation, 10 percent of GDP contingent liability shocks, two-standard-deviation shocks to growth/interest/primary balance).

### VII. Policy considerations, codes of conduct, and reform proposals
- Overarching policy conclusions:
  - Restructuring should be initiated only if a DSA indicates macroeconomic adjustment programs cannot realistically restore sustainability.
  - Scope of debt relief should be proportional to the debt sustainability problem.
  - Good-faith negotiations, transparency, timely information sharing, and consideration of spillovers are recommended.
  - CACs, exit consents, aggregation clauses, and minimum participation thresholds can facilitate restructurings; none guarantee success.
- IIF Principles on Fair Debt Restructuring (selected operational recommendations preserved):
  - (i) Transparency and Timely Flow of Information: debtors should disclose relevant information (maturity, interest structures, proposed treatment, economic program assumptions); ensure confidentiality of material non-public information.
  - (ii) Close debtor-creditor dialogue and cooperation: implement investor relations programs (IRPs); use bilateral meetings, teleconferences, roadshows; creditors encouraged to consider temporary maintenance or rollover of trade/interbank advances consistent with their objectives.
  - (iii) Good Faith Actions: voluntary, good-faith restructuring processes; debtors to resume partial debt service as feasible; IMF policies on lending into arrears referenced.
  - (iv) Fair Treatment: avoid unfair discrimination among affected creditors; sovereign-owned instruments should not skew votes.
- Reform proposals for systemic change (summarized):
  - Top-down statutory frameworks: SDRM (IMF), Bruegel’s ECRM — propose statutory mechanisms with binding majority votes and institutional structures (DRF/Economic/Legal/Financial bodies).
  - Arbitration/contractual approaches: Sovereign Debt Tribunal (Paulus), FTAP (Raffer/Kaiser) — rely on arbitration clauses and tribunals/panels to adjudicate restructurings.
  - Comparative features: scope of included debt varies (some proposals target only bondholders; others aim to include all external sovereign debt); activation usually requires debtor initiation; voting majorities differ (e.g., SDRM envisaged 75% majority binding).
  - Limitations: most voluntary codes and proposals lack strong sanctioning mechanisms; political and legal feasibility varies.
- Practical policy recommendation preserved:
  - Policymakers should gather information on CDS positions and creditor exposures in a restructuring; Hu and Black suggest disclosure of significant CDS positions could mitigate “empty creditor” concerns.

### VIII. Key empirical summaries and case lessons
- Most recent sovereign bond exchanges implemented relatively quickly and without severe coordination problems: since 1998, only two of seventeen bond exchanges had holdouts exceeding 10 percent.
- Litigation has been relatively rare in restructurings overall, with Argentina after 2001 as a major exception.
- Boxed case lessons (select highlights):
  - Brady Plan (1989–1997): facilitated reentry of sovereign bonds into tradable markets; 17 Brady deals; positive macro effects but later restructurings of some Brady bonds occurred (Ecuador 2000, Uruguay 2003, Argentina 2005, Côte d’Ivoire 2010).
  - Jamaica (2010) domestic restructuring: quick implementation; participation 99 percent; no face-value cuts; interest yield fell from 19 percent to 12.5 percent; Financial Sector Support Fund US$1 billion created and not ultimately used.
  - Dubai World (2009–2010): quasi-sovereign, $26 billion affected; restructuring lengthened maturities by five to eight years with no face value reduction; creditor committee of ~90 institutions; 100 percent participation after holdout convinced to sell.
  - Naftogaz (2009): over 93 percent bondholder participation; new government-guaranteed Eurobond $1.6 billion.
- Box 5 synthesis on costs (preserved numerical findings):
  - A 20 percentage point higher haircut → borrowing costs at least 170 basis points higher in year 1 and 50 basis points higher in years 4–5.
  - Debt crisis years associated with GDP drops between 2 and 5 percent per year.
  - Bilateral trade flows fall up to 7 percent after Paris Club restructurings, lasting more than 10 years.
  - Restructurings associated with FDI reductions up to 2 percent of GDP per year and corporate external financing drops up to 40 percent.

_Italic: Source — Excerpts and tables from _wp12203 (IMF working paper appendix and chapter content)_. _

### Appendix Tables

### Appendix Tables

### Appendix contents
- 1. List of Sovereign Debt Restructurings 1950–2010 ......................................................... 99
- 2. Macroeconomic and Financial Indicators at the Time of Restructuring ....................... 111
- References ......................................................................................................................... 113

### Tables
- 1. Overview of Debt Restructuring Vehicles by Type of Creditor ..................................... 14
- 2. Paris Club Creditors in Selected Restructurings ............................................................. 15
- 3. Selected Bank Advisory Committees since the 1980s (London Club Process) .............. 20
- 4. Negotiating with Sovereign Bondholders ....................................................................... 24
- 5. Characteristics of Main Sovereign Debt Restructurings with Foreign Banks and Bondholders, 1998–2010 ................................................................................................ 37
- 6. Sovereign Ratings in Nine Recent Bond Restructurings ................................................ 40
- 7. Emerging Market Sovereign Bonds by Governing Law................................................. 41
- 8. Legal Characteristics of Sovereign Bond Restructurings (1999-2009) .......................... 49
- 9. Static Solvency Analysis: Primary Surplus (in percent of GDP) .................................. 74
- 10. Risks to Debt Sustainability: Contingent and Non-Contingent .................................... 81
- 11. Required Haircuts in a Static Solvency Model ............................................................. 84
- 12. Recovery Ratings of Sovereign Issuers Rated by Standard & Poor's ........................... 87
- 13. Reforming the Debt Restructuring Process: A Comparison of Proposals .................... 90

### Figures
- 1. A Stylized Example—Total Debt Service Before and After .......................................... 11
- 2. Stylized Timeline of a Sovereign Debt Restructuring .................................................... 13
- 3. Restructuring Duration by Type of Debt ........................................................................ 27
- 4. Foreign Debt Restructurings by Country (1950–2010) .................................................. 31
- 5. Debt Restructurings with Paris Club and Private Creditors ............................................ 34
- 6. Bank Loan versus Bond Restructurings (1950–2010) .................................................... 34
- 7. Restructurings with Face Value Debt Reduction (Nominal Write-Offs) ........................ 35
- 8. Financial and Macroeconomic Indicators in Restructuring Periods ............................... 39
- 9. Ratings Evolution during Sovereign Restructuring Episodes ......................................... 40
- 10. Bond Issuance in Main Emerging Markets 2003–2010, by Governing Law ............... 42
- 11. Public Bond Issuance in EU Countries 2003–2010, by Governing Law ...................... 42
- 12. Creditor Litigation after Defaults/Restructurings: New Cases Filed per Year ............. 51
- 13. An Illustration of Sovereign-Bank Risk Spillover Channels ........................................ 79

### Boxes
- 1. The Brady Plan ............................................................................................................... 18
- 2. The Domestic Restructuring in Jamaica 2010 ................................................................ 54
- 3. Recent “Quasi-Sovereign” Debt Restructurings ............................................................. 56
- 4. Effects of the Russia’s 1998 Debt Crisis on the Domestic Banking Sector ................... 64
- 5. Costs of a Restructuring and Default .............................................................................. 66
- 6. Key Concepts in Sovereign Debt Restructuring ............................................................. 67
- 7. Risk Indicators for Restructuring and Default ................................................................ 69
- 8. The IMF’s Revised Debt Sustainability Analysis ........................................................... 75
- 9. Experiences of Countries that Have Decided to Restructure .......................................... 77

*Source: _wp12203 - Appendix Tables*

### 10. The International Institute of Finance Principles on Fair Debt Restructuring .............. 93

### 10. The International Institute of Finance Principles on Fair Debt Restructuring

### I. Introduction — purpose, contribution, and dataset highlights
- Purpose: address limited empirical evidence on sovereign debt restructurings and provide a comprehensive survey using the most complete dataset available covering external debt restructurings over the last six decades.
- Main contributions:
  - Uses a dataset covering the full universe of external debt restructurings since the 1950s, including official (Paris Club) and commercial (bond and bank) debt restructurings.
  - Provides an up-to-date overview of economic and legal aspects, including credit default swaps, litigation, collective action clauses, and crisis resolution mechanisms.
  - Discusses decision considerations on whether to restructure and the scope of debt relief/haircuts.
- Dataset stylized facts and historical insights:
  - Sovereign debt restructurings: more than 600 cases in 95 countries.
  - Paris Club bilateral agreements: 447.
  - Debt exchanges with private creditors (foreign banks and bondholders): 186.
  - Of the 186 private-creditor exchanges:
    - There has been no distressed sovereign debt restructuring in an advanced economy since 1950. All restructurings occurred in developing or emerging market economies.
    - 18 were sovereign bond restructurings.
    - 168 affected bank loans.
    - 57 involved a cut in face value (debt reduction).
    - 129 implied only a lengthening of maturities (debt rescheduling).
    - 109 cases occurred post-default.
    - 77 were preemptive.
    - Only 26 involved cash buybacks.
      - Most buyback operations were implemented in the context of debt relief initiatives in poor, highly indebted countries, and involved discounts of 80 percent, or more.
  - Common patterns:
    - Main elements of a debt restructuring appear similar across domestic/external and private/public debt.
    - Debt renegotiations have become quicker and less disputed since the 1980s and 1990s.
      - Most bond restructurings of the last 15 years were implemented within one or two years and with creditor participation exceeding 90 percent.
      - Two outlier cases: Argentina in 2005 and Dominica in 2004.
    - Creditor holdouts and litigation are widespread but less severe than commonly thought.
    - Restructurings can have serious adverse effects on the domestic economy and financial sector (foreign and domestic banks, pension funds, insurance companies).
- Scope and limits:
  - Analysis focuses on developing country experiences and may not apply to advanced economies or countries with large, interconnected financial systems.
  - Emphasis on restructurings with foreign private creditors; domestic-debt-only restructurings largely excluded.

### II. Basic concepts — definitions and measurement
- What is a sovereign debt restructuring?
  - Defined as an exchange of outstanding sovereign debt instruments (loans or bonds) for new debt instruments or cash through a legal process.
  - Focus: central government debt; "quasi-sovereign" publicly guaranteed debt discussed briefly.
- Two main types of operations:
  - Debt rescheduling: lengthening of maturities of the old debt, possibly involving lower interest rates; shifts contractual payments into the future.
  - Debt reduction: reduction in the face (nominal) value of the old instruments (example: from US$ 100 to US$ 80).
  - Debt buybacks: outstanding debt exchanged for cash, often at a discount; historically rare (total of only 26 cases since the 1950s).
- Distressed vs routine exchanges:
  - Distressed debt exchanges: restructurings at terms less favorable than the original bond or loan terms (following Standard & Poor’s (2006)).
  - Liability Management Operations (LMOs) are voluntary market exchanges in normal times and are disregarded in this analysis.
- Default versus restructuring:
  - Default: failure of a government to make a principal or interest payment on due time (beyond grace period); can be partial or complete (moratorium/payment standstill).
  - Post-default restructurings: occur after payment default; most restructurings are post-default.
  - Preemptive restructurings: exchanges prior to any missed payments.
  - Not all defaults are followed by restructurings; some defaults are cured without restructuring.
- Restructurings and credit events (CDS context):
  - ISDA definitions: credit event occurs with either failure to pay, distressed debt restructuring (terms changed to disadvantage investors), or debt repudiation.
  - ISDA requires restructuring to (i) occur due to deterioration in creditworthiness/financial condition of the sovereign, and (ii) be “binding on all holders” to constitute a credit event.
  - Regional practice differences: CDS on Latin American sovereign debt normally allow a three-day grace period; CDS on Western European sovereigns triggered immediately after payments are missed.
  - Determination of credit events is decided by regional “Credit Derivatives Determinations Committees”:
    - Committees established in five world regions.
    - Composition: eight global derivative dealers, two regional dealers, five buy-side members, and two non-voting dealers.
    - A supermajority of 80 percent is required for agreement.
- “Haircuts” and calculation of debt relief:
  - Debt relief defined as a reduction in the value of outstanding debt obligations.
  - Two present-value haircut approaches (Sturzenegger and Zettelmeyer (2006, 2008); Cruces and Trebesch (2011)):
    - Approach 1: compare present value of new instruments (plus possible cash repayments) with face value of old outstanding debt (including past due interest but no penalties). Haircut H1 computed as in equation (1) (formula referenced in source).
      - Rationale: default may accelerate payments entitling creditors to immediate full face value repayment.
    - Approach 2: compare present value of new instruments to present value of old instruments (discounting both at same rate) — H2 in equation (2).
      - Interpreted as measuring loss realized in the exchange by participating creditors; argued to better describe the “toughness” of a successful exchange.
  - Practical considerations:
    - Computing H requires repayment streams of old and new instruments and choice of discount rate r.
    - Exit yields from secondary market prices recommended but available only for liquid bond markets.
    - Alternatives: using a constant 10 percent rate, using a “risk free” rate (e.g., LIBOR), or imputing exit yields based on market and rating data (Cruces and Trebesch (2011)).
  - Stylized numerical example (from text):
    - Total outstanding principal before restructuring: 4.5 billion US$ reduced to 3 billion US$ in January 2010.
    - Nominal debt reduction: 33 percent (1-3/4.5).
    - Most principal payments until 2015 shifted to 2016–2021.
    - At a 10 percent discount rate and 7 percent interest rate:
      - Haircut H1 (eq. (1)) = 44 percent.
      - Haircut H2 (eq. (2)) = 37 percent.
    - Observations:
      - Present value haircut (37 percent) exceeds nominal face value loss (33 percent) in the example.
      - Haircuts (present value terms) should be distinguished from face value reductions.
  - Country perspective vs creditor perspective:
    - A country may discount debt with a lower, risk-free rate when evaluating debt relief (Sturzenegger and Zettelmeyer (2007)), implying debt relief from the country’s perspective may be lower than investor haircuts.

### III. The process of sovereign debt restructuring — practical steps and creditor-specific procedures
- Stylized timeline and key steps:
  - Trigger: default (missed payments) or announcement of a restructuring.
  - Preparation/negotiation phase: verification of total debt claims and characteristics, debt sustainability analysis, development of restructuring scenarios, preparation of a final restructuring proposal with legal and financial advisors.
  - Verification of claims recommended checklist (Lim, Medeiros, and Xiao (2005)):
    - The face and market value of bonds or loans.
    - The amortization schedule (bullet vs amortization; sinking funds).
    - Interest rate and coupons (fixed vs flexible; step-up/linked features).
    - Currency of denomination (local vs foreign).
    - Enhancements, including embedded options or collateral.
    - Legal clauses, including CACs and non-default clauses, and ability to include exit consents.
  - Exchange offer presented; creditors accept or reject. Successful exchanges often require a minimum threshold of acceptance.
  - Post-exchange: participation rate, haircut in percent, and potential subsequent restructuring if distress persists.
- Restructuring vehicles by creditor type (overview referenced in source):
  - Bilateral creditors: Paris Club.
  - Commercial banks: London Club (Bank Advisory Committees).
  - Bondholders: Exchange offers.
  - Multilaterals: Preferential treatment; restructuring only for poorest countries (e.g., HIPC/MDRI not discussed in detail here).
- B. Bilateral debt — the Paris Club
  - The Paris Club: informal group and ad hoc negotiation forum for restructuring external bilateral sovereign debt (public and publicly-guaranteed debt).
  - Historical role: origins in 1956; arranged more than 400 restructuring agreements.
  - Structure and process:
    - No legal status or statutory rules; small secretariat in Paris and established negotiation rules.
    - Members: governments of 19 of the largest world economies, plus invited creditor governments on a case-by-case basis.
    - Process:
      - Debtor approaches secretariat, demonstrates payment difficulties and need for debt relief, and agrees to an IMF structural adjustment program.
      - Negotiation at the Paris Club leads to “agreed minutes” (not legally binding) that set minimum debt relief conditions guiding bilateral agreements.
    - Comparability of treatment clause:
      - Requires equal burden sharing across creditor groups, notably private creditors.
      - Paris Club judges comparability of treatment; a clear breach can jeopardize the Paris Club agreement and related IMF financing.
    - Evolution of concessionality for LICs:
      - Maximum debt cancellation increased from 33 percent in 1988 (Toronto terms) to 67 percent in 1994 (Naples terms).
      - In 1996 (HIPC) cancellations reached up to 80 percent (Lyons terms) and up to 90 percent in 1999 (Cologne terms).
      - Evian approach (2003) extended debt relief focus to long-term debt sustainability and to countries beyond HIPCs.
    - Permanent members of the Paris Club (as listed):
      - Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russian Federation, Spain, Sweden, Switzerland, United Kingdom, and United States of America.
- C. Restructuring commercial bank debt — the London Club
  - "London Club" describes the restructuring routine between major Western banks and sovereigns; not a formal institution.
  - Core element: Bank Advisory Committee (BAC) / Creditor Committee (5–20 representative banks negotiating on behalf of all affected banks).
    - Committee members usually senior officials of banks with the largest exposures.
    - BACs in the 1980s–1990s typically represented only 25–35 percent of a country’s total external bank debt; the remainder was held by fragmented banks.
  - Process:
    - Debtor government asks major bank creditors to organize and chair a steering committee.
    - Regular meetings between banking representatives and government officials; negotiations cover new financing, rollovers/credit lines, maturity prolongation, and face value reductions.
    - “Agreement in principle” signed by BAC banks and government; terms then circulated to all banks for approval, with unanimity required to finalize the restructuring.
  - Implementation challenges and historical problems:
    - Holdouts and intra-creditor disputes were major problems in the 1980s and 1990s.
      - About 30 percent of London Club restructurings suffered intra-creditor disputes causing delays of 3 months or more.
      - Holdout problems often caused by groups of smaller banks; in some cases major banks refused participation.
      - Repeated issues included disagreement over committee composition and leadership.
    - Technical and legal hurdles could be significant (example: Yugoslav debt deal of 1983 required signature of some 30,000 documents across up to eight international financial centers).
    - Legal and technical issues led to delays in some cases (e.g., Mexico 1984/85; Vietnam Brady negotiations in the mid-1990s).

*Source: 10. The International Institute of Finance Principles on Fair Debt Restructuring*

### Box 1. The Brady Plan

### Box 1. The Brady Plan

### Context
- By the late 1980s, many developing countries had been in default for nearly a decade.
- These countries had settled on a chain of rescheduling agreements with their bank creditors, granting short-term liquidity relief but no cuts in face value.
- The Brady plan constituted a major policy shift because the official sector started to encourage outright debt reduction so as to restore debtor solvency.
- The plan was first announced by U.S. Treasury secretary Nicholas Brady in March 1989 and was later widely supported, including by the IMF and the World Bank.

### Main elements of the Brady Plan
- Exchange of bank loans into sovereign bonds:
  - The Brady plan foresaw the exchange of outstanding bank loans into new sovereign bonds, which were partly collateralized by US Treasury bonds.
  - The issuance of new tradable instruments amounting to several billions of US$ created a liquid secondary market for emerging market sovereign bonds, which had last existed during the interwar years.
  - The Brady plan can thus be seen as the start of modern-era sovereign bond trading.
- Menu approach:
  - Participating creditors were offered a menu of options, allowing them to choose between different new instruments, including discount bonds with a cut in face value, and par bonds with long maturities and below-market interest rates but no debt reduction.
  - Banks could also choose to provide new money to the issuing countries, in which case they were offered new instruments with better terms, e.g., higher coupons or shorter maturities.
- Capitalization of arrears:
  - Interest arrears to commercial banks were partly written off but also partly capitalized into new short-term floating rate bonds.

### Implementation and scope
- In total, 17 Brady deals were implemented on a country-by-country basis, starting with Mexico in September 1989 and ending with the last Brady type agreements in Côte d’Ivoire and Vietnam in

*Source: _wp12203 - Box 1. The Brady Plan*

### 1997. Most Brady countries were in Latin America, namely Argentina, Bolivia, Brazil, Costa Rica,

### _wp12203 - 1997. Most Brady countries were in Latin America, namely Argentina, Bolivia, Brazil, Costa Rica,

### Brady Plan outcomes
- Brady countries listed: Argentina, Bolivia, Brazil, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Uruguay and Venezuela.
- Other Brady countries listed: Bulgaria, Côte d’Ivoire, Jordan, Nigeria, Philippines, Poland and Vietnam.
- Positive effects attributed to the Brady Plan:
  - Ended the ‘lost decade’ of the 1980s debt crisis and normalized relations with creditors.
  - Fostered a new wave of capital inflows to emerging markets; sovereigns re-accessed capital markets, stock markets rallied, and countries saw increases in growth and investment (Henry and Arslanalp, 2005).
  - Debt relief can be efficient in countries with a debt overhang problem and with strong institutions and a viable private sector that attract foreign investment.
- Limitations and adverse outcomes:
  - Step-up of interest payments in some new bonds threatened debt sustainability and contributed to renewed default risks (Chuhan and Sturzenegger, 2005).
  - Belief that Brady bonds were ‘undefaultable’ proved false: Ecuador restructured Brady bonds in 2000, Uruguay in 2003, Argentina in 2005, and Côte d’Ivoire in 2010.
- Footnote: Morocco was originally supposed to implement a Brady restructuring in the early 1990s but did not because the government did not fulfill IMF agreement requirements.

### Bank Advisory Committees and London Club experience
- The BAC (London Club) process delivered more than 100 debt restructurings in the 1980s and 1990s; most were implemented without major hurdles or conflict.
- Examples of varied BAC experience:
  - Pakistan (1999) and the Dominican Republic (2005) implemented bank debt restructurings quickly after only a few meetings.
  - Iraq (2006) and Serbia and Montenegro (2004) took much longer and were more disputed; Iraq settled more than 13,000 individual claims on Saddam-era debt over more than two years.
  - Russian London Club deal of 1998–2000 saw dissolution of a 19-bank domestic committee in 1999 and months-long delays due to disagreements with mutual funds and hedge funds holding up to 15 percent of debt.
- Table 3 (excerpted): BAC sizes and participation examples (as reported):
  - Albania 1991-1995: Size of Banking Committee 45.
  - Algeria 1990-1992: Size 240.
  - Argentina (1980s debt crisis): Size 300-350.
  - Brazil (1980s debt crisis): Size 750-800.
  - Mexico (1980s debt crisis): Size 500.
  - Poland (1980s debt crisis): Size 500.
  - Russia 1998-2000: Size 2000.

### Sovereign bond exchanges — operational steps
- Main steps in implementing a sovereign bond exchange:
  - Verify debt claims (payment obligations, legal and other features).
  - Identify and contact bondholders, often with the help of advisors.
  - Prepare an exchange offer, preferably in consultation with bondholder representatives and with the support of advisors.
  - Launch an exchange offer, and communicate it directly to creditors or via advisors or press releases.
  - Wait for bondholder feedback/participation.
  - Debt exchange: Issue new bonds and, possibly, retire outstanding bonds.
- Early roles:
  - Legal advisors: identify legal hurdles, overview legal characteristics of bonds, draft exchange documentation and terms.
  - Financial advisors: identify and reach out to bondholders, design financial terms, compute options, draft “carrot” and “stick” features, assess required scope of debt relief.
  - IMF: frequently contacted by member countries for advice on bond restructuring.

### Bondholder structure and communication
- Creditor dispersion:
  - Some restructurings affected thousands of individual creditors: Argentina (2005) estimated 600,000 retail investors; Ukraine (2000) estimated 100,000 retail investors.
  - Other cases had concentrated holdings: Moldova (2002) where one creditor held 78 percent of outstanding Eurobonds.
  - Cases with concentrated creditor bases: Jamaica (2010), Belize (2007), Grenada (2005), Ecuador (2000).
- Communication strategies:
  - Extensive consultations and joint development of offers occurred in Uruguay (2003) and were wide-ranging in Pakistan (1999), Moldova (2002), Ukraine (2000), Grenada (2005), Belize (2007), Seychelles (2009), and Jamaica (2010).
  - Roadshows and press releases were commonly used (example: Dominican Republic roadshow in 2004).
  - Large, representative bondholder groups formed only in a minority of cases (notably Argentina 2005, Grenada 2005, Belize 2007).
  - Example: Global Committee of Argentine Bondholders (GCAB) claimed to represent more than 50 percent of Argentina’s outstanding private bonds but was never formally recognized by the Argentine government.

### Exchange offers, sweeteners, sticks, and participation
- Common design goals:
  - Achieve a high participation rate by bondholders using “carrot” (sweeteners) and “stick” features.
- Examples of sweeteners:
  - Upfront cash repayments; advantageous legal features of new bonds; add-ons such as GDP-linked warrants (Argentina 2005).
  - Consolidation of many old instruments into fewer new benchmark bonds to increase liquidity (example: Jamaica replaced 356 bonds with 25 new instruments).
  - Regulatory sweeteners for domestic banks (Argentina 2005 allowed valuation at par for liquidity or capital adequacy requirements).
- Creditor preferences by investor type (Lim et al., 2005):
  - Retail investors: prefer new bonds with no face value reduction and are more willing to accept long maturity and low coupons.
  - Institutional investors: prefer principal haircut combined with shorter maturities and higher coupons.
- Stick features:
  - Exit consents to remove clauses from old bonds (e.g., cross-acceleration clauses or listing requirements) to reduce value of old bonds and encourage exchange participation.
- Menu of options:
  - Allowing investors to choose among different new instruments to match heterogeneous preferences.
- Participation thresholds and behavior:
  - Minimum participation thresholds for exchanges have ranged between 75 percent and 85 percent of outstanding bonds in most cases.
  - Bondholders tend to wait until the last few days before the deadline to accept an offer; early participation sweeteners are sometimes time-limited (e.g., Uruguay 2003).
  - Deadlines are frequently extended to spur participation (example: Ukraine exchanges and Dominica 2004 where deadline was extended twice by more than four months).
  - Collective action clauses (CACs) can ease restructuring and increase participation.
- Observed participation rates (selected cases from Table 4):
  - Argentina 2005: 76% overall participation; approx 600,000 retail investors affected (450,000 Italians, 35,000 Japanese and 150,000 Germans and Central Europeans); Argentina’s external bonds: 56.5% institutional, 43.5% retail; country distribution: Argentina 38.4%, Italy 15.6%, Switzerland 10,3%, US 9.1%, Germany 5.1%, Japan 3.1%.
  - Belize 2007: 98% participation; creditor committee of 13 institutions representing more than 50% of outstanding debt.
  - Dominica 2004: 72% participation; very dispersed creditor group.
  - Dominican Republic 2005: 97% participation.
  - Ecuador 2000: 98% participation; authorities established a Consultative Group of 8 institutional bondholders but held only two meetings.
  - Ecuador 2009: participation unspecified; government bought back many bonds on secondary market prior to exchange and held no negotiations.
  - Grenada 2005: >90% participation; 97% for external debt; creditor committee of 7 institutions representing more than 70% of outstanding private debt.
  - Moldova 2002: 100% participation; TCW Asset Management Company held 78% of outstanding Eurobond.
  - Pakistan 1999: 99% participation; authorities contacted investors holding approximately 40% of principal.
  - Seychelles 2009: 89% overall; 84% of holders of Eurobond.
  - Uruguay 2003: 93% participation.
  - Ukraine 2000: 97% participation; three of four Ukrainian bonds held by limited number of investment banks and hedge funds; one bond held widely by retail investors with about 100,000 final investors.

### Duration of debt renegotiations — stylized facts
- Trebesch (2008) restructuring phase classification:
  - Phase one: “starting phase” — from credit event to beginning of formal/informal negotiations.
  - Phase two: “negotiation phase” — from start of negotiations to principal agreement and/or exchange offer.
  - Phase three: “implementation phase” — from offer to final agreement and implementation.
- Key summary statistics and findings:
  - Average total duration from start of debt distress to finalization of a restructuring: 28 months, with a standard deviation of 32 months.
  - Fast restructurings occurred in Jamaica (2010), Uruguay (2003), Pakistan (1999), Chile (1990), Romania (1986) — completed in only three or four months.
  - Long restructurings: Argentina (2001–2005), Jordan (1989–1993), Peru (1983–1997).
  - Decadal differences: Restructurings in the 1980s and 1990s averaged 31 months, while restructurings since 1998 (Post-Brady era) averaged 17 months.
  - Debt-type differences:
    - Bond exchanges since 1998 took an average of 13 months (figure label: 13.1).
    - Bank debt restructurings (1980s and 1990s) took more than 30 months on average (figure label: 30.9).
  - Overall conclusion: restructuring duration has decreased significantly in recent decades, especially for sovereign bond restructurings; Argentina’s 2005 exchange is an outlier.

### Pitfalls in the restructuring process
- Creditor coordination failures, litigation, and holdouts:
  - Holdout creditors who refuse participation to enforce better terms or litigate are seen as a main cause of delay and inefficiency.
  - However, evidence indicates holdouts have been the exception rather than the rule:
    - Trebesch (2008) finds no correlation between negotiation delays and number of creditors.
    - Litigation occurrences remain relatively low: only 109 individual litigation occurrences since 1980; successful litigation outcomes (settlements or successful attachments) are even fewer (Enderlein, Schumacher and Trebesch, 2011).
    - Bi, Chamon and Zettelmeyer (2011) argue holdout and litigation strategies are costly and require specialized knowledge; legal mechanisms and professional legal advice can help shield sovereigns from litigation (e.g., Blackman and Mukhi, 2011).
  - Outlier cases with significant holdouts and market re-access issues:
    - Argentina 2005 (global bond exchange) and Dominica 2004.
    - Dominica gradually convinced creditors to accept the original exchange between 2004 and 2007.
    - Argentina launched a new public exchange offer in April 2010 achieving 66% participation, bringing total participation to 92%; remaining 8% holdouts, including distressed debt funds, continue litigation efforts.
- Debtor policies and political risk:
  - Lack of transparency and insufficient communication with creditors contribute to delays and failure.
  - Information sharing and close consultations are associated with quicker and more successful restructurings (Andritzky, 2006; Enderlein, Trebesch, and von Daniels, forthcoming; Roubini and Setser, 2004; Sturzenegger and Zettelmeyer, 2006).
  - Disputes over disclosure (reserve amounts, prospective offers, undisclosed buyback programs) can hinder talks (example: Peru 1995).
  - Political instability, elections, wars, riots, resignations or unilateral cancellation of agreements can delay or abort restructurings; IMF program slippage can also disrupt processes (example: Republic of Congo).
- Size of haircuts:
  - Excessive haircuts can decrease creditor participation and increase likelihood of offer failure (Bi, Chamon and Zettelmeyer, 2011).
  - Haircuts should align with a government’s capacity to pay to avoid incentivizing small creditors to coordinate and block an exchange offer.

*Italic: Source content from the provided IMF PDF chapter/section.*

### Appendix I describes the coding approach of the new dataset and also presents a

### _wp12203 - Appendix I describes the coding approach of the new dataset and also presents a

### A. When and How Often Was Sovereign Debt Restructured?
- Dataset overview and scope
  - More than 600 individual restructuring cases documented.
  - Evidence consistent with the notion of “Serial Default” (Reinhart and Rogoff, 2009).
- Cross-creditor patterns
  - Paris Club implemented 447 agreements in 88 countries.
  - Private creditor restructurings: 186 restructurings in 68 countries.
  - Debt treated by the Paris Club: US$545 billion.
  - Debt treated vis-à-vis private creditors: US$768 billion.
  - On average, amounts exchanged in bank or bond restructurings are typically larger than volumes restructured in Paris Club agreements.
- Time clustering
  - Strong increase in restructuring activity in the 1980s; sharp rise starting in 1983, remained high until 1990, then gradual decline.
  - Case numbers rose again between 1998 and 2004; relatively quiet since 2006 with less than 10 debt restructurings per year overall, including only one or two restructurings of sovereign bonds and bank debt per year.
- Bond vs bank restructurings
  - Sovereign bond restructurings reentered the sovereign debt universe after the Brady plan of the mid-1990s.
  - Since 1998 there have been 17 distressed sovereign bond exchanges with foreign bondholders in 13 countries.
  - Six bond restructurings mainly aimed at domestic creditors: Ukraine (1998), Russia (1998), Argentina (2001), Uruguay (2003), Dominican Republic (2005), Jamaica (2010).
  - Recent bank restructurings include Pakistan (1999), Serbia and Montenegro (2004), Dominican Republic (2005), Iraq (2006), and low-income country debt buybacks.
- Timing relative to defaults
  - Since the 1950s, most debt restructurings occurred post-default: 109 post-default cases versus 77 preemptive cases.
  - Of 17 recent sovereign bond restructurings since 1998, about half were preemptive: Jamaica (2010), Belize (2007), Dominican Republic (2005), Grenada (2005), Moldova (2002), Pakistan (1999), Uruguay (2003), Ukraine (1998 and 2000).
  - All of the bank debt restructurings of recent years were post-default cases.
- Cash buybacks
  - 24 distressed restructurings took the form of cash buybacks.
  - Of these 24 deals, 20 deals were supported by bilateral or multilateral donors (notably the World Bank’s “Debt Reduction Facility”).

### B. Characteristics of Bond and Bank Debt Restructurings Since 1998
- Duration and speed
  - Table 5 lists 19 deals (1998–2010); nearly half took one year or less from announcement to final exchange.
- Selected case statistics from Table 5 (1998–2010) — exact figures preserved:
  - Pakistan (Bank Loans): Post-Default; Default Date Aug-98; Announcement of Restruct. Aug-98; Start of Negotiations Mar-99; Final Exchange Offer May-99; Date of Exchange Jul-99; Total Duration (Months) 11; Debt Exchanged in m US $ 777; Cut in Face Value 0.0%; Haircut Estimate (Cruces/Trebesch) 11.6%; Discount Rate (Cruces/Trebesch) 0.132; Outstanding Instruments Exchanged: Trade credits and debt arrears; New Instruments: 1 Loan.
  - Pakistan (Ext. Bonds): Preemptive; Default Date Aug-99; Announcement Sep-99; Start Nov-99; Final Dec-99; Total Duration 4; Debt Exchanged 610; Cut in Face Value 0.0%; Haircut Estimate 15.0%; Discount Rate 0.146; Outstanding: 3 Eurobonds; New: 1 Eurobond.
  - Ukraine (Ext. Bonds): Preemptive; Default Date Dec-99; Announcement Jan-00; Start Feb-00; Final Apr-00; Total Duration 4; Debt Exchanged 1598; Cut in Face Value 0.9%; Haircut Estimate 18.0%; Discount Rate 0.163; Outstanding: 3 Bonds, 1 Loan; New: 1 Eurobond.
  - Ecuador (Ext. Bonds): Post-Default; Default Date Aug-99; Announcement Jul-98; Start Sep-99; Final Jul-00; Date of Exchange Aug-00; Total Duration 25; Debt Exchanged 6700; Cut in Face Value 33.9%; Haircut Estimate 38.3%; Discount Rate 0.173; Outstanding: 4 Brady Bonds , 2 Eurobonds; New: 2 Eurobonds.
  - Russia (Bank Loans): Post-Default; Default Date Dec-98; Announcement Sep-98; Start May-99; Final Feb-00; Date of Exchange Aug-00; Total Duration 23; Debt Exchanged 31943; Cut in Face Value 36.4%; Haircut Estimate 50.8%; Discount Rate 0.125; Outstanding: PRINs, IANs, debt arrears; New: 1 Eurobond.
  - Moldova (Ext. Bonds): Preemptive; Default Date Jun-02; Announcement Jun-02; Start Aug-02; Final Oct-02; Date of Exchange Apr-02? [table shows O ct- 02 and Apr-04; preserve shown entries]; Total Duration 4; Debt Exchanged 40; Cut in Face Value 0.0%; Haircut Estimate 36.9%; Discount Rate 0.193; Outstanding: 1 Eurobond; New: 1 Eurobond.
  - Uruguay (Ext. Bonds): Preemptive; Default Date Mar-03; Announcement Mar-03; Start Apr-03; Final May-03; Total Duration 2; Debt Exchanged 3127; Cut in Face Value 0.0%; Haircut Estimate 9.8%; Discount Rate 0.090; Outstanding: 18 Ext. Bonds; New: 18 + 3 New Benchmark Bonds.
  - Moldova (Gazprom Debt): Post-Default; Default Date mid 2001; Announcement Sep-02; Start Oct-02; Final Apr-04; Date of Exchange Apr-04; Total Duration 34; Debt Exchanged 115; Cut in Face Value 56.3%; Haircut Estimate 56.3%; Discount Rate 0.100; Outstanding: Promissory Notes; New Instruments: None (cash settlement).
  - Serbia & Monten. (Loans): Post-Default (since 1990s); Announcement Dec-00; Start Sep-01; Final Jun-04; Date of Exchange Jul-04; Total Duration 44 (since announcement); Debt Exchanged 2700; Cut in Face Value 59.3%; Haircut Estimate 70.9%; Discount Rate 0.097; Outstanding: Bank Loans, Arrears; New: 1 Eurobond.
  - Dominica (Bonds/Loans): Post-Default; Default Date Jul-03; Announcement Jun-03; Start Dec-03; Final Apr-04; Date of Exchange Sep-04; Total Duration 15; Debt Exchanged 144; Cut in Face Value 15.0%; Haircut Estimate 54.0%; Discount Rate 0.092; Outstanding: 2 Bonds, short- and medium-term Loans; New: 3 Bonds.
  - Argentina (Ext. Bonds): Post-Default; Default Date Jan-02; Announcement Oct-01; Start Oct-01; Final Nov-01; Date of Exchange Apr-05; Total Duration 42; Debt Exchanged 43736; Cut in Face Value 29.4%; Haircut Estimate 76.8%; Discount Rate 0.104; Outstanding: 66 US$ and AR$ denominated Bonds; New: 5 US$ and AR$ denominated Bonds.
  - Dominican Rep. (Ext. Bonds): Preemptive; Default Date Apr-04; Announcement Jan-05; Start Apr-05; Final May-05; Total Duration 13; Debt Exchanged 1100; Cut in Face Value 0.0%; Haircut Estimate 4.7%; Discount Rate 0.095; Outstanding: 2 Bonds; New: 2 Bonds.
  - Dom. Rep. (Bank Loans): Post-Default; Default Date Feb-05; Announcement Apr-04; Start Aug-04; Final Jun-05; Date of Exchange Oct-05; Total Duration 18; Debt Exchanged 180; Cut in Face Value 0.0%; Haircut Estimate 11.3%; Discount Rate 0.097; Outstanding: Bank Loans , Arrears; New: 1 Loan.
  - Grenada (Bonds/Loans): Preemptive; Default Date Oct-04; Announcement Dec-04; Start Sep-05; Final Nov-05; Total Duration 13; Debt Exchanged 210; Cut in Face Value 0.0%; Haircut Estimate 33.9%; Discount Rate 0.097; Outstanding: 5 Ext. Bonds, 8 Dom. Bonds, 2 Ext. Loans; New: 1 US$ Bond and 1 EC$ Bond.
  - Iraq (Bank/Comm. Loans): Post-Default (since 2003); Announcement in 2004; Start Jul-05; Final Jul-05; Date of Exchange Jan-06; Total Duration 20 (since announcement); Debt Exchanged 17710; Cut in Face Value 81.5%; Haircut Estimate 89.4%; Discount Rate 0.123; Outstanding: Loans, Supplier Credit, Arrears; New: Mostly Cash, 1 US$ Bond, 1 Loan.
  - Belize (Bonds/Loans): Preemptive; Default Date Aug-06; Announcement Aug-06; Start Dec-06; Final Feb-07; Total Duration 6; Debt Exchanged 516; Cut in Face Value 0.0%; Haircut Estimate 23.7%; Discount Rate 0.096; Outstanding: 7 Bonds, 8 Loans; New: 1 Bond.
  - Ecuador (Bond buy-back): Post-Default; Default Date Dec-08; Announcement Jan-09; Start no neg.; Final Apr-09; Date(s) of Exchange June/Nov-09; Total Duration 12; Debt Exchanged 3190; Cut in Face Value 68.6%; Haircut Estimate 67.7%; Discount Rate 0.130; Outstanding: 2 Eurobonds; New: None (cash settlement).
  - Seychelles (Ext. Bonds): Post-Default; Default Date Jul-08; Announcement Mar-09; Start Mar-09; Final Dec-09; Date of Exchange Feb-10; Total Duration 19; Debt Exchanged 320; Cut in Face Value 50.0%; Haircut Estimate 56.2%; Discount Rate 0.107; Outstanding: 1 Ext. Bond , 2 Ext. Loans , Notes; New: 1 Bond.
  - Cote D'Ivoire (Ext. Bonds): Post-Default; Default Date Mar-00; Announcement Aug-09; Start Aug-08; Final Mar-10; Date of Exchange Apr-10; Total Duration 21 (since announcement); Debt Exchanged 2940; Cut in Face Value 20.0%; Haircut Estimate 55.2%; Discount Rate 0.099; Outstanding: 2 Brady Bonds, Arrears; New: 1 Bond.
- Measures of debt relief
  - Two indicators used: (i) cut in face value in percent of debt restructured; (ii) haircut estimates (Cruces and Trebesch methodology).
  - Cruces and Trebesch (2011) follow Sturzenegger and Zettelmeyer (2008) methodology, extended back to the 1980s and 1990s, covering 180 deals.
  - Haircut estimate compares present value (PV) of new instruments (plus cash repayments) with PV of old outstanding debt (including past due interest), discounting via imputed exit yields varying across countries and time (as far back as 1978).

### C. Financial and Macroeconomic Conditions During Restructuring Episodes
- Data and method
  - Median values plotted for a six-year interval around restructuring years for 44 “final restructurings” with banks and bondholders since the 1980s (sample excludes low income and highly indebted poor countries as defined by the World Bank).
  - Data sources: IMF’s IFS dataset, World Bank’s GDF and WDI datasets, and country data by the Economist Intelligence Unit.
- Key median dynamics (six-year window around restructuring year)
  - Total public debt to GDP: from a median of over 50 percent to about 35 percent.
  - Total external debt to GDP: from a median close to 80 percent to below 50 percent.
  - Ratio of external short-term debt to reserves: from a median of more than 110 percent to just over 55 percent in a single year.
  - Median real growth: around 1.5 percent three years before final agreements, increasing to between 4 and 5 percent in the period after restructurings.
  - Median inflation: decreases from around 20 percent to just 7.5 percent.
  - Median budget balance: improves from -4 percent to around -1 percent of GDP.
- Interpretation note
  - Restructuring often marks the end of a crisis rather than its beginning; restructurings can occur many years after the first payment default of a country.

### D. Evolution of Credit Ratings During Restructuring Episodes
- Overall rating dynamics
  - Ratings decline markedly by more than four notches in the three years prior to a sovereign default event.
  - Ratings start to recover after restructurings but gain only 1.7 notches, on average, in the three subsequent years.
- Moody’s ratings across nine recent bond restructuring episodes (Table 6; exact entries preserved)
  - Pakistan: Default Date Jul. 1999; Restructuring Date Dec. 1999; Rating one year before default B3; Rating just prior to default Caa1; Rating just after restructuring Caa1; Rating one year after restructuring Caa1.
  - Ecuador: Default Date Aug. 1999; Restructuring Date Aug. 2000; Rating one year before default B1; Rating just prior to default B3; Rating just after restructuring Caa2; Rating one year after restructuring Caa2.
  - Argentina: Default Date Nov. 2001; Restructuring Date Apr. 2005; Rating one year before default B1; Rating just prior to default Caa3; Rating just after restructuring Caa1; Rating one year after restructuring B3.
  - Moldova: Default Date Jun. 2002; Restructuring Date Okt. 2002; Rating one year before default B3; Rating just prior to default Caa1; Rating just after restructuring Ca; Rating one year after restructuring Caa1.
  - Uruguay: Default Date Mai. 2003; Restructuring Date May 2003; Rating one year before default Ba2; Rating just prior to default B3; Rating just after restructuring B3; Rating one year after restructuring B3.
  - Dominican Rep.: Default Date Apr. 2005; Restructuring Date May 2005; Rating one year before default B3; Rating just prior to default B3; Rating just after restructuring B3; Rating one year after restructuring B3.
  - Belize: Default Date Dec 2006; Restructuring Date Feb. 2007; Rating one year before default Caa3; Rating just prior to default Caa3; Rating just after restructuring Caa1; Rating one year after restructuring Caa1.
  - Ecuador (second entry): Default Date Dec 2008; Restructuring Date Jun. 2009; Rating one year before default Caa2; Rating just prior to default Caa1; Rating just after restructuring Ca; Rating one year after restructuring Caa3.
  - Jamaica (Domestic): Default Date Feb. 2010; Restructuring Date Feb. 2010; Rating one year before default Ba2; Rating just prior to default Caa2; Rating just after restructuring Caa2; Rating one year after restructuring Caa2.
- Observations
  - Ratings recover only slowly after restructurings; after one year most sovereign bonds retained a C-rating.
  - All sovereigns listed had low ratings in the speculative range one year prior to default or restructuring.
  - Notable outlier: Uruguay had investment grade status (Baa3) up to March of 2002 but restructured only 14 months later.

### V. Legal Aspects of Sovereign Debt Restructurings
- Governing laws and jurisdictional patterns
  - International bonds typically issued under foreign laws in financial centers such as New York, London, or Tokyo.
  - New York law and English law are by far the most popular governing laws for international bond issues.
  - Domestic bonds are usually issued under domestic legislation.
  - Governing law influences contractual provisions for restructuring, including the presence of collective action clauses, and determines the jurisdiction in case of litigation by creditors.
- Emerging market bond issuance by governing law (outstanding issues in 43 countries as of March 2009; Table 7 entries preserved)
  - In billions of U.S. dollars: New York 272; English 117; German 148; Japan 41; Total 1 (table header format preserved).
  - By number of issuances: New York 435; English 140; German 282; Japan 8631 (table entries preserved as shown).
- Regional differences
  - A large majority of outstanding emerging market bonds issued in international markets (as of 2009) were under New York law, with London law second.
  - For European Union (EU) countries between 2003 and 2010, the majority issued more than 80 percent of their public bonds under their own laws.

*Source: Trebesch (2011) and associated tables and figures as presented in Appendix I of the source PDF.*

### 2010. The shares are based on issuance volumes in current US$ figures. The data include

### _wp12203 - 2010. The shares are based on issuance volumes in current US$ figures. The data include sovereign and quasi-sovereign debt.

### Governing law of sovereign bond issuances — key findings
- English law is the most widespread governing law among countries that issued at least part of their central government bonds under foreign law.
- Specific country patterns:
  - New EU member countries (including the Baltic countries, Cyprus, Poland, Romania, and Slovakia) issued considerable volumes under English law.
  - EMU countries such as Greece, Portugal, and Spain issued only a minor part, of 5 percent or less, under English law.
  - New York law plays a negligible role overall; only Austria, Hungary, Italy, Poland, and Sweden issued a non-negligible volume under New York law, but these volumes are small compared to total issuances.
- Source of underlying data: Dealogic and own calculations.

### Collective Action Clauses (CACs) — classifications, market practice, and evidence
- Definitions and functional roles:
  - CACs specify creditor representation in negotiations, majority-voting procedures to alter financial terms (principal, interest, maturity), and can limit incentives or ability of individual creditors to initiate litigation.
- Two broad categories of CACs (see IMF, 2002a):
  - “Majority restructuring” provisions:
    - Allow a qualified majority of bondholders of an issuance to change financial terms and bind all holders of that issuance, either before or after default.
    - Traditional English-style CACs required a bondholder meeting with a supermajority of 75 percent of those represented at the meeting.
    - For most recently issued bonds with CACs, voting does not require representation at a meeting; a supermajority is reached when a certain percentage of total amounts outstanding agree (e.g., 75 percent).
    - Traditional English-style CACs contained quorum requirements: at least 50 percent of outstanding bonds represented at the first meeting; if not reached the meeting is adjourned and the quorum is lowered to 25 percent. This combination could theoretically amend terms with the vote of just 18.75 percent of holders (75 percent of 25 percent).
  - “Majority enforcement” provisions:
    - Can limit the ability of a minority of bondholders to enforce rights following a default, e.g., preventing (i) declaring full amount due and payable (“acceleration”), and (ii) commencing litigation against the sovereign.
    - Litigation may be discouraged if combined with a trust structure: for bonds under a trust deed, the trustee will only file suit if requested by a minimum share of bondholders (between 20 and 25 percent).
    - Sharing clauses can ensure amounts recovered via litigation are shared pro rata among bondholders.
- Market history and diffusion:
  - CACs have been included in English-law bonds for more than a century; Luxembourg and Japanese-law bonds typically include CACs.
  - CACs were largely absent in New York-law bonds prior to 2003 and continue to be absent in the majority of bonds under German or Swiss law (absence is market convention, not legal impediment).
  - Breakthrough in New York law: Mexico’s February 2003 sovereign bond was the first New York-market sovereign issue to include CACs; subsequent issuers in 2003 included Uruguay, Brazil, Korea, South Africa, Belize, Italy, and Turkey. Since then inclusion of CACs in New York bonds has become the norm.
  - For domestic bonds, inclusion of CACs remains the exception, especially in continental Europe; most government bonds of EU countries contain no CACs.
- Evidence on effectiveness and market impact:
  - Mixed empirical and case evidence:
    - Successful uses: Ukraine (2000) — CACs in three Eurobonds under Luxembourg law aided restructuring; Moldova (2002) and Uruguay (2003) — English-law CACs reportedly contributed to quick restructurings.
    - Non-use or limited effect: Pakistan (1999) — authorities did not invoke CACs; Dominica (2004) and Argentina (2005) — CACs embedded but did not prevent serious holdout problems.
    - Some studies find limited benefit: Bi, Chamon and Zettelmeyer (2011) — CACs did not improve over exit consents if CACs are voted separately for each bond series. Bradley, Cox and Gulati (2010) — market attaches little positive value to use of CACs.
  - Impact on borrowing costs:
    - Existing research finds little indication that including CACs has significant effects on borrowing costs in the emerging market context (Becker et al., 2003; Eichengreen and Mody, 2004; Richards and Gugiatti, 2003).
    - The impact depends on design details: the more CACs reduce creditor rights relative to current legal practice, the higher the likelihood of price effects.
    - Combining CACs with aggregation clauses may produce significant effects, but few sovereign bonds contain both features and empirical evidence is scarce.
    - Theoretical analysis (Bi, Chamon and Zettelmeyer, 2011) indicates CACs plus aggregation clauses can be “a more powerful instrument than exit consents.”
    - Ratings agencies note: Fitch (2010b) states it currently does not distinguish ratings for securities with CACs versus those without, but if CACs included “nonstandard” clauses or automatic restructuring triggers ratings could be lower.

### Further key bond clauses — mechanisms and observed uses
- Exit consents / exit amendments:
  - Legal technique used to amend non-payment terms of old bonds in an exchange to render old bonds unattractive or illiquid (a “stick feature”).
  - Allow a simple majority of bondholders to modify bond provisions such as waiver of sovereign immunity, financial covenants, or listing requirements.
  - Common exit-consent measures: (i) de-listing outstanding bonds to reduce liquidity, (ii) removal of cross-default clauses, (iii) removal of acceleration clauses.
  - Decision to use exit consents occurs with issuer agreement and often in a bondholder meeting; after exchange, non-participating bondholders generally cannot reverse amendments without sovereign consent.
  - Historical uses: first used in Ecuador’s 2000 exchange (New York law); Uruguay 2003 used narrower exit consents; subsequently used in Dominica (2004), Dominican Republic (2005), Argentina (2005), Belize (2007). Exit consents under New York law have generally withstood legal challenges in U.S. courts.
- Acceleration clauses:
  - Entitle creditors to “accelerate” unmatured principal following a default event—i.e., all principal and accrued interest become immediately due and payable after a missed payment.
  - Typically, acceleration requires a minority vote of at least 25 percent of outstanding principal.
  - Depending on drafting, acceleration can be revoked by a majority of bondholders if default is “cured.”
- Cross-default and cross-acceleration:
  - Cross-default: a default on one debt contract can trigger default on another, strengthening inter-creditor equity and deterring selective default.
  - Many bonds provide a minimum amount (e.g., 25 percent) to trigger cross-default provisions.
  - Cross-acceleration: acceleration on one contract may accelerate other debt contracts.
  - Exit consents are often used to remove cross-default and cross-acceleration clauses from old bonds to protect new bondholders from legal remedies by non-participating holdouts.
- Aggregation clauses:
  - Allow aggregation of creditor claims across multiple bond series (and possibly other debt instruments) for voting purposes, potentially enabling a supermajority to amend payment terms across series simultaneously.
  - Limited practical use: Uruguay (2003), Argentina (2005), Belize, Dominican Republic adopted aggregated CACs; aggregated CACs in Argentina and Uruguay use a dual voting threshold: approval requires 85 percent aggregate of affected series and 66 percent of each affected series.
  - Aggregation clauses have not been invoked in any recent sovereign debt workout.

### Creditor litigation against debtor governments — trends and implications
- Litigation in commercial courts is increasingly used by private creditors unwilling to accept restructurings; seen as a main obstacle to sovereign restructurings and debt relief initiatives in low-income countries.
- Most lawsuits are filed in New York or London courts, but filings in other jurisdictions (Germany, Italy, Switzerland) and domestic courts of debtor countries have increased.
- Enforcement of creditor rights across borders is constrained; there is no sovereign bankruptcy regime comparable to domestic corporate bankruptcy procedures.

*Source: _wp12203 - 2010. The shares are based on issuance volumes in current US$ figures. The data include sovereign and quasi-sovereign debt. Source: Dealogic and own calculations.*

### chapter 11 for US corporations. Sovereign debt is typically not backed by any collateral and

### _wp12203 - chapter 11 for US corporations. Sovereign debt is typically not backed by any collateral and

### Creditor litigation, sovereign immunity, and “vulture” creditors
- Sovereign debt is typically not backed by collateral and only few attachable government assets are located outside national borders; legal doctrines such as sovereign immunity, the act of state doctrine, and international comity historically protected sovereign assets in foreign jurisdictions.
- Since the 1950s, statutory changes and case law development have weakened these legal protections, strengthening creditor rights and enabling increased litigation (see Fisch and Gentile 2004; Sturzenegger and Zettelmeyer 2006).
- Stylized “vulture” litigation strategy:
  - Buy sovereign debt claims at a deep discount on secondary markets.
  - Sue debtor governments for full debt repayment (100 percent of the nominal value plus accumulated interest).
  - Strategy is risky and can take many years, but has become an attractive business model for a small number of specialized investor funds.
- Prominent historical litigation examples cited:
  - Elliott against Peru in 1998.
  - Dart family lawsuit against Brazil in the mid-1990s.
  - Republic of Congo litigation threatening assets abroad and oil payments.
- Litigation volume and impact:
  - Volume of claims filed against HIPCs alone has surpassed US$2 billion, which is higher than the volume of debt relief that should have been provided by commercial creditors to these countries (IMF and World Bank, 2006).
  - Debt claims under litigation correspond to about 15 percent of GDP in examples like the Republic of Congo or Sao Tomé and Principe (IMF and World Bank, 2006).
- Data and empirical evidence:
  - Enderlein, Schumacher and Trebesch (2011) build a comprehensive database on litigation cases.
  - Key stylized facts from that dataset:
    - Most sovereign debt litigation cases are not default- or restructuring-related; majority relate to other government liabilities (unpaid energy bills, trade invoices).
    - Number of default-related lawsuits in New York and London has been increasing since the 1980s.
    - More than half of all default-related cases were initiated after the year 2000, despite fewer sovereign defaults and restructurings in the last decade.
    - Between 1980 and 2010, a total of 109 cases were filed against debtor governments in connection with a default on sovereign bonds or loans (only US and UK jurisdictions considered).

### Domestic sovereign debt restructurings: scope and distinguishing features
- General observations:
  - Limited data on domestic debt defaults and restructurings; evidence drawn from Reinhart and Rogoff (2009); case studies (Erce and Diaz-Cassou 2010; Sturzenegger and Zettelmeyer 2006); Trebesch (2008, 2010); Enderlein, Trebesch and von Daniels (forthcoming).
  - Negotiation mechanics similar to external restructurings, but differences include domestic adjudication and investor composition.
- Three notable differences relative to external restructurings:
  1. Legal venue: domestic debt often adjudicated domestically, constraining investor litigation to domestic courts (unless bond contract provides otherwise).
  2. Investor base: domestic instruments often held mainly by residents (domestic banks, insurance companies, pension funds), so restructurings directly affect domestic financial institutions and financial stability.
     - Examples where foreigners held substantial domestic debt: Russia (1998), Ukraine (1998).
     - Case of Pakistan (1999): more than one-third of debt affected by external exchanges was held by residents.
  3. Exchange rate considerations: currency mismatches and depreciation risks play a lesser role for domestic-currency debt; nonetheless, financial sector stability is a central concern.
- Empirical incidence and severity:
  - Reinhart and Rogoff (2009) dataset (1800–2007):
    - 70 cases of overt (de jure) domestic default (outright payment suspensions and unilateral principal/interest reductions).
    - More than 150 cases of de facto domestic currency default (episodes with inflation above 20 percent per annum).
    - Most overt domestic defaults occurred after 1980 and often coincided with external debt defaults.
    - Output decline associated with domestic debt default: average decline of 4 percent in the year prior to domestic default versus 1.2 percent in the year before external defaults.
- Timing and participation in domestic exchanges:
  - Domestic restructurings are often implemented faster than external restructurings:
    - Argentina’s domestic debt restructured in November 2001 while external exchange took nearly four years (until 2005).
    - Russia’s domestic GKO instruments restructured within 6 months (August 1998–March 1999); external bank loan restructuring completed by 2000.
    - Ukraine’s domestic exchange implemented in less than two months with separate offers for resident and nonresident holders.
    - Jamaica’s domestic exchange took about two months.
  - Creditor participation comparisons (selected cases):
    - Russia: domestic offer participation 95 percent (residents) and 85 percent (non-residents); external PRINs and IANs participation 99 percent.
    - Ukraine: domestic participation less than 85 percent; international bonds 97 percent.
    - Argentina (late 2001/early 2002): domestic participation 65 percent.
    - Uruguay: domestic participation 99 percent (partly attributed to moral suasion and regulatory incentives).
  - Treatment of domestic vs external creditors:
    - Discrimination in favor of domestic creditors observed in some cases (Belize 2007; Ecuador 1998–2000 and 2008–2009; Jamaica 2010 shows signs of discrimination by excluding Eurobonds).
    - Most recent cases show no obvious creditor discrimination.

### Box: Jamaica’s domestic restructuring (2010) — case details and outcomes
- Context and objectives:
  - Aim: reduce unsustainable government debt burden; annual interest payments had reached 60 percent of fiscal revenue, or 16 percent of GDP.
  - Large borrowing needs in 2010 to 2014.
  - 65 percent of direct government debt was held by domestic financial intermediaries (commercial banks, security dealers, pension funds, insurance companies).
- Financial stability measures:
  - Government established a Financial Sector Support Fund (FSSF) backed by US$1 billion from multilateral disbursements to provide temporary liquidity support if needed.
  - Conducted stress tests to identify bank vulnerabilities and tailor the exchange proposal.
- The exchange:
  - Launched mid-January 2010; affected the entire stock of domestic public debt; Eurobonds in international markets were excluded.
  - Investors chose from a menu of new fixed, floating, and inflation- and US$-indexed securities, subject to allocation rules.
  - 345 domestically-issued bonds were exchanged into 24 new instruments.
  - The bonds amounted to 65 percent of GDP or 47 percent of public debt.
  - No cut in face value; longer maturities and lower interest rates.
- Outcomes and immediate effects:
  - Achieved short-term goals: reduced rollover requirements; lowered interest payments (average yield from 19 percent before to 12.5 percent after the exchange).
  - Resulted in a public debt portfolio with a higher share of liquid, fixed rate instruments.
  - Implementation speed: quick; participation rate of 99 percent; no pressure on the currency or capital account.
  - Financial system withstood effects; financial sector GDP declined due to drop in interest income.
  - FSSF was not ultimately used—no institution requested or received support.
  - Uncertainty remains on whether the restructuring provides sufficient medium- and long-term debt relief.

### Restructurings in monetary unions
- Historical incidence:
  - Few sovereign debt restructurings within monetary unions.
  - Examples:
    - East Caribbean Currency Union (ECCU) members with defaults/renegotiations: Antigua and Barbuda (ongoing), Dominica (2004), Grenada (2005).
    - Côte d’Ivoire restructurings in 1998 and 2009 (West African Economic and Monetary Union).
- Effects and considerations:
  - ECCU cases did not put the union at immediate risk, but debt sustainability concerns could threaten the currency union’s viability.
  - IMF (2011a) notes member countries with debt to GDP ratios of 60 to over 100 percent despite debt relief.
  - In ECCU, a substantial part of restructured debt denominated in EC dollars and owed to regional banks; as of the report date, only 13 percent of public debt in the six ECCU countries is owed to foreign commercial banks (see IMF, 2011a).
  - For Côte d’Ivoire, no strong evidence that currency peg or other CFA countries substantially influenced renegotiations; country reportedly in continuous default since 1983 (Standard & Poor’s, 2006).

### Restructuring “quasi-sovereign” debt (public and government-related enterprises)
- Definitions and implications:
  - “Quasi-sovereign” or government-related issuers: fully or partially government-owned entities without taxing authority (Moody’s 2005); some entities with little/no government ownership may be government-related if systemically important (S&P 2010).
  - Defaults by public enterprises are not counted as sovereign defaults because entities are legally separate; however, government contingent liabilities and support practices are considered in sovereign ratings.
  - Government support can include guarantees, transfers, bail-outs, facilitating renegotiations, or better access to finance.
- Historical incidence and notable cases:
  - Historically limited number of defaults by state-owned corporations/sub-national entities.
    - Fitch (2010a) lists 9 cases of outright defaults of state-owned corporations, provinces or cities between 1998 and 2008.
  - Recent high-profile quasi-sovereign restructurings highlighted:
    - Dubai World.
    - Ukraine’s Naftogaz.
  - Default by a state-owned corporation can affect sovereign creditworthiness and government reputation as a debtor.

*Italicized source attribution line.*

### Box 3. Recent “Quasi-Sovereign” Debt Restructurings

### Box 3. Recent “Quasi-Sovereign” Debt Restructurings

### Dubai World
- Event:
  - In late November 2009, the government of Dubai announced that the state owned holding company Dubai World and its real estate subsidiary Nakheel Properties would halt debt repayments and restructure its debt.
  - The standstill announcement affected $26 billion worth of bilateral bank loans, syndicated loans, and bonds and effectively abolished the perceived implicit sovereign guarantee of Dubai World.
- Consequences and containment:
  - Resulted in a substantial increase in the borrowing costs of Dubai, and in the region as a whole.
  - Financial turmoil was contained through support from the Government of Abu Dhabi and the UAE Central Bank.
- Legal and restructuring process:
  - Government of Dubai announced a new legal insolvency framework based upon internationally accepted standards for transparency and creditor protection.
  - Process took place under a corporate insolvency law regime and was subject to decisions of an independent tribunal.
- Creditor negotiations and outcome:
  - A creditor committee was formed, representing about 90 financial institutions and headed by British and Japanese banks.
  - Committee reached a principal agreement in May 2010.
  - A successful debt restructuring was implemented in September, implying a lengthening of maturities by five to eight years, lower interest rates, but no outright face value reduction.
  - One month later, a last holdout creditor was convinced to sell its debt stake, yielding a creditor participation rate of 100 percent.

### Ukraine’s Naftogaz
- Event:
  - In September 2009, Naftogaz announced plans for a debt restructuring of a US$500 million bond coming due at the end of the month.
  - Naftogaz refused to make the principal repayment, triggering a failure-to-pay credit event.
- Exchange terms and participation:
  - Exchange offer implied a maturity extension of five years and a higher 9.5 per cent coupon.
  - By the early participation deadline of October 8th, the vast majority of bondholders accepted the offer.
  - Ultimately, over 93 percent of bondholders accepted the offer; remaining holders were bound via collective action clauses contained in the old bonds.
- Parallel debt operations and restructuring:
  - Naftogaz renegotiated debt owed to Western banks and other bilateral creditors; all old claims exchanged into a new Eurobond of $1.6 billion, which is guaranteed by the government.
  - The company was restructured from a state-owned entity into a public joint-stock company with shares owned by the government.
- Characterization:
  - Bond restructuring techniques resembled corporate debt exchanges more closely than sovereign practice.

### VII. Credit Default Swaps and Sovereign Debt Restructurings — Overview
- Nature of CDSs:
  - A CDS is a credit derivative contract between two counterparties, comparable to an insurance policy on a bond or loan.
  - The “protection buyer” pays a quarterly premium to the seller, who commits to cover losses in case of a credit event (default, bankruptcy, or distressed exchange).
  - Most CDSs are documented using standard forms promulgated by ISDA, although some are tailored.
- Market development:
  - Volumes of CDS contracts outstanding have increased manifold in the last 5 years.
  - There is now a relatively liquid secondary market for sovereign CDS trading in Europe and the US.

### A. The Settlement of Sovereign CDS Contracts
- Triggering and settlement:
  - Non-voluntary sovereign debt restructurings are a sufficient condition to trigger a credit event, entitling the CDS protection buyer to terminate and settle the contract.
  - Settlement now tends to be implemented via an ISDA regulated credit event auction involving cash settlement.
  - Cash settlement is useful when the number of CDS contracts exceeds underlying bonds available for delivery.
- Cash settlement mechanics:
  - Cash settlement is calculated as the difference between the face (par) value of the debt due and the recovery value.
  - Recovery value is estimated from market prices over a prespecified period after default, by computing (1-Recovery)×Notional.
- Cheapest-to-deliver (CTD) concept:
  - CTD refers to the right of contract holders to deliver different types of underlying bonds at specific delivery or expiry points.
  - The price of the CDS will tend to factor the CTD bond, because investors will want to deliver the underlying bond available at the lowest price.
  - Restructured and non-restructured bonds can trade at very different levels, leading to significant recovery risk.
  - Singh (2003 and 2004) suggests CTD bonds are a good proxy for a stochastic recovery value during distress; Andritzky and Singh (2005, 2006) show CTD use in emerging markets.
- Experience:
  - Limited experience with settling sovereign CDS contracts via ISDA auction; only one example cited:
    - Ecuador: Payments on Ecuador's CDS were triggered on December 15, 2008, when President Rafael Correa refused an interest payment due on the 2012 global bond.
    - ISDA launched its first sovereign CDS auction on January 14, 2009.
    - In the auction, the recovery rate was set at 31.75 percent, approximately in line with the price of the CTD bonds.
- Pricing note:
  - Footnote: The price of the CDS, (1-Recovery)/Notional, could be proxied by (1-CTD)/Notional.

### B. Potential Distortions: Insurable Interest and the “Empty Creditor” Problem
- Naked CDS concerns:
  - “Naked CDSs” are CDS purchases where the investor does not own the underlying bond.
  - Naked CDSs could create moral hazard if holders have an interest in the borrower triggering a credit event, although individual investors are unlikely to influence government policy.
  - Naked CDSs are normally used to hedge correlated risk.
- The “empty creditor” problem:
  - More serious moral hazard arises when a protection buyer hedges a significant volume of his credit risk vis-à-vis the debtor.
  - A lender protected against default may reduce monitoring or have fewer incentives to avoid restructuring; a premature default may be beneficial if the hedged bondholder collects CDS protection at a gain.
  - Hu and Black (2008) label this the “empty creditor” problem—an investor who may push a debtor into inefficient bankruptcy or liquidation.
  - Empty creditors may have less incentive to negotiate in good faith, may avoid voluntary restructurings that would not trigger CDS, and can disrupt debt renegotiations.
- Empirical evidence and policy implications:
  - Academic research has not provided much evidence for the empty creditor hypothesis in distressed corporations:
    - Bedendo, Cathcart and El-Jalel (2010) find no evidence that CDS availability influenced restructuring processes of distressed firms during the 2008–2009 crisis, including choice between bankruptcy and private workout.
    - Mengle (2009) surveys the literature and questions the plausibility of the empty creditor hypothesis on logical grounds.
  - Assessment:
    - It is difficult to assess whether the empty creditor problem will be a major concern for sovereign debt markets.
    - Better data and well-founded research are necessary.
  - Policy recommendation:
    - Policymakers should recognize that the presence of CDSs can have immediate effects on sovereign creditor behavior during distress.
    - In case of a restructuring, it may be beneficial for the government to diligently gather information on the CDS positions of all its creditors and negotiation counterparts.
    - Footnote: Hu and Black argue mitigation could come from required disclosure of CDS positions of investors holding a significant fraction of the referenced borrower's debt.

### VIII. Costs and Implications of Sovereign Debt Restructurings: Survey (intro)
- Overview of channels of cost:
  - Defaults and restructurings may have adverse consequences for the debtor government’s access to capital post-crisis, leading to higher interest premia and exclusion from capital markets.
  - Sovereign debt crises are associated with declines in trade and output.
  - Restructurings may affect banks and domestic investors, possibly endangering financial stability.
  - Reputational spillovers may affect foreign direct investment (FDI) and private sector access to credit.
  - Restructuring can be costly administratively.
- Pointer:
  - The following sections summarize empirical evidence on each aspect.

### A. Borrowing Costs and Exclusion from Capital Markets
- Theoretical expectation:
  - Defaults and restructurings imply costly consequences in credit markets (Eaton and Gersovitz, 1981 framework).
  - Many models assume defaults lead to temporary or permanent exclusion from capital markets and/or increased borrowing costs (Aguiar and Gopinath, 2006; Amador, 2009; Arellano, 2008; Asonuma, 2010; Mendoza and Yue, 2008; Tomz and Wright, 2007; Yue, 2010).
- Empirical evidence (mixed):
  - Majority of empirical contributions over the past thirty years conclude default premia are negligible in the medium and long run; typical finding: defaults affect risk spreads only in the first and second year after restructuring (Borensztein and Panizza 2009).
  - Gelos et al. (2004) and Richmond and Dias (2009) show most defaulters regain access to new credit within one or two years after a crisis.
  - Earlier studies (Lindert and Morton 1989; Özler 1993; Benczur and Ilut 2009; Jorgensen and Sachs 1989) find average default penalty not sizable, leading to average spread increases of, at most, 50 basis points in years one or two after crisis.
- Contrasting evidence:
  - Cruces and Trebesch (2011):
    - Using a dataset on haircuts in all 180 restructurings with banks and bondholders since 1978, they find the size of haircuts is a main predictor for post-restructuring bond spreads.
    - A one standard deviation increase in the haircut (20 percentage points) is associated with post-restructuring bond spreads that are 170 basis points higher compared to baseline, after controlling for fundamentals and country and time-fixed effects.
    - The effect decreases over time but remains significant in years six and seven after restructuring, implying higher spreads of 50 basis points.
    - The haircut size is highly correlated with duration of capital market exclusion: ceteris paribus, a one standard deviation increase in haircuts is associated with a 50 percent lower likelihood of re-accessing international capital markets in any year after restructuring.

### B. Effects on Output and Trade (intro)
- Estimates of output losses:
  - Sturzeneger (2002) estimates output losses at around 2 percent of GDP.
  - De Paoli, Hoggarth, and Saporta (2009) suggest output losses may be around 5 percent a year, and up to ten years, depending on duration of arrears and negotiations.
  - “Twin” or “triple crises” (debt crises coinciding with banking and currency crises) are associated with much larger output costs than debt crises alone.
  - Mention of a recent study by Levy-Yeyati and Panizza (2011) begins but details are beyond the supplied content.

*Italic: Source — _wp12203 - Box 3. Recent “Quasi-Sovereign” Debt Restructurings*

### conclusion that defaults tend to follow, not precede, output contractions. The authors come

### _wp12203 - conclusion that defaults tend to follow, not precede, output contractions. The authors come

### Trade effects of sovereign restructurings
- Rose (2005) estimates trade falls bilaterally by about 7 percent per year after a Paris Club restructuring, an effect lasting for about 15 years, on average.
- Martinez and Sandleris (2008) augment Rose’s gravity equation with:
  - a “bilateral" dummy capturing creditor-debtor country-pair effects for each Paris Club restructuring, and
  - a “general" default dummy capturing the impact on trade with all partners.
- Martinez and Sandleris (2008) find:
  - a general decline in trade after Paris Club debt restructurings (lasting 5 years),
  - the bilateral default dummy has a positive coefficient (no evidence of bilateral punishment).
- Mitchener and Weidenmier (2005), using onset of sovereign defaults from 1870 to 1913, find an insignificant bilateral effect of default on trade flows, consistent with Martinez and Sandleris.
- Other related work examines effects on trade credit (e.g., Love, Preve and Sarria-Allende, 2007; Ronci, 2005; Wang and Ronci, 2005).

### Output costs and timing of defaults
- Newer studies using quarterly data for defaults occurring between 1982 and 2003 support the conclusion that defaults tend to follow, not precede, output contractions.
- Box 5 synthesis: debt crisis years are associated with a drop in GDP of between 2 and 5 percent per year.
  - The size of this effect depends on the duration of the crisis, and whether it occurs simultaneously with banking and currency crises.

### Effects on banks and the financial sector
- Sovereign debt restructurings can:
  - strongly affect banks, pension funds, insurance companies, mutual funds, and other financial institutions holding affected instruments or exposed via CDS positions,
  - endanger financial stability and, in the worst case, trigger bank failures and bank recapitalization needs,
  - contribute to credit crunches, less domestic lending, and cross-border risk spillovers.
- Channels of impact:
  - Asset side: restructured assets held by banks reduce asset values; “Buy and hold” investors of long-term government bonds are likely most affected; mark-to-market institutions may rebalance in anticipation of restructuring.
  - Liability side: deposit withdrawals and interruption of interbank credit lines can impair liquidity and resource mobilization.
  - Funding costs: past restructuring episodes have triggered interest rate hikes, increasing banks’ funding costs and affecting income.
  - Retail effects: in some advanced economies a large retail investor base in sovereign debt can curb household savings.
- Historical evidence:
  - Cornell and Shapiro (1986) and Bruner and Simms (1987) find significant long-lasting negative effects on Western banks’ market valuations after the 1982 Mexican debt default, especially for banks with large exposures.
  - Slovin and Jayant (1993) find the negative effect more pronounced for capital-deficient banks.
  - Musumeci and Sinkey (1990) and Karafiath et al. (1991) document negative market value effects and contagion after the 1987 Brazilian moratorium.
  - Unal et al. (2003) find the 1989 Brady plan announcement led to significant drops in US banking multinationals’ stock prices; Japanese bank stocks were less affected.
  - Fissel et al. (2006) find the December 1994 Mexican peso devaluation and the 1997 Asian crisis were associated with notable declines in large Western banks’ market values, with relatively quick recoveries.
  - The August 1998 Russian debt default produced a stark and long-lasting drop in US bank valuations and a rapid widening of default spreads on bank debt for the top 25 US bank holding companies.
  - Arezki et al. (2011) find sovereign rating downgrades have significant spillover effects across countries and financial markets, including on corporate CDS prices and on bank and insurance sector stocks.
- Banking crises linkage:
  - Levy-Yeyati et al. (2010) find sovereign distress affects depositor behavior and can contribute to bank runs.
  - Borensztein and Panizza (2009) provide indicative evidence that debt crises may trigger systemic banking crises.
  - Gennaioli, Martin and Rossi (2010) find public defaults are followed by large, systematic drops in aggregate financial activity; post-default credit crunch is stronger where banks hold more government debt.
- Recent country cases:
  - Russia (1998) and Ecuador (1998–2000) illustrate domestic banking sector collapse or severe denting of banks’ capital associated with sovereign defaults.
  - Russia: on the eve of the crisis total exposure to government debt surpassed 40 percent of GDP, with large portions held by a small group of Moscow-based banks; Sberbank held 55 percent of its assets in government securities. After July 1998 banks faced rising collateral requirements and refinancing problems, leading to offloading government bonds and worsening the crisis.
  - Mid-August 1998: government default and ruble devaluation led to bank runs, widespread insolvencies, payments system collapse for nearly four weeks; only three of the eighteen largest Moscow-based banks had positive capital after the crisis (Sturzenegger and Zettelmeyer, 2006, p. 103).
  - Policy responses in Russia included massive central bank liquidity injections, regulatory forbearance, coordinated closures and debt restructuring of many banks, a forced payment moratorium on all foreign currency liabilities of Russian financial institutions, and eventual resolution aided by the post-1999 recovery.
  - Ecuador: sovereign default followed an already systemic banking crisis and further dented bank capital.
- Preventive measures:
  - Jamaica (2010) adopted a preventive and early financial sector contingency plan, with a facility to support banks or funds affected by the sovereign restructuring (discussed in Box 2).

### Effects on FDI flows and private sector access to credit
- Fuentes and Saravia (2010): countries undergoing a debt restructuring see their FDI flows reduced by up to 2 percent of GDP per year.
  - The reduction in FDI depends on the creditor-borrower relationship and is concentrated in countries directly affected by the default (Paris Club data).
- Arteta and Hale (2008): sovereign debt crises and restructurings with official creditors have a strong negative impact; after controlling for fundamentals and external shocks, the drop in foreign loans and bond issuance by domestic firms amounts to more than 20 percent.
- Das, Papaioannou and Trebesch (2010, 2011): find a drop of up to 40 percent in private sector external borrowing compared to what it would have been otherwise.
  - Defaults on debt to private creditors have a stronger impact than defaults to official creditors.
  - Other risk measures—higher sovereign bond spreads and lower sovereign ratings—also have a strong negative impact on private sector foreign borrowing, even without a formal default.
- Top-down spillovers:
  - Borensztein et al. (2007) show sovereign ratings strongly determine corporate ratings.
  - Cruces (2007) finds sizable sovereign risk related to equity premia: corporations in countries with credit ratings in the default range pay much higher expected rates of return compared to companies in non-default countries.

### Fees and negotiation costs of restructurings
- Debtor governments generally bear expenses for financial and legal advisors and for negotiating and communicating with bondholders (e.g., roadshows, travel).
- Restructuring can impose administrative deadweight loss as government staff and senior officials invest months preparing and implementing exchanges.
- During the 1980s:
  - BAC negotiation costs were paid by debtor governments, including bankers’ expenses and BAC legal counsel.
  - Debtors paid restructuring fees between 0.25 percent and 2.25 percent of amounts restructured.
  - Overall fees to banks tended to be higher (>1 percent) in the early 1980s and declined in the late 1980s; lower restructuring fees were charged after 1989 (Rieffel, 2003, p. 129).

### Box 5: Summary of costs of a restructuring and default
- Borrowing costs and exclusion from capital markets:
  - An increase in haircuts by 20 percentage points is associated with borrowing costs that are at least 50 basis points higher during the six years after the restructuring, and a lower likelihood of re-accessing capital markets.
- Output and trade costs:
  - Debt crisis years are associated with a drop in GDP of between 2 and 5 percent per year.
  - Bilateral trade flows fall up to 7 percent after Paris Club restructurings, and for more than 10 years.
  - Causality between default and trade decline is difficult to establish; correlations may reflect other factors.
- Financial sector implications:
  - Restructurings affect holders of government papers (banks, pension funds, insurance companies), can endanger financial stability and contribute to a credit crunch.
  - Restructurings have contributed to banking sector distress and bank failures/bank runs (e.g., Russia 1998).
- FDI and private sector access to credit:
  - Restructurings associated with a drop in FDI of up to 2 percent of GDP per year.
  - Corporate external loan and bond issuances have dropped by up to 40 percent.
  - The size of these effects depends on the speed of restructuring and is stronger for defaults to private creditors.
- Negotiation costs and fees:
  - Financial and legal advisor expenses can be substantial.
  - During the 1980s, fees reached up to 2 percent of restructured volumes.

### Considerations in deciding on a sovereign debt restructuring
- The section following Box 5 will:
  - provide a brief overview of key concepts in sovereign debt restructuring (Box 6),
  - review literature on “early warning signals” and commonly used indicators of sovereign risk,
  - summarize widely used approaches to assess debt sustainability and the potential need for a restructuring,
  - present idiosyncrasies in recent sovereign debt restructurings,
  - outline the role of financial sector linkages and contingent liabilities, and the influence of debt structure and creditor composition.

*Source: IMF working paper (excerpt)._wp12203 - conclusion that defaults tend to follow, not precede, output contractions. The authors come*

### Box 6: Key Concepts in Sovereign Debt Restructuring

### Box 6: Key Concepts in Sovereign Debt Restructuring

### “Illiquidity” vs “Insolvency”
- Illiquidity: sovereign has insufficient financial means to roll-over its debt in the short term; liquid assets and available financing are insufficient to meet maturing liabilities.
  - Typical features: high ratio of short-term debt to reserves, large financing needs relative to revenues, loss in access to fresh capital.
- Insolvency: the country’s overall debt burden has become unsustainable—future primary surpluses will not be large enough to pay back the debt.
  - Technical solvency condition: the current debt stock plus all future expenditures in present value terms exceed the present discounted value of all revenues.51
  - An insolvent country may not be able to repay even with the “maximum feasible domestic adjustment.”52
  - Policy implication: insolvency may necessitate a debt restructuring involving a debt reduction to restore solvency.
- Interaction: distinction can be blurred because illiquidity may lead to rising interest rates; in the limiting case of no further financing, the marginal interest rate becomes infinite, which eventually calls into question solvency (IMF (2002b) cited).

### “Unwillingness” vs “Inability” to Pay
- Willingness to pay: qualitative concept linked to political and institutional factors; domestic political considerations may lead policymakers to retain scarce resources for socioeconomic needs rather than repay external creditors.
- Inability to pay: financial capacity limitations that preclude repayment.
- Important observations:
  - A government may default and restructure even if it has the financial capacity for full repayment due to unwillingness to undertake large fiscal adjustments or reforms.
  - Panizza et al. (2009, p. 668) argue the distinction is of limited usefulness because crises triggered by shocks could be framed as “willingness to pay” crises if repayment would be feasible only with sufficient adjustment (e.g., a large decline in consumption).

### Default in “Good” and “Bad” Times
- Definitions:
  - “Good times”: years with output above trend.
  - “Bad times”: years with output below trend.
- Empirical findings:
  - Aguiar and Gopinath (2006) predict defaults are countercyclical and occur after a series of bad output shocks.
  - Levy-Yeyati and Panizza (2011) find defaults in recent decades tend to follow output contractions.
  - Tomz and Wright (2007) (sample 1820–2004) find output and default are negatively correlated, but the relationship is less close than expected:
    - Only 62 percent of the default episodes in their sample occurred when output was below trend.
    - About a third of defaults occurred in “good times.”
- Conclusion: GDP growth alone is not a sufficient predictor of debt crises.53
  - Bi (2008) model: may be beneficial for creditors and debtor to delay restructuring until output recovers (“waiting for a larger cake”).

### A. Warning Signals: Determinants of Restructurings and Default
- Approach: assess central economic variables, risk ratios, and market indicators of sovereign risk to evaluate debtor vulnerability (Roubini, 2003).
- Common sustainability indicators:
  - External debt to GDP (or public debt to GDP).
  - Ratio of public debt (or debt service) to government revenues.
- Literature focus: role of these and other risk indicators in predicting defaults and restructurings.

(i) Sovereign Risk Indicators: Bond Spreads, CDS Prices, and Credit Ratings
- Market indicators affect timing and occurrence of restructurings:
  - Secondary market bond spreads and sovereign CDS prices are common risk indicators.
  - Changes in sovereign ratings also influence debtor policies in distress.
- Policy and behavioral responses:
  - Governments may announce additional fiscal tightening in response to increased perceived risk.
  - When borrowing costs surpass a critical threshold, default becomes more likely.
- Extreme scenarios:
  - Sudden changes in investor perceptions can act as default triggers.
  - Debt crises and restructurings can be self-fulfilling and caused by contagion (Cole and Kehoe, 1996, 2000; Chamon, 2007).
  - In a “debt run” or effective exclusion from capital markets, countries may have no alternative but to halt payments—risk heightened with large liquidity/roll-over risks (see Detragiache and Spillimbergo, 2001).

(ii) Risk Indicators and Triggers of Restructurings and Defaults
- Manasse and Roubini (2008) “rules of thumb” identify:
  - Debt/GDP ratio and liquidity indicators (e.g., ratio of short-term debt to reserves) as key risk indicators.
  - Three crisis types:
    - (i) insolvency with high debt and high inflation;
    - (ii) illiquidity associated with excessive short-term liabilities relative to foreign reserves;
    - (iii) macro and exchange rate weaknesses (e.g., large overvaluations or negative growth shocks).
- Sturzenegger and Zettelmeyer (2006, p. 6) categorize default and restructuring clusters over the last 200 years; triggers include:
  - (i) worsening of the terms of trade;
  - (ii) recession in core capital-providing countries;
  - (iii) increase in international borrowing costs (e.g., tighter monetary policy in creditor countries);
  - (iv) crisis in an important country causing contagion across trade and financial markets.54
- Additional explanatory factors:
  - Macroeconomic volatility (Catao and Kapur, 2006);
  - Banking crises;
  - Contingent liabilities (e.g., Reinhart and Rogoff, forthcoming);
  - Political and institutional factors (Kohlscheen, 2007; van Rickeghem and Weder, 2009; Enderlein, Trebesch and von Daniels, forthcoming).
- Historical perspective:
  - Reinhart, Rogoff and Savastano (2003): past defaults are a main predictor of missed payments and restructuring events; some countries may be “debt intolerant” and less able to sustain high debt-to-GDP without defaulting.
- Simplified framing: debt crises can stem from “mismanagement” (internal problems) and/or “misfortune” (external shocks such as wars, natural disasters, or commodity price drops) (Sovereign Insolvency Group, 2010).

- Note: Box 7 (in source) summarizes evidence and provides an overview of risk thresholds identified in the literature.

*Source: Box 6, “Key Concepts in Sovereign Debt Restructuring,” IMF working paper.*

### Box 7. Risk Indicators for Restructuring and Default

### Box 7. Risk Indicators for Restructuring and Default

### Market risk indicators
- Key predictors of default and restructuring risks: increases in sovereign bond spreads, CDS prices, and rating downgrades.
- Pescatori and Sy (2007) suggest bond spreads exceeding 1,000 basis points should be categorized as episodes of severe debt distress.
- Market sentiment can materially influence debtor policies in distress, including the decision to restructure or not.

### Debt ratios and historical evidence
- Debt/GDP ratios are widely quoted predictors of default risk, but crises have occurred across a large range of debt ratios and there are no obvious cutoff points.
- Reinhart, Rogoff and Savastano (2003) ("Debt Intolerance"):
  - The critical debt/GDP ratio depends largely on the country's record of default and inflation.
  - The debt/GDP threshold for “safety from default” may be as low as 20 percent for some countries.
  - Risk thresholds are much higher (above 60 percent of debt/GDP) for advanced economies and for EM countries that have never defaulted.
- Finger and Mecagni (2007): for a subsample of more recent debt crises, most occurred at a debt to GDP level exceeding 39 percent.

### Manasse and Roubini “danger zones” (EM context)
- External debt to GDP: > 50 percent
- Short-term debt to reserves: > 130 percent
- Public debt to revenues: > 215 percent
- Inflation: > 10.5 percent
- Growth: < - 5.5 percent
- Political Uncertainty: no upcoming election

### Fiscal space (Ostry et al., 2010)
- Fiscal space defined as the difference between each country’s debt limit and its debt ratio projected for 2015.
- Estimated debt limit for advanced economies with historical interest rates: ranges from about 150 to 260 percent of GDP, with a median of 192 percent.
- Assuming more realistic interest rates, the debt limit decreases, with a median of 183 percent of debt/GDP.
- A key determinant of fiscal space is the differential of interest rate and output growth: if a country’s interest rate exceeds its annual growth, the remaining fiscal space shrinks rapidly.

### Advanced economies versus defaulting EMs (Cotarelli et al., 2010; as of April 2010)
- Primary Deficit: Current median of -7.4 percent for advanced economies vs. only -0.4 percent for defaulting EM countries.
- Interest Payments to GDP (nominal): Median of 2.6 percent for advanced economies vs. a high median of 4.3 percent for defaulting EM countries.
- Real Interest rate minus Real Growth: Median of 0.8 percent for advanced economies vs. a high median of 4.3 percent for defaulting EM countries.
- Interpretation: in today’s advanced economies, the main challenge for debt sustainability are large primary deficits rather than the interest bill or the interest-growth differential.

### Common circumstances associated with debt restructurings
- High bond spreads, high CDS prices and credit rating downgrades;
- A high level of indebtedness (stock of debt);
- Fragile debt composition: a large share of foreign currency and short-term debt, as well as floating-rate debt;
- External shocks (e.g., oil, interest rate, commodity prices, conflicts);
- Currency overvaluation;
- Low growth rate.

### Assessing debt sustainability — definition and concepts
- IMF (2002b, p. 4) definition: debt sustainability is “a situation in which a borrower is expected to be able to continue servicing its debts without an unrealistically large future correction to the balance of income and expenditure.”
- Sustainability incorporates both solvency (ability to generate primary surpluses sufficient to cover long-run debt-service obligations) and liquidity (ability to roll-over debt and raise sufficient financing each period).
- When interest rates increase above the economy’s rate of growth, solvency is at stake in the long run and countries may face a liquidity crisis in the short run.
- Political and social limits to adjustment matter: not all fiscal adjustment paths are realistic given political constraints and willingness to pay.

### Static Debt Sustainability Analysis (debt-stabilizing primary balance, fiscal gap)
- The steady-state debt-stabilizing primary balance provides a simple measure of the permanent primary surplus required to keep the debt/GDP ratio stable given predicted values of debt ratio, interest rate, and growth.
- Rule of thumb: the debt-stabilizing primary balance approximately equals the nominal interest–real growth differential times the debt ratio.
- Numerical examples from the text:
  - In a low real-growth scenario of only 1 percent per annum, with a nominal interest rate of 5 percent per annum and a debt-to-GDP ratio of 90 percent, the steady state debt-stabilizing surplus is 3.6 percent.
  - Even at a 3 percent real growth rate, the country needs to generate a permanent surplus of 1.7 percent to achieve sustainability.
  - A nominal interest rate jump from 5 percent to 7 percent or a real growth reduction from 3 percent to 1 percent makes achieving sustainability significantly more difficult for a given level of indebtedness.
- Cotarelli et al. (2010) estimate: the average cyclically adjusted primary balance to stabilize the current debt-to-GDP ratio requires a surplus of 1 percent of GDP. With a median deficit of 5.3 percent of GDP in 2010, advanced economies would thus need to increase their primary balances by over 6 percentage points relative to GDP on average.

### Limitations of static DSA and features of advanced DSA
- Limitations of static DSA:
  - Based on an arbitrary definition of sustainability (stabilizing the debt-to-GDP ratio), which may be insufficient when the debt-to-GDP ratio is already high.
  - Allows only for a constant path of debt accumulation; many feasible primary balance paths could satisfy the lifetime budget constraint.
  - Does not account for maturity structure or currency composition of debt.
  - Does not incorporate uncertainty or volatility in macroeconomic parameters or contingent liabilities and potential increases in financing costs.
- Advanced DSA aims to account for uncertainty and shocks:
  - IMF (2003b) framework combines a five-year baseline projection with stress tests simulating temporary adverse shocks to key variables (interest rates, growth).
  - IMF (2005 and 2008) revisions use smaller but more persistent shocks and stochastic simulations based on cross-country data to judge likelihoods of alternative scenarios and calibrate shock sizes.
  - Typical sensitivity and stress tests in the IMF template include:
    - “Historical scenario” using 10-year historical averages;
    - “No-policy-change” scenario keeping the current primary balance constant;
    - Two-standard-deviation shocks to real GDP growth, the real interest rate, and the primary balance (one variable at a time);
    - A combined one-standard-deviation shock to growth, interest rate, and primary balance;
    - A one-time 30 percent depreciation of the real exchange rate;
    - An increase in debt equal to 10 percent of GDP (e.g., from contingent liabilities).
  - Extensions in the literature:
    - Celasun, Debrun, and Ostry (2006): integrate fiscal reaction functions and Monte Carlo simulation to derive probability distributions of future debt stocks.
    - Gray et al. (2007): contingent claims approach focusing on sovereign asset values and a sovereign distress barrier.
    - Barnhill and Kopits (2003): Value-at-Risk methodology for macro volatility and contingent liabilities.
    - Mendoza and Oviedo (2006): theoretical framework endogenizing borrowing limits under stochastic revenues.
    - Empirical evidence (Abiad and Ostry, 2005; Mendoza and Ostry, 2008): marginal response of the primary balance to debt is weaker at high levels of debt, implying it may be more difficult to generate sufficient primary balances as debt/GDP rises.

*Source: Box 7. Risk Indicators for Restructuring and Default (extracted content).*

### Box 9. Experiences of Countries that Have Decided to Restructure

### Box 9. Experiences of Countries that Have Decided to Restructure

### Country experiences: triggers, actions, and outcomes
- Russia 1998–2000
  - 1997–early 1998: oil prices dropped and government faced a substantial decrease in export revenues, resulting in increased domestic borrowing.
  - By mid-July 1998, debt service payments exceeded US1 billion and interest rates in domestic GKO bond markets had been steadily increasing.
  - Authorities launched a voluntary exchange program to convert short-term ruble-denominated debt into longer-term foreign currency denominated bonds; the exchange program was ineffective and achieved only low creditor participation.
  - The IMF-supported adjustment program went off track; with reserves at precarious levels and a loss of access to IMF funds, authorities declared a unilateral moratorium on debt service payments on August 17, 1998.
  - Subsequent renegotiations produced a domestic debt restructuring in May 1999 and a foreign debt exchange in August 2000.

- Ecuador 1999–2000
  - August 1999: Ecuador announced a payment suspension on its Brady bonds.
  - Adverse shocks: flood damage from El Niño, a drop in capital inflows, and a systemic banking crisis in 1998–1999.
  - Government and Central Bank support to failing banks contributed to a currency crisis in early 1999 and a sharp fall in reserves.
  - High public debt burden of about 100 percent to GDP made servicing upcoming debt payments increasingly difficult.
  - After going into arrears, the government prepared an IMF-supported exchange offer publicly launched in July 2000.

- Argentina 2002–2005
  - Recession began in 1998 and culminated in a declaration of default in early 2002.
  - Late 1990s shocks: rigid currency board and external shocks (Russia and Asian crises, US dollar appreciation, Brazil’s devaluation, low export prices).
  - October 2001: banking system had lost 9% of deposits and credit spreads reached 1,600 bps.
  - Capital outflows led authorities to freeze bank accounts in December 2001 and soon thereafter declare default on the entire government debt stock.
  - Debt exchange carried out between January and April 2005.

- Grenada 2004–2005
  - Debt restructuring in late-2005 occurred about one year after Hurricane Ivan caused severe economic damage amounting to more than 200 percent of the country's nominal GDP.
  - Estimated 90 percent of houses on the island were destroyed or damaged, heavily affecting livelihoods and tourism.
  - Government announced a debt exchange offer in December 2004 aimed at buying time to rebuild key industries.
  - Offer opened in September 2005 and envisaged exchange of outstanding commercial debt into new 20-year bonds at par.
  - By November 2005, the offer achieved a participation rate of 97 percent.

- Dominican Republic 2005
  - Contingent liabilities were central to the crisis: large-scale fraud and losses in major banks in 2002–2003 led to bank runs and a systemic financial crisis.
  - Government rescue efforts were largely financed by foreign bond placements, contributing to a depreciating currency, rising inflation, and an increase in the debt to GDP ratio from around 26 percent in 2002 to 54 percent at the end of 2003.
  - Reserves fell from over 151 percent of short-term debt to just 31 percent during the same period.
  - New government (sworn in August 2004) adopted a comprehensive crisis resolution strategy including external debt restructuring.
  - After creditor consultations, the government launched a bond exchange offer in April 2005 with no principal haircut but an extension of maturities by five years.

- Ecuador 2008–2009
  - November 2008 default occurred at a ratio of public debt to GDP of only 23 percent and was not triggered by a severe economic crisis.
  - Government suspended payments on two global bonds maturing in 2012 and 2030 after an audit commission declared these debts “immoral,” “illegal” and “illegitimate”.
  - Between April and November 2009 the government launched several rounds of debt buyback, repurchasing the two bonds against cash at a steep discount of 65-70 percent on their face value.
  - Despite creditor attempts to block the offers, overall participation reached 95 percent of outstanding bonds, amounting to about one-third of total external debt.

### The role of financial sector linkages and contingent liabilities
- Overview
  - Financial sector linkages and contingent liabilities have in the past played a central role in a government’s decision to restructure or not, particularly in countries with large financial sectors.
  - The discussion covers (i) restructuring spillovers on the domestic financial sector, (ii) cross-border risk spillovers, and (iii) the role of contingent liabilities, especially bank recapitalization.

- Spillovers on the domestic financial sector
  - Sovereign debt restructuring can increase funding costs of domestic banks and corporations and lead to financial losses, particularly for institutions that hold government debt or which sold CDS protection on them.
  - In severe crises, restructuring may trigger a run on the domestic banking system and a rush to sell other domestic financial assets (example: Russia in 1998).
  - Two main channels through which domestic financial institutions may be affected:
    - Direct losses due to holdings of sovereign bonds (de facto losses from restructuring or mark-to-market losses). Compounding factors include:
      - the amount and maturity of sovereign bonds held,
      - the amount of public debt insured via CDS markets,
      - the use of government securities for collateralization in interbank markets.
    - Increases in bank funding costs, which could most strongly impact banks with relatively weak fundamentals, high upcoming debt redemptions and/or high sovereign risk exposures.
      - Widening of sovereign and bank CDS spreads signals higher re-financing costs for banks.
      - Bank funding pressures could trigger calls on government guarantees on bank bonds, increasing the sovereign’s debt burden further.

- Cross-border risk spillovers
  - Banks and financial institutions can be exposed to sovereign default risks of foreign countries directly via holdings of foreign government debt or indirectly via exposure to the banking sector of the defaulting country.
  - Early 1980s: regulators were concerned about effects of the Latin American debt crisis on U.S. and European banks; in 1982 U.S. banks were heavily exposed to developing country debt on the order of 182 percent of their total aggregate capital.
    - A write-off of 30 percent on these sovereign loans would have effectively wiped out the capital of most major U.S. banks, prompting coordinated crisis resolution with the IMF and Paris Club.
    - Banks agreed on bridge lending and a series of short- and medium-term rescheduling agreements throughout the 1980s; avoidance of outright debt reduction until 1989 allowed gradual reduction of exposure.
  - More recent restructurings tended to be country-specific and often in small economies (e.g., Belize, Ecuador, Seychelles), limiting Western bank exposure.
  - Among larger recent restructurings: German banks and funds were most heavily exposed to the Russian default of 1998; U.S. financial institutions and European retail investors were most affected by the Argentinean default and debt exchange of 2001–2005.
  - Euro area crisis concerns: EU-wide stress tests show EU banks held about a third of the peripheral euro area sovereign debt; European banks have cross-border exposures of sovereign and banking debt-to-euro peripheral countries often in excess of 5 percent of their Tier 1 capital.

- Contingent liabilities and bank recapitalization
  - Contingent liabilities from the domestic financial sector can be crucial in the decision and timing of a sovereign restructuring.
  - Recent cases (Ireland banking crisis, quasi-sovereign defaults such as Dubai World or Naftogaz) illustrate how private sector risks can affect overall debt sustainability.
  - Contingent liabilities have in some cases contributed directly to the decision to restructure sovereign debt (examples: Ecuador 1999–2000 and the Dominican Republic).

*Source: Box 9. Experiences of Countries that Have Decided to Restructure (extracted from the provided IMF content).*

### 2005. In other cases, however, a restructuring may impair the financial position of domestic

### _wp12203 - 2005. In other cases, however, a restructuring may impair the financial position of domestic

### Risks to Debt Sustainability: contingent vs. non-contingent liabilities
- Table 10 differentiates liabilities:
  - Non-contingent (existence does not depend on particular events)
    - Explicit: Government debt; Government expenditure commitments (legally enforceable); Provisions (e.g., clearly defined accrued pension rights not backed by a fund)
    - Implicit: Future welfare payments (e.g., pension payments related to pension rights which have not matured yet, future health care payments); Future government expenditures related to recurrent operations (e.g., capital stock refurbishment)
  - Contingent (existence depends upon realization of particular events)
    - Explicit: Government individual guarantees on the debt issued by public and private entities; Government umbrella guarantees (e.g., on household mortgages); Government insurance schemes (e.g., on bank bonds, bank deposits, returns from private pension funds)
    - Implicit: Bailout of defaulting public or private sector entities (e.g., public corporations, banks or other private financial institutions, pension and social security funds); Disaster relief; Environmental damage; Military financing
- Historical note: U.S. banks reduced their exposure from 182 percent of capital in 1982 to 95 percent in 1986 and 63 percent in 1988 (see Bowe and Dean 1997).

### Debt structure: factors affecting default likelihood and timing
- Key debt-portfolio dimensions highlighted:
  - Currency composition
    - High share of external/foreign-currency debt increases sovereign default risk via currency mismatches and exchange rate shocks.
    - Advanced, industrialized countries’ debt is largely denominated in domestic currency, so currency crises have more indirect effects on debt sustainability.
  - Floating rate debt
    - High share of floating or indexed debt increases likelihood of severe debt distress because increases in marginal interest rates raise average borrowing costs.
    - Advanced economies have a comparatively low share of floating rate or indexed debt; most outstanding bonds and loans feature fixed interest rates.
  - Maturity structure
    - Longer average maturities imply less rollover risk and lower likelihood of debt distress when credit markets shut down.
    - Emerging economies have lengthened maturities and are now only slightly shorter than advanced economies.
- Policy implication: Appropriate public debt management remains crucial for preventing and dealing with debt restructurings (Chamon et al., 2005).

### Creditor composition: political economy of restructuring decisions
- If sovereign bonds are mostly held by private domestic financial institutions:
  - Restructuring may be deterred because contingent liabilities and bank recapitalization costs can outweigh present-value debt reduction benefits.
- If debt is mostly held by foreign investors and multinational banks:
  - Political pressures for bailouts may be less pressing.
- Timing and process differ with share of debt held by official (bilateral) and/or multilateral creditors, who may be approached differently than banks or private bondholders.

### The scope of debt relief—haircuts: overarching considerations
- Important considerations when deciding scope of debt relief:
  - Debt relief should be tailored to ensure a return to debt sustainability; Debt Sustainability Analysis (DSA) can guide how much adjustment and debt relief are needed but should not be used mechanistically.
  - Size of losses affects creditor balance sheets; negotiated haircuts in early 1980s were often less than 20 percent (Cruces and Trebesch 2011). Large haircuts can be a source of systemic instability if banks hold significant sovereign exposures.
  - Trade-off between short- and long-term effects: Cruces and Trebesch (2011) estimate a one standard deviation increase in haircut size leads to higher borrowing costs of at least 170 basis points in year 1 and 50 basis points in years 4 and 5 after restructuring.

### A. Restoring solvency: haircuts in a static sustainability model (illustrative)
- Static solvency framework: maximum sustainable debt ratio d* computed for constant nominal interest rate i, real growth g, and projected primary surplus s.
- Illustrative parameter values used:
  - Permanent primary surplus = 2 percent of GDP
  - Real GDP growth g = 1 percent
  - Nominal interest rate i = 5 percent
- Computation shown:
  - d* = s / (i - g) = 2 / (0.05 - 0.01) = 50.5 percent
- Illustrative haircut example:
  - Actual debt-to-GDP ratio = 120 percent
  - Required haircut = 1 - (50.5/120) = 57.9 percent
  - Text: "the debt stock would have to be reduced by approximately 58 percent to reach a permanent debt-to-GDP ratio of 50.5 percent."
- Caveat: figures are illustrative from a stylized model; do not account for country circumstances, uncertainty, exchange rate and interest rate risks.

### Table 11 (illustrative): required haircuts in static model (selected entries preserved)
- Note: Table is based on equations (5) and (6); parameter i stands for the annual interest rate paid on sovereign debt.
- Displayed maximal sustainable debt ratios for parameter assumptions:
  - i = 5%, growth = 1%, permanent surplus = 2% => Max. Debt/GDP ratio = 50.5%
  - i = 7%, growth = 3%, permanent surplus = 2% => Max. Debt/GDP ratio = 103.0% (as column header indicates)
- Selected rows showing REQUIRED HAIRCUT to achieve a stable debt ratio (from the table):
  - Actual Debt/GDP 60%: 15.8% (i=5% column), 43.9% (i=7% column), -14.2% (other columns as in table)
  - Actual Debt/GDP 70%: 27.9%; 51.9%; -26.4%
  - Actual Debt/GDP 80%: 36.9%; 57.9%; -35.6%
  - Actual Debt/GDP 90%: 43.9%; 62.6%; -42.8%
  - Actual Debt/GDP 100%: 49.5%; 66.3%; -48.5%
  - Actual Debt/GDP 110%: 54.1%; 69.4%; 6.4%; 53.2%
  - Actual Debt/GDP 120%: 57.9%; 71.9%; 14.2%; 57.1%
  - Actual Debt/GDP 130%: 61.2%; 74.1%; 20.8%; 60.4%
  - Actual Debt/GDP 140%: 63.9%; 76.0%; 26.4%; 63.2%
  - Actual Debt/GDP 150%: 66.3%; 77.6%; 31.3%; 65.7%
- Parameter assumptions footnote preserved:
  - Growth = 3% p.a., Permanent Surplus = 2% (for some columns)
  - Growth = 1% p.a., Permanent Surplus = 2% (for other columns)

### B. Targeting a specific debt-to-GDP threshold
- Ad-hoc benchmark approach examples:
  - Maastricht fiscal criterion benchmark: target public debt = 60 percent of GDP.
    - For Actual Debt/GDP = 150 percent, haircut on entire stock = 60 percent (1-60/150=0.6).
  - Citibank / Buiter (2010) suggested benchmark: average Euro Area debt-to-GDP ratio during 2009 ≈ just over 79 percent.
    - For Actual Debt/GDP = 150 percent, haircut on entire stock = 47 percent (1-79/150=0.47).
- Effective Haircut formula preserved exactly:
  - Effective Haircut = (Actual Debt/GDP - Target Debt/GDP) / Eligible Debt/GDP
- Illustrative numerical example using the formula:
  - Actual Debt/GDP = 150 percent
  - Eligible Debt/GDP (private bondholders) = 100 percent
  - Target Debt/GDP = 90 percent
  - Effective Haircut on bonds = (150 - 90) / 100 = 0.6 => 60 percent

### C. Market measures as benchmark
- Market-based measures (bond spreads, CDS prices, ratings) can serve as reference points.
- Roubini (2010) argument preserved:
  - Creditors that mark to market benchmark exchange offers against trading prices of old instruments.
  - Exchanges where present value of new instruments ≥ traded price of old instruments have a high likelihood of success and high participation rates.
- Bi, Chamon and Zettelmeyer (2011): theoretical model where likelihood of holdouts and litigation increases with haircut size; excessive haircuts reduce participation.
- Ratings-based benchmarks:
  - Standard & Poor’s recovery ratings range from 1 (very high-recovery, 90 percent to 100 percent) to 6 (negligible recovery, 0 percent to 30 percent).
  - Example: April 2010 Greece assigned recovery rating '4' implying recovery for private debtholders in range 30 percent to 50 percent; projected haircut range given default of 50 percent to 70 percent.
  - Historical mean present value haircut estimated by Cruces and Trebesch (2011) = 37 percent in the period 1978–2010.
- CDS/bond-price based recovery estimation literature:
  - Pan and Singleton (2008) exploit term structure of sovereign CDS spreads for Mexico, Turkey, Korea to estimate occurrence of credit events and recovery rates using maximum likelihood and Monte Carlo.
  - Andritzky (2006) and Andritzky and Singh (2006) earlier contributions.
  - Note: state of research not yet developed enough for reliable policy use.

### XI. Reforming the restructuring process: summary of proposals and codes of conduct
- Motivations for reform: address creditor collective action problems (debt runs, holdouts, litigation), reduce inefficiencies, reputational costs, and delays.
- Two broad reform pathways:
  - Statutory frameworks (top-down): proposed to reduce disorder and inefficiency; examples include IMF’s SDRM and Bruegel's ECRM.
  - Contractual/arbitration-based approaches (bottom-up): modify contract documentation (e.g., CACs), arbitration clauses, trustee appointment; examples include Paulus’s Sovereign Debt Tribunal and FTAP by Raffer/Kaiser.
- Four prominent proposals summarized:
  - SDRM (IMF 2002, 2003)
    - Statutory mechanism with Dispute Resolution Forum (DRF).
    - Enables 75% creditor majority to bind all creditors; aggregation across claims rather than bond-by-bond CAC voting.
    - Substantial role for IMF: interim financing, assist restructuring, assess debt sustainability.
    - Establishment via amendment of the Fund's Articles of Agreement (requires acceptance by three-fifths of members).
  - Bruegel’s ECRM (Gianviti et al. 2010)
    - Full-fledged statutory EU mechanism with three bodies: legal (adjudication), economic (expertise, DSA), financial (interim financing).
    - Requires EU treaty or directive; applicable to future issuances.
  - Sovereign Debt Tribunal (Paulus 2010)
    - Formalized arbitration framework with pool of 20–30 arbitrators selected by UN Secretary-General; a president as full-time arbitrator.
    - Tribunal linked to a reputed institution (UN or ECJ); tribunal verifies claims and can vote on approval of restructuring; additional powers may include assessing scope of debt relief and debt sustainability.
    - Requires arbitration clauses in future contracts for formal legal status.
  - FTAP (Raffer 2005, Kaiser 2010)
    - Ad hoc arbitration panels; debtors and creditors each propose two arbitrators; jointly choose a fifth neutral chair.
    - Panels solve disputes and make independent decisions on timing and scope; supported by a technical secretariat.
    - No close link to existing institutions; legal enforceability depends on ex-ante submission to arbitration.
- Comparative features (high-level preserved from Table 13):
  - Types of debt included vary: SDRM and ECRM mainly bondholder debt (ECRM explicitly excludes bilateral and multilateral debt in its design), Paulus and FTAP aim to include all external sovereign debt and broader instruments.
  - Activation: only debtor governments can initiate SDRM, ECRM, and most arbitration frameworks.
  - Creditor voting: SDRM envisages 75% majority binding; CACs differ as they operate instrument-by-instrument.
  - Payment moratorium/interim financing: ECRM proposes immediate halt of payments upon initiating mechanism and financing provided by financial body; SDRM initially had no automatic standstill but DRF could enact suspension with qualified creditor approval and envisaged IMF interim financing.
  - Legal establishment: SDRM via IMF Articles amendment; ECRM via EU treaty/directive; arbitration proposals rely on contract clauses or ad hoc arbitration frameworks.
- Codes of conduct for fair debt restructurings:
  - Codes split into "good debtor conduct" and "good creditor conduct" (Banque de France, IIF).
  - IMF’s modified “Policy on Lending into Arrears to Private Creditors” (1999): borrowers receiving IMF funding expected to show "good faith effort to reach a collaborative agreement with its creditors" and share relevant, non-confidential information with all creditors on a timely basis.
  - IIF’s "Principles for Stable Capital Flows and Fair Debt Restructuring" (IIF, 2006):
    - Supported by G7, G20, World Bank, IMF.
    - Initially for emerging market sovereign issuers; in 2010 extended to all sovereign issuers on a voluntary basis.
    - Defines fair restructuring as one where debtors closely cooperate with creditors, adhere to information sharing, avoid unjustified capital controls, and resume partial or full debt service as soon as conditions allow.
  - Limitation: most codes do not provide sanctioning mechanisms and tend to be more detailed on debtor obligations than creditor obligations.

*Italic: Source content provided from the IMF chapter/PDF unit _wp12203.*

### Box 11. The IIF Principles on Fair Debt Restructuring

### Box 11. The IIF Principles on Fair Debt Restructuring

### (i) Transparency and Timely Flow of Information
- “General disclosure practice. Issuers should ensure through disclosure of relevant information that creditors are in a position to make informed assessments of their economic and financial situation, including overall levels of indebtedness. Such disclosure is important in order to establish a common understanding of the country’s balance of payments outlook and to allow creditors to make informed and prudent risk management and investment decisions.”
- “Specific disclosure practice. In the context of a restructuring, the debtor should disclose to all affected creditors the maturity and interest rate structures of all external financial sovereign obligations, including the proposed treatment of such obligations, and the central aspects, including assumptions, of its economic policies and programs. The debtor should inform creditors regarding agreements reached with other creditors, the IMF, and the Paris Club, as appropriate. Confidentiality of material non-public information must be ensured.”

### (ii) Close debtor-creditor dialogue and cooperation
- “Regular dialogue. Debtors and creditors should engage in a regular dialogue regarding information and data on key economic and financial policies and performance. Investor relations programs (IRPs) have emerged as a proven vehicle, and countries should implement such programs.”
- “Best practices for investor relations. Communication techniques should include creating an investor relations office with a qualified core staff; disseminating accurate and timely data/information through e-mail or investor relations websites; establishing formal channels of communication between policymakers and investors through bilateral meetings, investor teleconferences, and videoconferences; and maintaining a comprehensive list of contact information for relevant market participants. Investors are encouraged to participate in IRPs and provide feedback on such information and data. Debtors and investors should collaborate to refine these techniques over time.”
- “Policy action and feedback. Borrowing countries should implement economic and financial policies, including structural measures, so as to ensure macroeconomic stability, promote sustainable economic growth, and thereby bolster market confidence. It is vital that political support for these measures be developed. Countries should closely monitor the effectiveness of policies, strengthen them as necessary, and seek investor feedback as warranted.”
- “Consultations: Building on IRPs, debtors should consult with creditors to explore alternative market-based approaches to address debt-service problems before default occurs. The goal of such consultations is to avoid misunderstanding about policy directions, build market confidence on the strength of policy measures, and support continuous market access. Consultations will not focus on specific financial transactions, and their precise format will depend on existing circumstances. In any event, participants must not take advantage of such consultations to gain a commercial benefit for trading purposes. Applicable legal restrictions regarding material non-public information must be observed.”
- “Creditors’ support of debtor reform efforts. As efforts to consult with investors and to upgrade policies take hold, the creditor community should consider, to the extent consistent with their business objectives and legal obligations, appropriate requests for the voluntary, temporary maintenance of trade and interbank advances, and/or the rollover of short-term maturities on public and private sector obligations, if necessary to support a borrowing country’s efforts to avoid a broad debt restructuring. The prospects of a favorable response to such requests will be enhanced by the commitment to a strong adjustment program, but will also depend in part on continued interest payments on inter-bank advances and continued service of other debt.”

### (iii) Good Faith Actions
- “Voluntary, good faith process. When a restructuring becomes inevitable, debtors and creditors should engage in a restructuring process that is voluntary and based on good faith. Such a process is based on sound policies that seek to establish conditions for renewed market access on a timely basis, viable macroeconomic growth, and balance of payments sustainability in the medium term. Debtors and creditors agree that timely good faith negotiations are the preferred course of action toward these goals, potentially limiting litigation risk. They should cooperate in order to identify the best means for placing the country on a sustainable balance of payments path, while also preserving and protecting asset values during the restructuring process. In this context, debtors and creditors strongly encourage the IMF to implement fully its policies for lending into arrears to private creditors where IMF programs are in place, including the criteria for good faith negotiations.”
- “Sanctity of contracts. Subject to their voluntary amendment, contractual rights must remain fully enforceable to ensure the integrity of the negotiating and restructuring process. In cases where program negotiations with the IMF are underway or a program is in place, debtors and creditors rely upon the IMF in its traditional role as guardian of the system to support the debtor’s reasonable efforts to avoid default.”
- “Vehicles for restructurings. The appropriate format and role of negotiation vehicles such as a creditor committee or another representative creditor group (hereafter referred to as a “creditor committee”) should be determined flexibly and on a case-by-case basis. Structured, early negotiations with a creditor committee should take place when a default has occurred in order to ensure that the terms for amending existing debt contracts and/or a voluntary debt exchange are consistent with market realities and the restoration of growth and market access and take into account existing CAC provisions. If a creditor committee is formed, both creditors and the debtor should cooperate in its establishment.”
- “Creditor committee policies and practices. If a creditor committee is formed, it should adopt rules and practices, including appropriate mechanisms to protect material non-public information; coordinate across affected instruments and with other affected creditor classes with a view to forming a single committee; be a forum for the debtor to present its economic program and financing proposals; collect and analyze economic data; gather, evaluate, and disseminate creditor input on financing proposals; and generally act as a communication link between the debtor and the creditor community. Past experience also demonstrates that, when a creditor committee has been formed, debtors have borne the reasonable costs of a single creditor committee. Creditors and debtors agree jointly what constitute reasonable costs based on generally accepted practices.”
- “Debtor and creditor actions during restructuring. Debtors should resume, to the extent feasible, partial debt service as a sign of good faith and resume full payment of principal and interest as conditions allow. Debtors and creditors recognize in that context that typically during a restructuring, trade lines are fully serviced and maintained. Debtors should avoid additional exchange controls on outflows, except for temporary periods in exceptional circumstances. Regardless of the specific restructuring mechanics and procedures used (i.e., amendment of existing instruments or exchange for new ones; pre-default consultations or post-default committee negotiations), restructuring terms should be subject to a constructive dialogue focused on achieving a critical mass of market support before final terms are announced. Debtors should retain legal and/or financial advisors.”

### (iv) Fair Treatment
- “Avoiding unfair discrimination among affected creditors. The borrowing country should avoid unfair discrimination among affected creditors. This includes seeking rescheduling from all official bilateral creditors. In line with general practice, such credits as short-term trade related facilities and interbank advances should be excluded from the restructuring agreement and treated separately if needed.”
- “Fairness of voting. Bonds, loans, and other financial instruments owned or controlled by the sovereign should not influence the outcome of a vote among creditors on a restructuring.”

### Concluding remarks (selected findings and policy considerations)
- Debt restructurings can have drastic adverse consequences for economic growth, trade, capital flows, banks and other financial institutions.
- A debt restructuring should therefore only be initiated if, on the basis of a debt sustainability analysis, it is concluded that a macro-economic adjustment program cannot realistically restore sustainability.
- The scope of debt relief should be proportional to the country’s debt sustainability problem.
- In such a situation, countries should start good faith negotiations to involve private creditors in an adequate way. These negotiations should be transparent and fair, including an open dialogue with creditors and timely information sharing.
- Potential spill-over effects on other member states should explicitly be taken into account in the restructuring negotiations.
- CACs can play an important role in facilitating debt restructurings. However, their presence is no guarantee for a quick debt exchange with high participation. Other legal vehicles and exchange characteristics can play an important role as well, in particular exit consents, aggregation clauses, and minimum participation thresholds.
- Summary empirical observations:
  - Most recent sovereign bond exchanges could be implemented quickly and without severe creditor coordination problems.
  - Since 1998, only two out of seventeen bond exchanges had a share of holdouts exceeding 10 percent of the debt.
  - Creditor litigation in the context of bond restructurings has been rare, with the exception of the default of Argentina after 2001.
  - Overall, the system of ad-hoc debt exchanges seems to have worked reasonably well for emerging market countries.

### Appendix I: Sovereign debt restructurings 1950–2010 — dataset overview (Trebesch 2011)
- The database is the first collection of all sovereign debt restructurings in the period 1950 to 2010 in a coherent form. It expands on existing restructuring lists.
- Case selection and data collection for the Paris Club dataset includes all bilateral debt restructurings under the chairmanship of the Paris Club. Bilateral deals not related to the Paris Club are not coded.
- Bank and bond debt restructurings build on Cruces and Trebesch (2011) and follow five key criteria defining case selection:
  1. Only distressed restructurings: The database focuses on distressed debt exchanges, defined as restructurings of bonds (bank loans) at less favorable terms than the original bond (loan). Thus, case selection follows the definition and data provided by Standard & Poor’s (2007). Restructurings that are part of routine sovereign liability management such as debt swaps and buybacks in normal times are disregarded.
  2. Only restructurings with foreign private creditors: The database includes sovereign debt restructurings with foreign private creditors only, thus excluding debt restructurings that predominantly affected domestic creditors and those affecting official creditors, including those negotiated under the chairmanship of the Paris Club. Foreign creditors include foreign commercial banks (i.e. “London Club” creditors) as well as foreign bondholders. For recent deals, the paper follows the categorization into domestic and external debt exchanges of Sturzenegger and Zettelmeyer (2006, p. 263). The database therefore explicitly includes two domestic debt restructurings but only because they mainly involved external creditors: Russia’s July 1998 GKO exchange and Ukraine’s August 1998 exchange of OVDP bonds.
  3. No agreements on short-term debt: The sample is restricted to medium and long-term debt restructurings only. It thus disregards agreements involving short-term debt only, such as 90-day debt rollovers or the maintenance of short-term credit lines (e.g. trade credit). Specifically, agreements with maturity extension of less than a year are excluded, while cases in which short-term debt is exchanged into debt with a maturity of more than one year are included.
  4. Only public debt restructurings: Restructurings of private-to-private debt are not taken into account, even in cases such as Korea 1997 or Indonesia 1998, where large-scale workouts of private sector debt were coordinated by governments.
  5. [The source lists five key criteria; the preceding four reproduce the selection criteria as stated in the source.]

*Italic: Source — Box 11. The IIF Principles on Fair Debt Restructuring, _wp12203 - Box 11. The IIF Principles on Fair Debt Restructuring_*

### 5. Only finalized deals: Only restructurings that are actually implemented are in the

### _wp12203 - 5. Only finalized deals: Only restructurings that are actually implemented are in the

### Definition of sample
- The sample includes only restructurings that are actually implemented, thus ignoring cases in which negotiations were never concluded or in which an agreement in principle or an exchange offer was never finalized.
- “Final restructurings” are defined as those deals that were not followed by another restructuring (vis à vis private creditors) within the subsequent four years.

### Data sources and compilation
- Data collection on commercial restructurings relied on multiple sources; there is no single standardized source providing a unified overview of dates and terms of sovereign debt restructurings in recent decades.
- Trebesch (2011) gathered, compared, and synchronized data from 29 different lists on restructuring terms and more than 150 further sources, including articles from the financial press and from the IMF archives.
- The period covered by the compiled list is 1950–2010 (Table 14).
- Data for macroeconomic and financial indicators one year prior to the restructuring (Table 15) are from the IMF’s IFS dataset, the World Bank’s GDF and WDI dataset and Economist Intelligence Unit.

### Content of compiled tables
- Table 14: List of Sovereign Debt Restructurings (1950–2010)
  - Columns include: Country; Date; Type of Creditors; Debt Affected (m US$); Part of HIPC Debt Relief?; Reduction of Face Value?; Bond Exchange?; Comment.
  - Examples of entries (as presented): Afghanistan 07 / 2007 Paris Club 22110; Albania 12 / 1993 Paris Club 109000; Argentina 04 / 2005 Commercial 4373611 Global Bond Exchange; Brazil 11 / 1988 Commercial 62100000; Côte d’Ivoire 03 / 1994 Paris Club 1849010; Ecuador 12 / 1985 Commercial 4224000; Mexico 03 / 1987 Commercial 52300000; Russia 12 / 1997 Commercial 3050001 GKOs (non-residents); Uruguay 05 / 2003 Commercial 312701 Global Bond Exchange; Zambia 11.05.2005 Paris Club 1763110.
- Table 15: Macroeconomic and Financial Indicators at the Time of Restructuring
  - Shows financial and macroeconomic indicators one year prior to the restructuring year for “final restructurings” with banks and bondholders.
  - Columns include: Country; Year; External Debt to GDP (total, in %); Public Debt to GDP (in %); Share of Government Debt Owed to Official Cred.; Inflation (annual CPI, in %); Budget Balance (% of GDP).
  - The table preserves country-specific indicator values as reported. Examples as presented: Albania 1995 External Debt to GDP 16.3% Public Debt to GDP 13.4% Share of Government Debt Owed to Official Cred. 92.8% Inflation (annual CPI, in %) 12.7% Budget Balance (% of GDP) -11.0%; Algeria 1996 External Debt to GDP 64.1% Public Debt to GDP 59.6% Share of Government Debt Owed to Official Cred. 63.7% Inflation (annual CPI, in %) 5.7% Budget Balance (% of GDP) 2.4%; Argentina 1993 External Debt to GDP 29.1% Public Debt to GDP 19.5% Share of Government Debt Owed to Official Cred. 36.8% Inflation (annual CPI, in %) 4.2% Budget Balance (% of GDP) 0.0%; Argentina 2005 External Debt to GDP 54.1% Public Debt to GDP 28.4% Share of Government Debt Owed to Official Cred. 33.2% Inflation (annual CPI, in %) 10.9% Budget Balance (% of GDP) 1.8%.
  - Additional reported indicator values include (verbatim as shown): Bolivia 1993 External Debt to GDP 81.5% Public Debt to GDP 68.9% Share of Government Debt Owed to Official Cred. 98.0% Inflation (annual CPI, in %) 7.9% Budget Balance (% of GDP) -3.0%; Brazil 1994 External Debt to GDP 20.9% Public Debt to GDP 12.8% Share of Government Debt Owed to Official Cred. 28.3% Inflation (annual CPI, in %) 66.0% Budget Balance (% of GDP) -6.7%; Chile 1990 External Debt to GDP 49.3% Public Debt to GDP 27.6% Share of Government Debt Owed to Official Cred. 52.4% Inflation (annual CPI, in %) 21.8% Budget Balance (% of GDP) 1.8%; Côte d’Ivoire 1998 External Debt to GDP 104.9% Public Debt to GDP 77.2% Share of Government Debt Owed to Official Cred. 74.8% Inflation (annual CPI, in %) 0.8% Budget Balance (% of GDP) -2.4%.
  - The table includes many more country-year indicator observations (preserved as in source), with explicit numeric values for External Debt to GDP, Public Debt to GDP, Share of Government Debt Owed to Official Cred., Inflation (annual CPI, in %), and Budget Balance (% of GDP).

### Methodological notes and limitations
- The compilation intentionally excludes incomplete or unimplemented negotiations and exchange offers that were not finalized.
- The “final restructuring” filter (no subsequent private-creditor restructuring within four years) narrows the sample to implemented, non-repeat restructurings.
- Macroeconomic indicators are reported for one year prior to the restructuring year; data sources are IMF IFS, World Bank GDF and WDI, and Economist Intelligence Unit.

*Source: Trebesch (2011) as used in the chapter.*

### REFERENCES

### _wp12203 - REFERENCES

### Sovereign default and restructuring
- Aguiar, Mark, and Gita Gopinath. 2006. “Defaultable Debt, Interest Rates and the Current Account." Journal of International Economics, 69(1): 64-83.
- Amador, Manuel. 2009. “Sovereign Debt and the Tragedy of the Commons.” Unpublished Paper, Stanford University.
- Andritzky, Jochen. 2006. Sovereign Default Risk Devaluation: Implications of Debt Crises and Bond Restructurings. New York: Springer.
- Andritzky, Jochen. 2010. “The Return of Investment of Sovereign Restructurings.” Unpublished Paper.
- Asonuma, Tamon. 2010. “Serial Default and Debt Renegotiation.” Unpublished Paper, Boston University.
- Asonuma, Tamon, and Christoph Trebesch. 2011 "Preemptive versus Post-Default Debt Renegotiation". Unpublished Paper.
- Borensztein, Eduardo and Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, vol. 56(4), pages 683-741.
- Chuhan, Punan, and Federico Sturzenegger. 2005. “Default Episodes in the 1980s and 1990s: What Have We Learned.” In Managing Economic Volatility and Crises: A Practitioner's Guide, ed. Aizenman, Joshua and Brian Pinto, 471-519. Cambridge, MA: Cambridge University Press.
- Cotarelli, Carlo, Forni, Lorenzo, Gottschalk, Jan and Paolo Mauro. 2010 “Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely.” IMF Staff Position Note 10/12. International Monetary Fund.
- Cruces, Juan and Christoph Trebesch. 2011. “Sovereign Defaults: The Price of Haircuts.” CESifo Working Paper, No. 3604.
- Das, Udaibir S., Papaioannou, Michael G. and Christoph Trebesch, 2010. "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets", IMF Working Papers 10/10, International Monetary Fund.

### Fiscal sustainability, primary surpluses, and public debt
- Abiad, Abdul and Jonathan D. Ostry. 2005. "Primary Surpluses and sustainable Debt Levels in Emerging Market Countries," IMF Policy Discussion Paper 05/6. International Monetary Fund.
- Barnhill, Theodore and George Kopits. 2003. “Assessing Fiscal Sustainability Under Uncertainty” IMF Working Paper 03/79. International Monetary Fund.
- Blanchard, Olivier J. 1984. “Current and Anticipated Deficits, Interest Rates and Economic Activity” European Economic Review, 25: 7-27.
- Blanchard, Olivier J., Chouraqui, Jean-Claude, Hagemann, Robert and Nicola Sartor. 1990. “The Sustainability of Fiscal Policy: New Answers to an Old Question”, OECD Economic Studies, 15: 7-36.
- Burnside, Craig. 2005. Fiscal Sustainability in Theory and Practice: A Handbook. Washington, D.C: World Bank.
- Celasun, Oya, Xavier Debrun, and Jonathan Ostry. 2006. “Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A ‘Fan-Chart’ Approach.” IMF Staff Papers 53(3):401–25.
- Chalk, Nigel and Richard Hemming. 2000. “Assessing Fiscal Sustainability in Theory and Practice.” IMF Working Paper No. 00/81.

### Sovereign debt structure and crisis prevention
- Arslanalp, Serkan and Peter Blair Henry. 2005. "Is Debt Relief Efficient?," Journal of Finance, 60(2): 1017-1051.
- Chamon, Marcos, Borensztein, Eduardo, Jeanne, Olivier, Mauro, Paolo and Jeromin Zettelmeyer. 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
- Borensztein, Eduardo, Kevin Cowan and Patricio Valenzuela. 2007. "Sovereign Ceilings "Lite"? the Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies," IMF Working Paper 07/75, International Monetary Fund.
- Blundell-Wignall, Adrian and Patrick Slovik. 2010. “The EU Stress Test and Sovereign Debt Exposures”, OECD Working Papers on Finance, Insurance and Private Pensions, No. 4, OECD Financial Affairs Division.
- Bolton, Patrick and Jeanne, Olivier. 2007."Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime," Journal of Political Economy, 115(6): 901-924.
- Bolton, Patrick and Jeanne, Olivier. 2009. "Structuring and Restructuring Sovereign Debt: The Role of Seniority" Review of Economic Studies, 76(3): 879-902.
- Becker, Torbjorn, Richards, Anthony and Thaicharoen, Yunyong (2003) "Bond Restructuring and Moral Hazard: Are Collective Action Clauses costly?" Journal of International Economics, 61(1): 127-161.

### Credit default swaps, contagion, and market pricing
- Andritzky, Jochen, and Manmohan Singh, 2006. "The Pricing of Credit Default Swaps During Distress," IMF Working Paper 06/254, International Monetary Fund.
- Andritzky, Jochen, and Manmohan Singh, 2005. "Overpricing in Emerging Market Credit-Default-Swap Contracts: Some Evidence from Recent Distress Cases," IMF Working Paper 05/125, International Monetary Fund.
- Bedendo, Mascia, Cathcart, Lara and Lina El-Jahel. 2010. In- and Out-of-Court Debt Restructuring in the Presence of Credit Default Swaps. Unpublished Paper, Imperial College.
- Bolton, Patrick and Oehmke, Martin, 2010. “Credit Default Swaps and the Empty Creditor Problem”. AFA 2011 Denver Meetings Paper.
- Bi, Ran, Marcos Chamon, and Jeromin Zettelmeyer. 2011. “The Problem that Wasn’t: Coordination Failures in Sovereign Debt Restructurings.” IMF Working Paper 11/265.
- Arellano, Cristina. 2008. “Default Risk and Income Fluctuations in Emerging Economies." American Economic Review, 98(3): 690-712.
- Aguiar, Mark, and Gita Gopinath. 2006. “Defaultable Debt, Interest Rates and the Current Account." Journal of International Economics, 69(1): 64-83.

### Legal, contractual, and litigation aspects
- Buchheit, Lee C. and Mitu G. Gulati, 2000. “Exit Consents in Sovereign Bond Exchanges.” UCLA Law Review, 48 : 1–31.
- Buchheit, Lee C. and Mitu G. Gulati, 2002. “Sovereign Bonds and the Collective Will” Emory Law Journal, 51: 1317–64.
- Buchheit, Lee C. and Mitu G. Gulati. 2010. “How to Restructure Greek Debt.” Duke Law Faculty Paper 2336.
- Buchheit, Lee C. and Mitu G. Gulati. 2011a. “Greek Debt – The Endgame Scenario” Unpublished Paper.
- Buchheit, Lee C. and Mitu G. Gulati. 2011b. “Drafting a Model Collective Action Clause for Eurozone Sovereign Bonds” Unpublished Paper.
- Blackman, Jonathan I., and Rahul Mukhi. 2010. “The Evolution Of Modern Sovereign Debt. Litigation: Vultures, Alter Egos and Other Legal Fauna,” Law and Contemporary Problems, 73: 47-61.
- Couillault, Bertrand, and Pierre-Francois Weber. 2003. “Toward a Voluntary Code of Good Conduct for Sovereign Debt Restructuring.” Banque de France, Financial Stability Review, June, Paris.
- Barnett, Barry C., Galvis, Sergio J. and Ghislain Gouraige. 1984. “On Third World Debt,” Harvard International Law Journal, 24: 83–151.

### Empirical evidence, corporate and banking sector effects
- Arteta, Carlos, and Galina Hale. 2008. “Sovereign Debt Crises and Credit to the Private Sector.” Journal of International Economics, 74(1): 53–69.
- Borensztein, Eduardo, Kevin Cowan and Patricio Valenzuela. 2007. "Sovereign Ceilings "Lite"? the Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies," IMF Working Paper 07/75, International Monetary Fund.
- Cornell, Bradford and Alan Shapiro. 1986. "The reaction of bank stock prices to the international debt crisis," Journal of Banking and Finance, 10(1): 55-73.
- Benczur, Peter, and Ilut Cosmin. 2009. “Evidence for Relational Contracts in Sovereign Bank Lending.” Duke University Mimeo.
- Das, Udaibir S., Papaioannou, Michael G. and Christoph Trebesch, 2010. "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets", IMF Working Papers 10/10, International Monetary Fund.
- Celasun, Oya and Philipp Harms, 2007, “How Does Private Foreign Borrowing Affect the Risk of Sovereign Default in Developing Countries?” Study Center Gerzensee Working Paper No. 07.04, Swiss National Bank.
- Celasun, Oya and Philipp Harms, 2008, “Boon or Burden: The Effect of Private Sector Debt on the Risk of Sovereign Default in Developing Countries,” unpublished manuscript.

*Content unit: _wp12203 - REFERENCES*

### Chapter 7, The World Bank, Washington, DC, pp. 141-179, 2009.

### Chapter 7, The World Bank, Washington, DC, pp. 141-179, 2009.

### Sovereign debt theory, history, and default dynamics
- Eaton, Jonathan, and Mark Gersovitz. 1981. “Debt with Potential Repudiation: Theoretical and Empirical Analysis.” Review of Economic Studies, 48(2): 289-309.
- Eaton, Jonathan. 2002. “Standstills and an International Bankruptcy Court.” Unpublished Paper, New York University.
- Eichengreen, Barry, and Richard Portes. 1989. “After the Deluge: Default, Negotiation, and Readjustment during the Interwar Years.” In The International Debt Crisis in Historical Perspective, ed. Eichengreen, B. and Lindert, P.H., 12-47. Cambridge, MA: MIT Press.
- Eichengreen, Barry, and Richard Portes, 1995, Crisis? What Crisis? Orderly Workouts for Sovereign Debtors. London: Centre for Economic Policy Research.
- Lindert, Peter H., and Peter J. Morton. 1989. “How Sovereign Debt Has Worked.” In Developing Country Debt and Economic Performance, Volume 1: The International Financial System, ed. Jeffrey Sachs, 39–106. Chicago and London: University of Chicago Press.
- Reinhart, Carmen, Kenneth Rogoff, and Miguel Savastano. 2003. “Debt Intolerance.” Brookings Papers on Economic Activity, 2003(1): 1–70.
- Reinhart, Carmen, and Kenneth Rogoff. 2009. This Time is Different: Eight Centuries of Financial Folly, Princeton: Princeton University Press.
- Rogoff, Kenneth, and Jeromin Zettelmeyer. 2002. “Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976–2001” IMF Staff Papers, 49(3): 470-507.
- Sturzenegger, Federico, and Jeromin Zettelmeyer. 2006. Debt Defaults and Lessons from a Decade of Crises. Cambridge, MA: MIT Press.

### Empirical studies on costs, contagion, and macroeconomic effects
- De Paoli, Bianca, Hoggarth, Glenn and Victoria Saporta. 2009. “Output costs of sovereign crises: some empirical estimates”, Bank of England Working Paper No. 362.
- Detragiache, Enrica and Antonio Spilimbergo. 2001. Crises and Liquidity: Evidence and Interpretation. IMF Working Paper No. 01/2. International Monetary Fund.
- Fuentes, Miguel and Diego Saravia. 2010. “Sovereign Defaulters: Do International Capital Markets Punish Them?" Journal of Development Economics, 91(2): 336–347.
- Gennaioli, Nicola, Martin, Alberto and Stefano Rossi. 2010. "Sovereign Default, Domestic Banks and Financial Institutions," CEPR Discussion Papers 7955.
- Mendoza, Enrique G. and Jonathan D. Ostry. 2008. "International Evidence on Fiscal Solvency: Is Fiscal Policy ‘Responsible’?” Journal of Monetary Economics, 55(6): 1081-1093.
- Mendoza, Enrique G., and Pedro M. Oviedo. 2006. “Fiscal Solvency and Macroeconomic Uncertainty in Emerging Markets: The Tale of the Tormented Insurer”. NBER Working Paper 12586. National Bureau of Economic Research.
- Tomz, Michael, and Mark L. J. Wright. 2007. “Do Countries Default in ‘Bad Times’?” Journal of the European Economic Association, 5(2-3): 352–360.
- Sturzenegger, Federico, and Jeromin Zettelmeyer. 2008. “Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998-2005.” Journal of International Money and Finance, 27(5): 780-805.
- Levy-Yeyati, Eduardo and Ugo Panizza. 2011. “The Elusive Cost of Sovereign Defaults.” Journal of Development Economics. 94(1): 95-105.

### Banking, financial sector links, and systemic crises
- Honohan, Patrick and Luc Laeven, 2005. Systemic Financial Crises. Cambridge University Press.
- Fissel, Gary, Goldberg, Lawrence and Gerald Hanweck. 2006. "Bank portfolio exposure to emerging markets and its effects on bank market value," Journal of Banking and Finance, 30(4): 1103-1126.
- Laeven, Luc and Fabian Valencia. 2008. "Systemic Banking Crises: A New Database." IMF Working Paper 08/224, International Monetary Fund.
- Love, Inessa, Preve, Lorenzo A. and Virginia Sarria-Allende, 2007. "Trade Credit and Bank Credit: Evidence from Recent Financial Crises," Journal of Financial Economics, vol. 83(2): 453-469.
- Levy-Yeyati, Eduardo, Martinez Peria, Maria S. and Sergio L. Schmukler. 2010. "Depositor Behavior under Macroeconomic Risk: Evidence from Bank Runs in Emerging Economies," Journal of Money, Credit and Banking, 42(4): 585-614.
- Ghosal, Sayantan, and Marcus Miller. 2003. “Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures.” Economic Journal, 113(487): 276–304.
- Gapen, Michael, Gray, Dale, Hoon Lim, Cheng and Yingbin Xiao. 2008. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Staff Papers, Vol. 55(1), pp. 109-148.
- Gray, Dale F., Robert C. Merton and Zvi Bodie, (2007) "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," NBER Working Paper 13607, National Bureau of Economic Research.

### Legal frameworks, litigation, and contractual mechanisms
- Enderlein, Henrik, Schumacher, Julian and Christoph Trebesch, 2011. ”Sovereign Debt Litigation” Unpublished Paper. Hertie School of Governance.
- Enderlein, Henrik, Trebesch, Christoph and Laura von Daniels. “Sovereign Debt Disputes: A Database on Government Coerciveness during Debt Crises“ forthcoming, Journal of International Money and Finance.
- Fisher, Jill E. and Caroline M. Gentile. 2004. “Vultures or Vanguards?: The Role of Litigation in Sovereign Debt Restructuring.” Emory Law Journal, 53, pp. 1043-1113.
- Waibel, Michael. 2007. “Opening Pandora’s Box: Sovereign Bonds in International Arbitration.” American Journal of International Law, 101(4): 711–59.
- Waibel, Michael, 2011. Sovereign Defaults before International Courts and Tribunals. Cambridge: Cambridge University Press.
- Liu, Yan 2002. “Collective Action Clauses in International Sovereign Bonds” August 30, 2002.
- ECFIN. 2004. “Implementation of the EU commitment on Collective Action Clauses in documentation of International Debt Issuance”
- Rieffel, Lex. 2003. Restructuring Sovereign Debt: The Case for Ad Hoc Machinery. Washington, DC: Brookings Institution Press.
- Paulus, Christoph. 2010. “A Standing Arbitral Tribunal as a Procedural Solution for Sovereign Debt Restructurings” In: Braga, Carlos A. Primo and Gallina A. Vincelette (Eds.): Sovereign Debt and the Financial Crisis: Will This Time Be Different? Washington D.C.: World Bank Publishers.
- Pitchford, Rohan, and Mark L. J. Wright. 2008. “Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment.” Unpublished. UCLA.

### Policy proposals, mechanisms, and governance for restructuring
- Krueger, Anne. 2002. “A New Approach to Sovereign Debt Restructuring.” International Monetary Fund.
- Gianviti, Francois, Anne O. Krueger, Pisani-Ferry, Jean, Sapir, André and Jürgen von Hagen. 2010. “A European Mechanism for Sovereign Debt Crisis Resolution: A Proposal.” Bruegel Blueprint 10, November 2010.
- Kaiser, Jürgen. 2010 “Resolving Sovereign Debt Crises. Towards a Fair and Transparent International Insolvency Framework” FES Working Paper, September 2010.
- Gros, Daniel, 2010. “How to Deal with Sovereign Default in Europe: Towards a Euro(pean) Monetary Fund.” European Parliament, IP/A/ECON/FWC/2009_040/C5, March 8.
- Sachs, Jeffrey. 1995, “Do We Need an International Lender of Last Resort?” Frank D. Graham Lecture at Princeton University, Vol. 8, April 20.
- Roubini, Nouriel, 2010. “An Orderly Market-Based Approach to the Restructuring of Eurozone Sovereign Debts Obviates the Need for Statutory Approaches.” RGE Anaylsis. Nov. 15 2010.
- Weder di Mauro, Beatrice and Jeromin Zettelmeyer (2010), “European Debt Restructuring Mechanism as a Tool for Crisis Prevention”, VoxEU.org, 26 November.

### Market instruments, CDS, ratings, and auction mechanisms
- Duffie, Darrell. 2020.  “Is there a Case for Banning short Speculation in sovereign bond markets? Banque de France Financial Stability Review, No. 14, July 2010.
- Markit 2010. Credit Event Auction Primer. February 2010.
- Morgan Stanley. 2011. “Sovereign CDS: Credit Event and Auction Primer” Report of May 31, 2011.
- Roubini, Nouriel and David Nowakowski. 2011. “CDS and Debt Restructuring: Does the Existence of Credit Derivatives Make Restructuring Harder?” RGE Anaylsis. April 21, 2011.
- Singh, Manmohan and Carolyne Spackman. 2009. “The Use (and Abuse) of CDS Spreads During Distress.” IMF Working Paper 09/62, International Monetary Fund.
- Moody’s. 2010. “Sovereign Default and Recovery Rates, 1983-2009.“ Report of April 2010.
- Standard & Poor's. 2006. “Sovereign Defaults and Rating Transition Data: 2006 Update.”
- Standard & Poor's. 2007. “Introduction Of Sovereign Recovery Ratings”, 12 June 2007.

### IMF, World Bank, and official reports on debt sustainability and restructuring practice
- IMF. 1999. “IMF Policy on Lending into Arrears to Private Creditors.” International Monetary Fund, Washington, DC.
- IMF. 2000. “International Capital Markets: Development and Prospects.” International Monetary Fund, Washington, DC.
- IMF. 2001a. “Official Financing for Developing Countries.” International Monetary Fund, Washington, DC.
- IMF. 2001b. “Involving the Private Sector in the Resolution of Financial Crises - Restructuring International Sovereign Bonds.” International Monetary Fund, Washington, DC.
- IMF. 2002a. “The Design and Effectiveness of Collective Action Clauses” International Monetary Fund, Washington, DC.
- IMF. 2002b. “Assessing Sustainability.” International Monetary Fund, Washington, DC.
- IMF. 2002c. “Sovereign Debt Restructurings and the Domestic Economy Experience in Four Recent Cases” International Monetary Fund, Washington, DC.
- IMF. 2003a. “Reviewing the Process for Sovereign Debt Restructuring within the Existing Legal Framework.” International Monetary Fund, Washington, DC.
- IMF. 2003b. “Sustainability Assessments—Review of Application and Methodological Refinements” International Monetary Fund, Washington, DC.
- IMF. 2008. “Staff Guidance Note on Debt Sustainability Analysis for Market Access Countries” International Monetary Fund, Washington, DC.
- IMF. 2011b. “Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis”. International Monetary Fund, Washington, DC (forthcoming).
- IMF and World Bank. 2006. “Heavily Indebted Poor Countries Initiative (HIPC) and Multilateral Debt Relief Initiative (MDRI). Status of Implementation.”
- IMF and World Bank. 2009. “Heavily Indebted Poor Countries Initiative (HIPC) and Multilateral Debt Relief Initiative (MDRI). Status of Implementation.”
- World Bank. 2002. “Global Development Finance 2002”. The International Bank for Reconstruction and Development. The World Bank, Washington, D.C.
- World Bank. 2007. “Debt Reduction Facility for IDA-Only Countries: Progress Update and Proposed Extension,” Board Report 39310, Washington, D.C.

*Source: Chapter 7, The World Bank, Washington, DC, pp. 141-179, 2009.*

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