Debt restructuring is changing the conditions of the
loan in favor of the debtor. The new conditions provide for the decrease of
liabilities by those who provide the loan to those who receive the loan. It can
be a decrease in the interest or writing off part of the capital. As for the
decrease in the interest, the payoff period can be extended or longer maturity
in conjunction with lowering the interest rate. Haircut is referred to the writing
off of interest or capital. In such a case it is a step before default.
Debt restructuring is a normal procedure when it comes
to the private sector. Banks prefer to come to a settlement with private
companies and individuals, which may entail a longer maturity payment schedule,
but when things come to a dead end they may include debt restructuring. It is obvious
to the interest of the banks as they would prefer not to lose the entire loan,
but rather get something.
An example is the case of General Motors in 2009 where
the US government stepped in to the creditors to impose debt restructuring so
as to prevent the company from declaring bankruptcy. General Motors became a public
company, its debt was haircut by 90% of the value, and when the company became financially
sound, the US government sold it back to the private sector.
Another example is Argentina where the crisis began
when the Peso was pegged to the US dollar. Before inflation started to fall and
prices began to stabilize, the country went through a prolong period of
hyperinflation. The pegging did not allow for devaluation of the currency and
although inflation was falling, production was deteriorating. Argentina could
not devalue its currency to make its products competitive, and this made
imports competitive while its own products sat idle. This increased
unemployment, which meant lower revenue for the government, and at the same
time public debt and the current account deficits were mounting.
Despite the import of foreign capital to Argentina
from the currency, suddenly there was a rush of flea of capital. The government
was under pressure and rather that applying a policy to unpeg its currency to
devalue it, it fell onto the arms of the IMF so as to maintain the 1:1 ratio
with the US dollar. When the oligarchs and the rich managed to flee their
capital, GNP fell by 4% in 1999. The country fell into a recession and in 2001
everyone started to withdraw their money out of the banks. The government under
panic imposed a one year freeze on deposits.
Being under pressure, the peg policy was let go in
2002 thereby leading to a free fall of the peso, dragging along inflation and
unemployment. Many businesses declared bankruptcy and imports became expensive.
Despite this the accomplishments of the free fall of the peso did not take long
to come about. Exports rose as did tourism and the economy became competitive.
To this came along to a rise in several markets which made a positive impact on
growth.
In 2005 Argentina managed to restructure its debt to
the private sector by reducing the nominal value of bonds by 25%, and
prolonging the repayment period. On the contrary, the IMF maintained a tough
stand and did not agree to a restructuring. Due to the economic boom (reasons
outlined above), Argentina was in a position to announce that it would cover
its liabilities, by using its currency reserves. This surplus was sufficient to
repay the IMF totaling $9.5 billion.
Bill T. Alexandratos
billnyc60@gmail.com
