THE European sovereign debt crisis has been running for two years now and it needs decisive and bold resolutions.  However, due to the numerous sovereign participants in the European Union and the need to get the consensus of all governments and the support of the respective parliaments, the process has become very tedious and complicated.

The Asian Financial Contagion Crises of 1997 to 1998 and the Debt Restructuring Crises of the Latin American Countries and the Philippines during the 1980s seemed far less complex.  Their impacts on the global economy were also much less not only because of the lesser size of the combined economies of the countries involved but also the individual governments and multilateral institutions involved seemed to have a better handle on the situation.  Furthermore, exchange rate adjustments were used as tools or consequences and part of the solutions to the crises.  In the case of the European crisis, the euro as a common currency is now part of the problem and exchange rate movements cannot be among the solutions to the problem.

Comparing the Situation to the Philippine Debt Crisis of the 1980s

In order to appreciate better the European crisis, it is useful to compare the circumstances obtaining then to the circumstances surrounding the European crisis.

Outstanding Sovereign Debt Obligations of the countries concerned in the crises of the 1980s that we can refer to as the “Less Developed Countries” were mostly due to banks in the form of syndicated loans, to multilateral institutions and to countries.

Now most debt of countries are in the form of securities held by banks, managed funds, trusts and anonymous numerous entities and individuals. Therefore, it was much easier to get the creditors of the countries facing debt problems to work out a restructuring or rescheduling of debt then than it is now.  As a matter of fact in the case of the Philippine debt moratorium and restructuring of the 1980s, outstanding securities obligations were excluded and fully paid on their respective maturities.

The predominant characteristic of the less developed countries’ debt crises of the 1980s and even the Asian crises  of the late 1990s was  lack or deficiency of foreign currency resources to meet their foreign currency obligations and needs.  While these had fiscal implications on domestic spending and borrowing, the warranted adjustments on the fiscal side were complemented by foreign currency debt restructuring and other external solutions to cover the foreign currency requirements.

In the case of the European crisis, the problem lies in the countries’ total debt service capabilities. The adjustments needed are much more severe fiscal adjustments. In the case of Greece, for example, its government would be hard put to raise debt either domestically or overseas because its debt is in euro and the face value of that debt would only be worth less than half of the debt in the same denomination of Germany and with very serious doubts as to the service of the Greek debt.

The countries involved in the previous crises maintained their capabilities  to issue debt in their own currencies in  their respective domestic markets.

Credit Default Swaps (CDS) have become a problem in the resolution of the European crises.  The CDS is a form of insurance against the default of the debt which the issuer of the CDS guarantees against the holder of the debt security. There are trillions of dollars worth of CDS outstanding nowadays including CDSs against the debt issuances of sovereigns. There were virtually none outstanding in the 1980s.  As a matter of fact, country risk insurance issued by the government agencies of North America and Europe were among the solutions available for the foreign-currency debt-restructuring countries then to cover their foreign currency requirements.  Now, the CDSs outstanding against sovereign Greek default poses a major hurdle to the resolution of the problem because if the restructuring and/or “haircut”  or forced write-down of its debt by the holders is considered an event of default various consequences can be triggered.  A default will mean that all holders of CDSs against sovereign Greek debt can present their CDSs to the issuers and legally demand payment in cash against the face value of the debt.  It will then be very difficult to get an orderly restructuring of the Greek debt with the new holders of the debt.

Learning from the Philippine Experience of Debt Restructuing

THE European Crisis triggered by the Greek sovereign debt problem can possibly look at the solutions to the debt crisis that hit the less developed countries in the ’80s, including the Philippines.

For example, the Brady solution was to convert the outstanding foreign currency debt of restructuring less developed countries into various forms of  longer and lower coupons  partly collateralized bonds. In this way, nominal principal losses were avoided which instead took the form of losses on interest earnings over a much longer period of time for the holder.  The holders also had better options of getting liquidity out of their Bradyized bonds by selling them at a discount in a market that was more liquid and transparent than the rescheduled country loans that they used to hold.  A Brady type of solution is already being worked out for Greek soveriegn debt but it is now so much more complicated partly because of the CDS issue.

Debt for Asset and Debt for Debt swaps were used by the Philippines as a means for reducing its foreign currency debt obligations and as an incentive to generate investments in certain Philippine assets mainly assets foreclosed by Philippine government financial institutions.

Through these programs, foreign and domestic investments were attracted through a share in the discount of the foreign currency denominated Philippine debts when making the investment.  Greece and other players in the European crisis are also looking at debt for equity solutions because Greece is now caught in a vicious cycle of fiscal deficit, debt crises, recession leading to a lower tax base and hence more fiscal deficit. They can look at debt for equity swaps as a means to bring in more investments.