Moody's: Sovereign restructurings often do not reduce debt levels

The new report, entitled "Sovereign Defaults Series: Sovereign Debt Restructurings Provide Liquidity Relief But Often Do Not Reduce Debt Levels", is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

"Over the 1997-2012 period, nominal debt levels actually rose in the aftermath of half of sovereign bond exchanges," explains Elena Duggar, Moody's Group Credit Officer for Sovereign Risk and author of the report. "Further, the average country exited default with a debt-to-GDP ratio only 5 percentage points lower than before the debt restructuring."

The report analyzes 31 distressed exchanges since 1997, by 19 sovereign issuers, and finds that in 50% of cases, debt levels were higher in the year after the debt exchange than they had been in the year before. Experiences varied across countries and some bond exchanges did lead to reductions in the nominal level of debt -- examples include the bond exchanges of Ukraine in 2000, Argentina in 2005 and Ecuador in 2009.

More often, though, debt levels fell only marginally or even rose. Recent examples of such outcomes include the recent debt exchanges of Jamaica, St. Kitts and Nevis, and Greece. In particular, despite the large haircut suffered by investors during the restructuring of Greek debt earlier this year, debt-to-GDP ratio in Greece is expected to be 179% at end-2012, higher than the 171% at end-2011.

The terms of the exchanges were key contributing factor to this outcome, as the majority of sovereign bond exchanges included maturity extension and a reduction in interest, but no nominal haircut on the principal. As a result, the distressed exchanges alleviated liquidity pressure and debt servicing costs were reduced in the long term, but the stock of debt remained unchanged.

Even in the presence of a nominal haircut, three other factors often counteracted the beneficial impact of a sovereign debt exchange. First, economic deterioration contributed to budget deficits in the absence of fiscal adjustment. Second, currency depreciation, led to an increase in the value of foreign currency debt relative to domestic GDP. Third, there were banking sector recapitalization costs and other measures to support the economy. New borrowing as a result of these developments during the crisis often undermined the debt reduction achieved via the exchange.

"Our findings underscore the fact that defaults are rarely a quick cure for sovereign debt crises", says Duggar. "Resolving sovereign debt crises is a prolonged and difficult process and significant fiscal adjustment is typically necessary over many years in order to reduce debt levels."

Subscribers can access this report via this link: http://www.moodys.com/research/Sovereign-Defaults-Series-Sovereign-Debt-Restructurings-Provide-Liquidity-Relief-But--PBC_146909. ***

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Elena Duggar VP-Sr Credit Officer Credit Policy 250 Greenwich StreetNew York, NY 10007 U.S.A. Richard Cantor Chief Risk Officer Credit Policy Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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