Debt restructurings: lessons from Argentina & Ecuador - Capital Economics
Emerging Markets Economics

Debt restructurings: lessons from Argentina & Ecuador

Frontier Markets Monthly Wrap
Written by Edward Glossop
Cancel X

Argentina and Ecuador’s swift debt restructuring deals may provide a blueprint for other debt-distressed sovereigns. But these deals are not quite the success stories they seem at first sight. In any case, no two restructurings are ever alike, and other distressed sovereigns will face some different obstacles.

  • Argentina and Ecuador’s swift debt restructuring deals may provide a blueprint for other debt-distressed sovereigns. But these deals are not quite the success stories they seem at first sight. In any case, no two restructurings are ever alike, and other distressed sovereigns will face some different obstacles.
  • The deals agreed by Argentina and Ecuador this week have generated a flurry of positive headlines, and not without good reason. At various stages during the negotiations in the past few months, particularly in Argentina, it looked like bondholders and the government had reached an impasse.
  • More generally, the big picture is that two governments with a chequered past have secured debt deals quicker than many had anticipated – and quicker than other debt workouts. The average length of sovereign debt restructurings since 1970 is about seven years. History also suggests that there is often a narrow window for a quick deal. After a year has passed, talks can often take more than a decade. (See Chart 1.)
  • Argentina and Ecuador’s swift deals provide some lessons for other debt restructurings. First, swift deals are more likely when governments have the political will to get them done. Talks remained amicable even when thorny issues arose. And governments always emphasised their willingness to negotiate.
  • Second, deals are more likely when bondholders have confidence in the government’s policies. Ecuador’s economic team won over investors in recent years by tightening fiscal policy aggressively. Argentina’s new government has proved less radical than many had anticipated. Third and related, IMF involvement helps to instil confidence. Both Argentina and Ecuador stated their intention to sign new IMF deals, which bondholders often view as an anchor for market-friendly policymaking.
  • But perhaps the biggest lesson for other countries is that governments need to cede ground to investors to get deals over the line quickly. Both Argentina’s and Ecuador’s deals have resulted in fairly modest debt relief, and therefore smaller losses for investors than would’ve been the case had governments played hardball. In this light, the recently agreed deals are not quite the success stories that many seem to think. Indeed, we think there is a good chance of further sovereign debt restructurings in both countries.
  • There are a few implications of all this for other debt distressed frontiers. One is that it provides some optimism for a swift restructuring in Angola. Its government has a good track record on austerity, and a new IMF deal looks a realistic possibility. That said, one complication is that much of Angola’s debt is owed to China in the form of oil-for-loans deals (which don’t form part of the recent G20 debt moratorium).
  • History suggests that China can be a tough negotiator, which might hold up a restructuring of Eurobonds. Indeed, investors are unlikely to accept writedowns until they know what China is willing to cede. Moreover, while ceding ground to China might get a deal done quicker, it could reduce the amount of debt relief and prevent a return to debt sustainability. That would raise the risk of future debt crises.
  • The other implication is that debt restructurings are set to be long and arduous in Venezuela and Lebanon, and potentially Zambia too. None of these governments have shown appetite for austerity and IMF deals look unlikely. (See Table 1.) In Venezuela and Lebanon, talks with investors haven’t even started. As such, it’s likely to be a long time before policymaking improves and foreign investors return to these countries.

Chart 1: Length of Time Between Sovereign Debt Defaults & Restructuring Deals Since 1970

Table 1: Sovereigns in default and/or announced intention to restructure debts owed to main creditors*

Sources: Refinitiv, IMF

Source: Capital Economics *only includes countries with Eurobonds.


Edward Glossop, Senior Emerging Markets Economist, +44 (0)7896064878, edward.glossop@capitaleconomics.com