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How Does My Country Grow?Economic Advice Through Story-Telling$

Brian Pinto

Print publication date: 2014

Print ISBN-13: 9780198714675

Published to Oxford Scholarship Online: September 2014

DOI: 10.1093/acprof:oso/9780198714675.001.0001

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(p.217) Annex 3 : The Russian and Argentine Debt Swaps

(p.217) Annex 3 : The Russian and Argentine Debt Swaps

How Does My Country Grow?
Oxford University Press

The main features of the Russian GKO–Eurobond swap of July 1998 were as follows: (a) it was voluntary and market-based; (b) all GKOs maturing before July 1, 1999 were eligible, with a face value of $39.3 billion, and a market value of $32.3 billion at prevailing exchange rates.1 Excluding the 60 percent share believed held by the central bank and the state-owned savings bank, Sberbank, which were barred from participating, the market value of eligible GKOs dropped to about $13 billion, held by nonresidents and Russian commercial banks. (c) Those wanting to convert would receive an equal amount by market value of 7-year and 20-year dollar Eurobonds, and could bid by quoting a spread in basis points over the respective US Treasury benchmark bonds.

The bid results were announced on July 20, 1998. Even though the maximum spread of 940 basis points chosen by MOF was much higher than the prevailing spread on the benchmark Russian Eurobond, only $4.4 billion of GKOs by market value was tendered for exchange. This suggested that the holders of GKOs preferred to hold on to their short-dated paper and take the risk of a devaluation—mitigated by the prospect of a large official rescue package—than swap into long-term Eurobonds at highly attractive spreads, indicating anxiety about default risk.

Box A3.1 describes the Argentine swap. Argentina had little short-term debt; but its projected financing requirements were $22 billion per year over 2001–2005 provided primary fiscal surpluses were raised to at least 4 percent of GDP in order to stabilize the public debt to GDP ratio, which was not credible given the fiscal track record. A $29.5 billion debt swap (“megacanje”) was orchestrated in June 2001 to extend maturities and was greeted enthusiastically by investors.

The mega-swap would have enabled Argentina to postpone over $16 billion in debt service payments between 2001 and 2005; but this was small relative to financing requirements of $110 billion over this period. Above all, the swap was done at a spread of 1100 basis points, whereas according to Mussa (2002), calculations showed that, at spreads of over 1000 basis points, Argentina’s debt dynamics were “virtually hopeless.” After the swap, meltdown set in, as bond spreads rose even higher, tax collections continued to flag, and bank runs intensified as depositors rushed to convert their pesos into dollars before the constitutionally mandated exchange rate peg collapsed.

In contrast to the enthusiasm which greeted both swaps, ex post reviews were uniformly skeptical: (p.218)

  • Commenting on the Russian swap, Stanley Fischer, then First Deputy Managing Director of the IMF, expressed skepticism that a “market-friendly restructuring alone can fundamentally change a country’s debt dynamics. Such restructurings take place at market prices, and thus almost by definition, do not significantly change the present value of the country’s debt obligations...”2

  • Calvo, Izquierdo, and Talvi (2002) observed that “the [Argentine] government engineered a massive debt swap in June 2001 to extend the maturity of the debt profile, but ended up validating extremely high interest rates which, in turn, confirmed expectations about an unsustainable fiscal position.”

  • Fischer’s comment on the Russian swap is echoed by Lesson 8 of the ten lessons distilled by the Independent Evaluation Office (IEO) in its July 2004 evaluation of the IMF’s role in Argentina, quoted in Box 7.4 of Chapter 7.

The fundamental insight from both cases was that market-based debt swaps will not lower the present value of the government’s debt burden because market investors will not less this happen voluntarily. To the contrary, the additional compensation investors could exact for (p.219) letting the government “reprofile” its debt would end up making matters worse. Fiscal fundamentals and market signals rule supreme.


(1) . Please refer to the discussion in Chapter 7 on Russia. This annex draws on Pinto and Tanaka (2005).

(2) . “Comments and Discussion”, Kharas, Pinto, and Ulatov (2001, p. 63).