Public Debt Markets

Argentina’s Economic Experience: Lessons for Europe’s Periphery? | November 2012 |

Public Debt Market – Public Debt Market: - To lend to a King has been always a risky business - How is it possible a public debt market if - There is no mechanism to avoid a sovereign default - It is very difficult to cash 100% Nominal Value after a default - It is not easy to restructure debt and regularize payments

- Most striking is: why sovereign borrowers delay a default even when the situation does look totally unsustainable?

| Itaú BBA | Argentina´s Economic Experience: Lessons for Europe´s Periphery | November 2012

Public Debt Market – However…

- Private sector purchases and trades sovereign debt - Government delays a default

- At the end, debt restructuring is completed – Relevance of the models:

- Sovereigns do not borrow to smooth consumption - Sovereigns do not like to default and official lenders may play a key role in the default

- Defaulters are not precluded from the markets on a permanent basis | Itaú BBA | Argentina´s Economic Experience: Lessons for Europe´s Periphery | November 2012

Public Debt Market: – The best strategy - Which is the best strategy to achieve a sustainable debt burden?

- How are we sure that a fiscal adjustment scenario is better than one of default and restructuring?

- What are the likely payments in both scenarios?

| Itaú BBA | Argentina´s Economic Experience: Lessons for Europe´s Periphery | November 2012

Public Debt Market – Preventive debt restructuring - Not an easy task? Incentive problems vs operational problems - Hypotesis: - Economic and political costs for the incumbent - Bondholders may prefer to leave the room in silence - Fast restructuring is better than a longer process?

– Experiences - The risks of avoiding hostile clauses (Mopping-up)

| Itaú BBA | Argentina´s Economic Experience: Lessons for Europe´s Periphery | November 2012

Thanks!