Escolar Documentos
Profissional Documentos
Cultura Documentos
Zachary Oseland
International Debt Finance Spring 2010
4/28/2010
I. Introduction
While recent press coverage of Greece, Iceland, and other countries’ sovereign debt
problems may suggest otherwise, sovereign debt default is not a new phenomenon. Greece has
been struggling with its foreign debt for well over a century. In 1893, only 63 years after it was
first recognized as a state independent from the Turkish Empire, Greece was bankrupt. The
Prime Minister sought bondholder approval to reduce payments by 70%. They did not approve.
In 1898, Greece issued its first bond since the bankruptcy: a 2.5% bond that would
mature in 1918. If 2.5% seems like a low yield for a country that went into full default only five
years earlier, that is because the international community decided that Greece was not to be
trusted with servicing its own loans. In order to issue this bond, Greece was forced to submit to
the oversight of the Great Powers: France, Great Britain, and Russia. These countries guaranteed,
with joint and several liability, the repayment of the bonds. In exchange for this guarantee,
Greece was subjugated to the authority of the International Financial Control Commission, a
group of financial delegates representing Germany, Austria, Hungary, France, Great Britain,
Italy and Russia. Greece was stripped of most of its powers of taxation, including control over its
ports and state monopolies like spirits, all of which were given to the Commission. Because
Greece had shown that it could not be trusted to administer its own finances, other countries had
to step in to both collect funds for the sovereign and to service make debt payments on behalf of
the sovereign.
1
Lito Apostolakou, The Bankruptcy of Greece in 1893, available at
http://greekhistory.suite101.com/article.cfm/the_bankruptcy_of_greece_in_1893 (last visited Apr. 21, 2010).
2
In recent years a number of countries have proven themselves to be similarly
untrustworthy. While the International Financial Control Commission no longer exists, there are
formal organizations of countries like the International Monetary Fund that provide economic
assistance and oversight to these struggling sovereigns.2 IMF membership could be seen as a
modern, albeit less stringent, equivalent of Greece’s submission to the Commission in 1898.
Most countries, even developed countries with valuable natural resources and no history of
external default, agree to follow certain IMF rules and procedures to maintain their membership.
Ever the contrarian, Venezuela’s Hugo Chavez announced in 2007 that he planned to
revoke his country’s membership in the IMF.3 The biggest problem with this plan was that
Venezuela’s bonds stated that “the Republic (of Venezuela) ceas[ing] to be a member of the IMF
or ceas[ing] to be eligible to use the general resources of the IMF,” would constitute and event of
default, which would trigger acceleration of repayment. Fears over the consequences of a default
Unfortunately for those interested in sovereign debt default, Chavez did not follow
through with his promise. In fact, in late 2009, Venezuela received a new $3.5 billion Special
Drawing Right from the IMF,5 an amount significantly higher than its $2.6 billion quota.6
From 19th century Greece to 21st century Venezuela, international external oversight has
had an important effect on sovereign debt. This paper will examine the occurrence and
2
International Monetary Fund: Our Work, http://www.imf.org/external/about/ourwork.htm (Last visited Apr. 14,
2010): “The IMF oversees the international monetary system and monitors the financial and economic policies of its
members.”
3
W. Brandimarte & M. Badawy, Banks recommend cut Venezuela debt exposure on IMF news, May 2, 2007,
available at: http://www.reuters.com/article/idUSN0260434220070502
4
Id.
5
Darcy Crowe, Venezuela’s central bank reserves boosted by IMF infusion, Sep. 17, 2009, available at:
http://www.hacer.org/latam/?p=549 (Last visited Apr. 13, 2010)
6
IMF Members’ Quotas and Voting Power, Apr. 9, 2010, available at:
http://www.imf.org/external/np/sec/memdir/members.htm (Last visited Apr. 15, 2010)
3
retain their membership in the IMF? Why make this promise? And what effect does this promise
have on the bond? The attached Excel document contains the research underlying the following
discussion.
II. Discussion
A limited number of sovereigns were analyzed for this paper. Sovereigns will be divided
based on their consistency: those that do or do not contain the membership provision in every
bond, and those that include the provision in some bonds but not others. This distinction is made
only for organizational purposes. The consistency of the sovereign appears random, but a more
thorough analysis than is made in this paper may be able to explain why all sovereigns are not
consistent.
a. Consistent Sovereigns
i. Brazil
Brazilian bonds do not contain an IMF membership provision. From 1995 to 2010, Brazil
issued bonds denominated in yen, dollars, and reales, none of which included the provision. The
bonds’ maturation dates ranged from nine to fifteen years, and their yields ranged from 5.875%
to 12.5% for the real denominated bond. The only one of these bonds that even mentions the
International Monetary Fund is the 1995 yen issue, which appears to have been sold to Japanese
institutions. This bond has an “External Affairs and Membership in International Organizations”
section which states that "Brazil is an original member of the International Monetary Fund."
However, this is statement does not appear to create any obligation for Brazil, and no other
ii. Chile
4
Chilean bonds do not contain an IMF membership provision. In 1999, Chile issued a
$500 million floating rate four-year bond that contains a brief mention of the fact that Chile is a
member of the IMF and has been using IMF financing for years, but this mention is less than a
paragraph in length, and does not contain any promise to retain membership in the future.
In 2004, Chile issued a $600 million 6.875% ten-year bond that contained a lengthy
the IMF, but again, no explicit promise to retain IMF membership. The rationale for the
expansion of this section is unclear, particularly since it creates no higher obligation for Chile.
Perhaps Chile wanted to reassure investors regarding its IMF membership without creating a
iii. Colombia
Colombian bonds contain an IMF membership provision. Between 1993 and 2009,
Colombia issued dollar and peso denominated bonds with maturities ranging from nine to thirty
two years and yields ranging from 6.125% to 12% for the peso denominated bond. An interesting
variation in Colombian bonds is that some contain the provision in the “Events of Default”
section, and others in the “Default and Acceleration of Maturity” section, with slight changes in
the language used, as shown in the chart. The significance of this variation is unclear, as the
variation is random over time and does not seem to affect yield or maturity. Perhaps the variation
can be explained by the use of different lawyers and underwriters, or another of the possibilities
Costa Rican bonds contain an IMF membership provision. Between 2000 and 2004,
Costa Rica made three separate $250 million issues. Maturities ranged from ten to twenty years,
5
and yields ranged from 6.548% to 9.995%. All three contained the exact same language in the
same section of the governing document regarding Costa Rica’s commitment to retaining its IMF
membership. Unlike some other countries whose IMF provisions are in “Events of Default” or
“Acceleration of Maturity” sections, Costa Rica’s is in a section titled “Certain Covenants of the
Republic.”
v. Guatemala
Guatemalan bonds contain an IMF membership provision. In 2001 and 2004, Guatemala
issued bonds with ten and thirty year maturities respectively, and yields of 10.25% and 8.125%
respectively. Like Costa Rica, Guatemala’s provision is in the “Covenants” section, not the
“Defaults” section.
vi. Italy
Italian bonds do not contain an IMF membership provision. Bonds issued between 1993
and 2010, with values between $1 billion and $2.5 billion, yields ranging from 3.125% to 6.75%,
and maturities ranging from two to ten years, contain absolutely no reference to the IMF. Italy
made no promise to retain its IMF membership in any of these issues. In fact, the existence of the
IMF is not even mentioned. Considering Italy’s well known financial issues, the absence of a
membership provision suggests that investors believe Italy is trustworthy absent external
oversight.
vii. Belgium
Belgian bonds do not contain an IMF membership provision. Belgium has some of the
oldest bonds available on ThomsonOne, dating back to 1985, and none of the bonds, from 1985
to 2010, contain a mention the IMF. Bonds were issued in deutschemarks, euros, and dollars,
with maturities ranging from five to thirty one years, and yields ranging from 2.75% to 5.375%.
6
Belgium does not promise to retain its IMF membership or even mention the fact that it is a
b. Inconsistent Sovereigns
i. Greece
Greece’s use of the IMF membership provision is complicated, and can probably be
understood best by reference to the chart. To summarize, the provision seems to have
disappeared around 1998. The disappearance could be explained by a variety of factors, but it
appears that basic changes in how the bonds were written are to blame.
section. Later bonds dropped the acceleration language in favor of an “Events of Default”
section, where the provision appeared later in 1994. By 1998, the provision had moved to the
“Redemption and Purchase” section while other default provisions remained in “Events of
Default.” By 2002, the “Redemption and Purchase” section had been significantly simplified.
What had been a multi-page list became a couple of short paragraphs, and the membership
provision disappeared. The disappearance does not seem to have affected Greek bond yields.
ii. Venezuela
Venezuelan bonds contained an IMF membership provision until Chavez made his
announcement. Issues in 2001 and 2004, a $200 million 11% seven year and a $1 billion 7%
eleven year bond respectively, both contained the standard “ceas(ing) to be a member of the
Bonds issued in 2007 and 2009 (long term 7%) do not contain this event of default.
Instead, both state, very prominently on the first page of the prospectus, that "the provisions
relating to events of default in the Bonds differ from those contained in the substantial majority
7
of its other outstanding public issues of Venezuela's capital market indebtedness in that the
Bonds do not contain an event of default provision that would be triggered if Venezuela were to
cease at a future date to maintain its membership in the International Monetary Fund or cease to
be eligible to use the general resources of the IMF." And later in the prospectus, "the Bonds will:
not contain an Event of Default provision that would be triggered if Venezuela were to cease at a
future date to maintain its membership in the IMF or cease to be eligible to use the general
These statements indicate that the IMF membership provision has some value to
investors. If it had no value, it would be unnecessary to affirmatively state that the provision
would not be included. Other inconsistent sovereigns have not included similar warnings in the
bonds that did not contain the provision, so perhaps Venezuela was forced to give investors some
iii. Argentina
Argentina’s approach to the IMF membership provision varies with no clear pattern. In
1992, Argentina issued a $250 million 8.25% five year bond. The “Negative Pledge and
Covenants” section of this bond indicates that “(i)n the Trust Deed, the Republic has given
certain covenants to the Trustee, including a covenant that the Republic will maintain its
membership in, and its eligibility to use the general resources of, the International Monetary
Fund.” Whether a bond is governed by trust is not a factor that was analyzed in this paper, but as
a factor that may have an effect on the membership provision, it is included below as a
In 2001, Argentina issued a substantially similar bond, a $227 million floating rate with a
three year maturity that included the same language as the 1992 issue. But to complicate this
8
analysis, it issued a bond in 1999 that did not contain the membership provision. The 1999 bond
was euro denominated, but similar in other respects to the 1992 and 2001 bonds: €250 million
9.25% three year. This bond states that "It should be noted that Argentina still has recourse to
IMF assistance,” and contains a lengthy discussion of past and present IMF finances in
Argentina, but does not include a promise to retain IMF membership. The significance of this
promise’s absence is unclear, given that the promise was included in issues immediately
preceding and subsequent. Perhaps European investors care less about IMF membership, or
maybe Argentina’s European issues are just managed by different lawyers and underwriters.
In 2005, Argentina made an exchange offer on $81 billion of its outstanding debt. The
document governing this exchange notes that "(t)he IMF is Argentina's single largest creditor,"
obvious that if Argentina were no longer a member of IMF, its finances would be in absolute
chaos. However, the terms in the offer that would govern the new bonds do not contain any
promise to retain IMF membership like that found in Argentina’s 1992 and 2001 bonds. When
compared with Panama’s exchange offer, the lack of a membership provision here is mysterious,
particularly considering Argentina’s total reliance on IMF funding. Because Argentina would
default on all of its bonds if it were to pull out of the IMF (because it would have no money),
adding an explicit default provision for not retaining membership would impose no additional
obligation on Argentina. The absence of the membership provision in this exchange offer
suggests that it has little value, or that its value is reduced when a sovereign’s absolute reliance
iv. Panama
9
Panama issued bonds in 1978, 1999, 2004, 2006, and 2009, among other years. None of
these bonds contained an IMF membership provision, though the IMF was mentioned in some of
the prospectuses.
The 1978 issue, a $70 million twelve year floating rate bond, states that Panama is a
member of the IMF, and contains a relatively detailed analysis of Panama’s Special Drawing
In 1999, Panama issued a $500 million thirty year 9.375% bond that did not contain a
membership provision, did not contain the analysis of Panama’s IMF financials, and did not even
mention the existence of the IMF. It is unclear why the IMF did not come up in this bond,
Panama’s 2004 issue was for less money and less time than the 1999 issue ($326 million
19 year maturity), but carried the same 9.375% yield. This bond contained an “IMF
Membership” section that, in a short paragraph, explained Panama’s recent dealings with the
The 2006 bond, a $1.4 billion thirty year 6.7% issue, contained a similar “IMF
Membership” section. Why this section was not included in 1999, since it was included in 1978
and 2004, and the 2004 issue appears less risky but carries the same yield, is unclear. It seems
unlikely that Panama hired different counsel to draft only one bond.
In 2009, the “IMF Membership” section disappears. This $323 million six year 7.25%
bond references money forthcoming from and owed to the IMF in its financials section, but there
is no separate “IMF Membership” section, and like the previous bonds, no explicit promise to
10
The only time Panama has obligated itself to retain its IMF membership was in 1996,
when the country attempted an exchange offer for $70 million of past due bonds. The document
governing this offer provided for varying yields and maturities based on the note to be
exchanged. A characteristic that would be common among all new notes was that “The Republic
default.
The inclusion of the IMF membership provision in this offer suggests that its inclusion
makes a bond more valuable, and that investors trust the IMF to provide some oversight over a
sovereign with a history of default. When Panama was particularly desperate for money because
it was in default to past bondholders and presumably was in need of spending cash, the only way
it could access the international markets was by promising to remain a member of the IMF, a
While the 1996 Panamanian offer provides some support for the proposition that
investors view IMF membership as some sort of extra guarantee, that support is somewhat
negated by the absence of the membership provision from later issues. The 1999 issue, only three
years after the exchange offer, does not even mention the IMF. If the membership provision was
essential to accessing capital markets in 1996, it would stand to reason that it would be essential
in 1999 as well. The transition from being in default to being stable enough to guarantee a thirty
year bond seems like it would take more than three years. So, the significance of the membership
III. Conclusion
The factors considered in this paper do not adequately explain the occurrence or
importance of the IMF membership provision. If the provision had substantial value as a
11
reassurance to investors that some outside body was overseeing the sovereign, bond yields or
maturities should change depending on whether the provision appears. This is not the case. The
size of the offering, the yield, and the maturity appear completely unaffected by the presence or
lack of the membership provision. Less obvious factors like the currency in which the bond is
It would stand to reason that, if external oversight was the purpose of the provision, then
less economically stable countries would use the provision more often than stable countries. This
does appear to be true, but to such a limited extent that economic stability is at best an
incomplete explanation for the presence and value of the provision. Of the countries examined,
less stable Central and South American countries included the provision more than their more
stable European counterparts, but countries like Chile and Panama have never used the
This paper is probably most valuable as a starting point for future research. There are
many more factors that could explain the occurrence and significance of the IMF membership
For example, my research was based only on prospectuses filed with ThomsonONE. I did
not consider whether the bonds were issued under a trust, or another type of agreement. Bonds
that were issued under trust agreements may have governing documents other than the
prospectus, documents which could contain the IMF membership provision or some other
Regardless of the bond’s structure, the membership provision I looked for may be
unnecessary because of some other provision. If some other language has the same substantive
12
effect as the membership provision, the provision’s inclusion in some bonds can be explained by
counsel’s laziness or predilection towards repetition. For example, most bonds contain language
to the effect that a default on any other “external indebtedness” would constitute a default on the
bond. Whether dropping out of the IMF, and failing to repay any funds lent by the IMF, would
constitute an external indebtedness default is beyond the scope of this paper, as are any other
The attached spreadsheet contains the section in which the provision appeared, and the
language used in each provision, as well as any non-binding references to the IMF. Whether
variations in the language of the provision or the heading under which it is located has any
meaning is unclear.
IMF membership may change in relative importance based on a country’s IMF quota
compared to its SDR or other funds owing to the IMF. I did not analyze, with the slight
exception of Venezuela, any country’s financial standing with the IMF. It could be that the
membership provision is more important as the country borrows more, relative to its quota, from
the IMF.
Also not considered were such factors as: who drafted the bond, who underwrote the
issue, who acted as counsel for the sovereign and the underwriters, or on which exchange the
bond was listed. Analysis of any of these factors could provide greater insight into the IMF
membership provision.
13