Sovereign debt restructurings with private creditors

Attempting to cure an overhang of private debt by issuing mountains of safe government debt is too dangerous. After all, when the private debt was issued, it, too, was considered safe.

Unsustainable private debt problems must be resolved by defaults, debt reductions, and conversion of debt into equity. If, instead, private debts are excessively socialized, the advanced economies will face a grim future serious sustainability problems with their public, private, and foreign debt, together with crippled prospects for economic growth.

Emphasizing the important role that private sector creditors play in debt relief and debt sustainability,

Table 3 Recent sovereign debt restructurings with private creditors main features

The recent experiences of debt restructurings with private creditors are very diverse.

On 20 January 1989, the author signed a private document acknowledging a debt to the company.

This suggests that net private borrowing using debt instruments has been rather small over this recent period.

More broadly, the ECB s marginal lending facility is an indirect means of monetizing sovereign debt. It is an even less direct way to address the private, related debt overhang.

Meanwhile, governments were running large deficits a legacy of the economic downturn which renewed growth was supposed to shrink. In the eurozone, countries like Greece faced sovereign debt crises as bank bailouts turned private debt into public debt.

That left individual eurozone members exposed to brutal pressure by financial markets at a time when excessive private debt was turned into unsustainable public debt. Suddenly, the eurozone had become a straightjacket.

Cleaning up high private sector debt and lowering public debt ratios by growth alone is particularly hard if a balance sheet crisis leads to an anemic recovery. And reducing debt ratios by saving more leads to the paradox of thrift too fast an increase in savings deepens the recession and makes debt ratios even worse.

The delay in reaching an agreement enabled most private creditors to escape the consequences of their reckless lending to Greece. Roughly half of Greece s external debt migrated from the private sector to official institutions.

In 2012, as the debt to GDP ratio skyrocketed, Greece s private creditors were given a significant 34 haircut. At the same time, however, new loans worth 63 of GDP were added to Greece s national debt.

The provision of greater economic aid, debt relief, public and private investment, and technology transfer to those countries was of prime importance.

It can also provide technical expertise to Arab policymakers on debt management. Without first rate expertise in debt management, an economy implementing large scale public outlays risks crowding out private investment through overreliance on domestic savings.

Two other destabilizing developments emerged in the last quarter of the twentieth century a strong incentive to use debt to prop up demand, and a shift toward financing public debt through private institutions at market prices, under the pretext of fighting inflation. These trends boosted public debt burdens, while flooding the global financial system with liquidity generated by private banking activities that were unconnected to transactions in the real economy.

The crisis started with too much private debt and leverage, which became public debt and deficits as crisis and recession triggered fiscal deterioration and private losses were mostly socialized via bailouts of financial systems. Then, distressed sovereigns that had already lost market access Greece and Ireland were bailed out by the International Monetary Fund and the European Union.

Indeed, history suggests that severe recession and socialization of private losses often lead to an unsustainable build up of public debt. Moreover, financial crises triggered by excessive debt and leverage in the private sector are followed after a few years by sovereign defaults and or high inflation to wipe out the real value of public debts.

Options include international debt financing, domestic tax revenue and user fees, borrowing in domestic capital markets, and public private partnerships for water related investments.

The fact is that Greece had no right to borrow from German or any other European taxpayers at a time when its public debt was unsustainable. Before Greece took any loans, it should have initiated debt restructuring and undergone a partial default on debt owed to its private sector creditors.

Domestic resource mobilization, remittances from expatriate workers, private debt and equity flows, and philanthropic contributions exceed official international aid by a wide margin. Private flows are no longer the tail, but the dog that wags the development agenda.

Third, while ECB policies keep borrowing costs lower, private and public debt in the periphery countries, as a share of GDP, is high and still rising, because the denominator of the debt ratio nominal GDP is barely increasing. Thus, debt sustainability will remain an issue for these economies over the medium term.

NEW YORK Like individuals, corporations, and other private firms that rely on bankruptcy procedures to reduce an excessive debt burden, countries sometimes need orderly debt restructuring or reduction. But the ongoing legal saga of Argentina s fight with holdout creditors shows that the international system for orderly sovereign debt restructuring may be broken.

Sustainability of public debt has replaced sustainability of private debt as the biggest threat to financial stability, and the focus of debate about the US current account has shifted from the sustainability of foreign debt to the impact of reducing the external deficit on growth and employment. The dilemma facing US policymakers is how to stimulate growth while lowering the level of total debt.

First, as Lee Buchheit, the attorney who oversaw the Greek private restructuring, has proposed, maturities on official Greek debt could be greatly extended. A simple structure would be to make all debt payable over 40 years, carrying an interest rate of 2 .

The issue was not only the aggregate level of debt it was also a question of balance between private and public sector debt, their maturity structure, the level of contingent liabilities, reserve management and pursuit of macroeconomic policies consistent with development objectives.

These negative transfers have persisted, despite the commitments made by the developed countries to increase official development assistance, to reduce debt and debt service payments, to open their markets to the products of developing countries, and to encourage private investment in developing countries.

Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.

But they have not prevented a borrowing binge in their private sectors. Since private debts have a way of turning into public liabilities, a low government debt burden might not, in fact, provide these countries with the cushion that they think they have.

16. Stresses the need to continue to take effective measures, preferably within the existing frameworks, to address the debt problems of the least developed countries, including through cancellation of the multilateral and bilateral debt owed by least developed countries to creditors, both public and private

20. Stresses the need to continue to take effective measures, preferably within the existing frameworks, to address the debt problems of the least developed countries, including through cancellation of the multilateral and bilateral debt owed by least developed countries to creditors, both public and private

How did we get here? Once upon a time, conventional wisdom maintained that curbing governments appetite for debt would put an end to over borrowing, because private agents would know to act prudently and weigh the costs and benefits of one more dollar of debt.

The answers to these questions cannot be found by discussing sound finance, public or private, for they reside firmly in the realm of power politics. Debt is creditor power and, as Greece has learned the hard way, unsustainable debt turns the creditor into Leviathan.

Or perhaps the shock will affect sovereign debt values in faraway places, as happened in 1982. It is striking that no experts public or private really have a firm grip on what could happen if there is another round of difficulties with Greek government debt.

Forcing a debt for equity swap or debt forgiveness would be no greater a violation of private property rights than a massive bailout. But, for the major players in the financial sector, it is much more appealing to be bailed out by the taxpayers.

Indeed, JPM runs one of the two major private operations for settling major trades of government debt. If a shadow falling over JPM from its trading desk had extended to its capacity to settle government debt properly, the economic fallout could have been severe.

When an economy is closer to full employment, government borrowing to finance budget deficits can crowd out private investment that would raise productivity and the standard of living. Budget deficits automatically increase government debt, requiring higher future taxes to pay the interest on that debt.

Counter cyclicality is a useful mindset for individuals and governments. Recent history, particularly the excessive accumulation of private and public debt, suggests that we have not acquired it.

Japan s deflation and economic stagnation over the last two decades stemmed largely from a dysfunctional financial system and a lack of private demand. The collapse of asset bubbles in the 1990 s left Japan s financial system and private sector saddled with a huge debt overhang.

Subsequent programs to deal with emerging market crises featured an analogous combination of country adjustment and private sector involvement. Voluntary debt exchanges worked, roughly speaking, with investors accepting haircuts.

Some sovereign debtors and private creditors have been attempting to develop voluntary Principles of stable capital flows and fair debt restructuring in emerging markets , but progress has been slow.

Reaffirming the Monterrey Consensus of the International Conference on Financing for Development, which recognizes sustainable debt financing as an important element for mobilizing resources for public and private investment,

Unemployment remains far too high, with alarming levels of long term and youth joblessness. Public debt remains too high as well, and, making matters worse, much more of it is now owed to official rather than private creditors (which would complicate debt restructuring should it become necessary).

Unemployment remains far too high, with alarming levels of long term and youth joblessness. Public debt remains too high as well, and, making matters worse, much more of it is now owed to official rather than private creditors (which would complicate debt restructuring should it become necessary).