1. Argentina Is Unique - Implications for Sovereign Debt Restructurings 11 December 2013Elena Duggar, Group Credit Officer - Sovereign Risk, Moody’s Investors Service Cato Institute Forum

2. 2Cato institute – 11 December 2013 Agenda 1.Why the Case of Argentina Is Unique in the Historical Context 2.Implications for Sovereign Debt Restructurings

3. 3Cato institute – 11 December 2013 Related Research Sovereign Default Research: www.moodys.com/sdrwww.moodys.com/sdr »Sovereign Defaults Series Compendium: The Aftermath of Sovereign Defaults, October 2013Sovereign Defaults Series Compendium: The Aftermath of Sovereign Defaults, October 2013 »The Role of Holdout Creditors and CACs in Sovereign Debt Restructurings, Moody’s Special Comment, April 2013The Role of Holdout Creditors and CACs in Sovereign Debt Restructurings, Moody’s Special Comment, April 2013 »US Court Ruling on Argentina’s Debt Could Have Limited Implications for Sovereign Debt Restructurings, Moody’s Special Comment, December 2012US Court Ruling on Argentina’s Debt Could Have Limited Implications for Sovereign Debt Restructurings, Moody’s Special Comment, December 2012

4. 4Cato institute – 11 December 2013 Disclaimers »The author is not an attorney, and this presentation does not offer any legal opinions or interpretations. »Neither the author nor Moody’s Investors Service advocates any particular approach or policy with respect to sovereign debt restructurings.

5. 5Cato institute – 11 December 2013 Why the Case of Argentina Is Unique 1

6. 6Cato institute – 11 December 2013 Main Conclusion: Recent History Shows that the Case of Argentina Is Unique - Holdout Litigation Has Not Been an Obstacle to Sovereign Debt Restructurings »The case of Argentina was the only one of the 34 modern era sovereign bond exchanges that resulted in persistent litigation »There were several unique features about Argentina’s experience: –The economic and banking crisis at the time of default were extremely severe –The losses involved in the debt exchange were large (about 70%) –The debt exchange was large and very complex –The negotiation process was contentious –The amount of holdout debt was relatively large –The litigation process was prolonged »In general, sovereign bond restructurings have been resolved quickly, without severe creditor coordination problems, and involving little litigation

7. 7Cato institute – 11 December 2013 Sample coverage: The 34 Sovereign Bond Exchanges Since 1997 Capturing the rise in emerging market bond finance since the late 1990s and focusing on bond restructurings, where creditor coordination problems were expected to be more pronounced. Source: Moody’s Modern Era Sovereign Bond Restructurings by Region, 1997-Q1 2013

8. 8Cato institute – 11 December 2013 Extremely Severe Crisis Argentina experienced extremely severe economic, banking, debt and political crises in the 2001-2002 period. Source: Moody’s Argentina Debt-to-GDP (%) and Exchange Rate (% change) Real GDP (% change)

9. 9Cato institute – 11 December 2013 Very Large Investor Losses in the Debt Exchange Source: Moody’s Losses Suffered by Investors and Closing Time in the Debt Exchange »The 2005 Argentinean foreign debt exchange imposed losses on investors of over 70% in NPV terms »Compared to the average investor losses in sovereign debt exchanges since 1997 of 47% »From the 34 sovereign debt exchanges since 1997 only 6 exchanges imposed such large losses – Russia, Cote d’Ivoire, Argentina, the Seychelles, Ecuador, and Greece

10. 10Cato institute – 11 December 2013 Complex Debt Exchange »Argentina’s debt exchange was large and very complex: –Almost US$ 80bn of debt, equivalent to over 50% of GDP –152 different bond series –Across 8 governing laws –6 different currencies –And dispersed creditor structure »The typical sovereign bond restructuring involved only a few bond series, across one or two governing laws »The average sovereign bond exchange involved US$ 16bn of debt. The only debt exchange that was larger than Argentina in terms of the amount of debt involved was Greece’s March 2012 restructuring of US$ 273bn of debt

11. 11Cato institute – 11 December 2013 Unlike the Case of Argentina, the Typical Sovereign Bond Restructuring Was Resolved Relatively Quickly »On average sovereign bond restructurings closed 10 months after the government had announced its intention to restructure »And 7 months after the first offer or the start of negotiations with creditors »Only 4 exchanges took longer than an year to resolve – Dominican Republic, Russia, Argentina, and Cote d’Ivoire »Delays were related to the parallel restructuring of official sector and commercial loan debt, and the civil conflict in Cote d’Ivoire Time from First Offer to Closing of Debt Exchange Source: Moody’s

12. 12Cato institute – 11 December 2013 Unlike Argentina, High Level of Participation In Sovereign Debt Restructurings Was The Norm Outcome »Creditor participation averaged 95% »All but 2 cases had 90% or higher participation rate »Moreover, 74% of exchanges had 95% or higher participation rate »In only two exchanges, holdout creditors represented more than 10% immediately after the exchange - Argentina (76% participation rate) and Dominica (72% participation rate) »However, later on, participation rates increased to 93% in Argentina and close to 100% in Dominica Participation Rates in Sovereign Bond Exchanges Source: Moody’s

13. 13Cato institute – 11 December 2013 Unlike Argentina, Holdout Litigation Has Not Been an Obstacle »Only 1 of the 34 modern era sovereign bond exchanges resulted in persistent litigation –The case of Argentina. »Only a few other court cases have been filed over the years and they have generally not represented an obstacle to the conclusion of debt exchanges: –1 lawsuit in the case of Ecuador in 2001 by a commercial bank –1 lawsuit in the case of Dominica in 2005 by the Export-Import Bank of Taiwan –1 lawsuit filed in the case of Grenada in 2006 by the Export-Import Bank of Taiwan –1 lawsuit in the case of Pakistan in 1999 by one small creditor. »“ Runs to the courthouse” have been the exception rather than the rule in sovereign debt crises

14. 14Cato institute – 11 December 2013 Implications for Sovereign Debt Restructurings 2

15. 15Cato institute – 11 December 2013 In Practice Implications for Future Sovereign Debt Restructurings Could Prove Limited »The experience of Argentina with respect to its debt restructuring had several unique features and was an outlier in the historical context »Pari passu clauses in sovereign bond contracts are not all equal »CACs are prevalent in sovereign bond contracts »Exit consents can be used to amend bond contracts during debt exchanges

16. 16Cato institute – 11 December 2013 Pari Passu Clauses Are Not All Equal (1) »Pari passu clauses in sovereign bond contracts exist in three different formulations: –“Low risk” formulation, commonly used before 1990 provides that “the bonds rank pari passu with all External Indebtedness” -- generally considered not readily susceptible to the ratable payment interpretation. –“Medium risk” formulation might state that “the bonds will rank pari passu in priority of payment and in rank of security” –“High risk” formulation adds “and shall be paid as such” to the “rank equally” -- the last two versions are more susceptible to the ratable payment interpretation as they explicitly require equal treatment at the moment of payment. »Empirical evidence suggests that sovereign bonds increasingly incorporated the two “more risky” versions only in the 1990s and 2000s »About two-thirds of sovereign bonds issued in the 1990s and almost half of the bonds issued in the 2000s contained the “low risk” version of the pari passu clause.

17. 17Cato institute – 11 December 2013 Pari Passu Clauses Are Not All Equal (2) »Further, Argentina’s case is unique in that Argentina passed the “Padlock Law” in 2005 –It forbade the government to settle with holdout creditors who had refused to participate in the restructuring –The law effectively granted preferential status to one group of creditors –Should the Courts interpret the ruling in a narrow sense related to the Padlock Law, rather than in a broader sense related to the pari passu clause, the implications of the ruling for other sovereigns could be limited »Finally, new sovereign bond contracts are currently being modified to specify that the pari passu clause should not be interpreted to mean “ratable payment”

18. 18Cato institute – 11 December 2013 CACs and Exit Consents Have Played a Significant Role in Sovereign Bond Exchanges »35% of sovereign debt exchanges relied on using CACs or exit consents to bind a larger share of creditors in the restructuring »CACs allow a supermajority of creditors to amend the debt instrument’s payment terms »Exit consents allow a majority group of creditors to change the non-financial terms of the old bonds CACs and Exit Consents in Sovereign Bond Exchanges Source: Moody’s

19. 19Cato institute – 11 December 2013 CACs Are Prevalent in Sovereign Bond Contracts »CACs set a lower threshold for the completion of a debt restructuring, limiting the impact of the court ruling »Empirical evidence shows that the vast majority of foreign-law sovereign bond contracts contain CACs: –CACs are commonly included in almost all New York law issuances after 2003 –English law bonds typically contain modification clauses »In local-law bonds, CACs can be retroactively inserted by act of legislation, as was done in the case of Greece »Thus, the pari passu clause risk is more applicable to New York law bonds issued before 2003, which contain “high risk” pari passu clauses but no CACs »Finally, it can be possible in future restructurings to legally subordinate holdout bonds by using exit consents which require lower level of bondholder approval (for example, to waive the pari passu and negative pledge clauses on old debt)

20. 20Cato institute – 11 December 2013 Appendix

21. 21Cato institute – 11 December 2013 More Details (1) Source: Moody’s, IMF country reports, Sturzenegger and Zettelmeyer (2005), and Diaz-Cassou, Erce-Dominguez and Vazquez-Zamora (2008). Notes: Time is rounded to the month. [1] Payments suspended due to legal investigation. [2] Bonds under legal dispute. [3] In default on loans

22. 22Cato institute – 11 December 2013 More Details (2) Source: Moody’s, IMF country reports, Sturzenegger and Zettelmeyer (2005), Diaz-Cassou, Erce-Dominguez and Vazquez-Zamora (2008), and Andritzky (2006). Notes: [1] Each series of new bonds carried a “mandatory debt management” feature that required Dominica to retire from the market a specified percentage of the original principal amount of that series in each year. [2] Early redemption clause triggered.

23. 23Cato institute – 11 December 2013 Elena Duggar Group Credit Officer for Sovereign Risk Credit Policy Group Moody’s Investors Service elena.duggar@moodys.com