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Cracks in the new financial architecture

Jorge Gallardo, minister of finance and economy of the Republic of Ecuador, offers his views on sovereign debt restructuring.

Following the Mexican devaluation crisis of 1994 and the Asian crisis of 1997, the official sector (the IMF and the G-10 governments) became increasingly uncomfortable with the policy implications of bailing out private bondholders with public funds. The message went out in 1998 that bondholders and bank lenders should not expect to escape future sovereign debt crises without rescheduling their existing claims, lending new money or, when necessary, writing off part of the debt. This was hailed as the new international financial architecture. It lasted for only three years:1998-2000.

During this period, two countries, Pakistan and Ukraine, were forced to reschedule their Eurobonds as a condition of obtaining multilateral and bilateral financial assistance. Russia successfully completed a restructuring of its Soviet-era debt owed to private creditors in August of 2000 and obtained a 36.5% reduction in the size of those claims. After defaulting on its Brady bonds (the first country to do so) and its Eurobonds in late 1999, Ecuador restructured those instruments a year later with approximately a 40% reduction in the size of the affected debt stock.

Even in the heyday of the new financial architecture, however, a few cynics wondered aloud whether the public sector's insistence on burden sharing by private-sector lenders would apply only to the smaller debtor countries (such as Pakistan, Ukraine and Ecuador), but would evaporate when crises appeared in countries that were thought to pose a systemic risk to the international financial network, or in countries that enjoyed significant geopolitical clout.

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