Most sovereign restructuring haircuts clustered in the 25% to 35% range, says IMF working paper

By Reshmi Basu

New York, July 28 - Domestic residents are not treated systematically better of worse than foreign investors during the debt restructuring process, according to an International Monetary Fund working paper titled "Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998 to 2005" by Federico Sturzenegger and Jeromin Zettelmeyer.

The motivation behind the study was to shed some light on the question of how much investors recover in a default situation, whether there are variations from one debt restructuring to another and whether investors were treated equally within each debt restructuring.

Through empirical and statistical analysis, the authors estimated bond-by-bond haircuts in recent debt restructurings in Russia, Ukraine, Pakistan, Ecuador, Argentina and Uruguay.

The authors concluded that there are substantial differences between average investor losses from one restructuring to another.

They found the average haircuts ranged from 13% as seen during Uruguay's restructuring to 73% seen in Argentina. Most restructurings were clustered in the 25% to 35% range, noted the authors, who were expressing their own views, not official IMF policy.

The authors also added domestic residents appear to have been treated more favorably in Russia's and Ukraine's 1998 to 1999 domestic debt exchanges, but noted that this is not true in Argentina's 2001 to 2005 and Uruguay's 2003 restructurings.

"Considerable variation in haircuts existed within some of the exchanges, depending on the instrument tendered. In some restructuring, holders of longer-dated instruments appear to suffer smaller losses in NPV (net present value) terms, while in others, within-exchange variation in NPV losses does not seem to follow an obvious pattern," the authors write.

One way to implement inter-creditor equality is to offer all bondholders the same units of a new instrument or the same access to instruments, suggested the authors.

"Most debt exchanges do not seem to have sought inter-creditor equity in this sense, as holders of longer dated instruments typically received a higher face value reduction, comparatively longer-dated new instruments, or a combination of both."

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