THE WORLD BANK Internal Discussion Paper Report No. IDP-0030 Debt Reduction Schemes and the Management of Chilean Debt Felipe Larrain (consultant) March 1989 Office of the Vice President Discussion Papers are not formal publica.ions of the World Bank. They present preliminary and unpolished results of country analysis or research that is circulated to encourage discussion and comment; citation and the use of such a paper should take account of its provisional character. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the cntimpe ihe reprsnnc f LAC DISCUSSION PAPER SERIES Report No. Title, Author and Date IDP-3 "An Analysis of the Sources of Earnings Variation Among Brazilian Males" by Marcelo Dabos and George Psacharopoulos, December 1987 IDP-4 "The Efficiency and Effectiveness of Export Credit and Export Credit Insurance Programs" by Bruce Fitzgerald and Terry Monson (Consultant), December 1987 IDP-9 "Export Processing Zones: The Economics of Offshore Manufacturing" by Peter G. Warr (Consultant), August 1987 IDP-10 "Dumping, Anti-dumping and Efficiency" by Bruce Yandle and Elizabeth M. Young (Consultants), August 1987 IDP-11 "The Regulation of the Quality of Traded Commodities and Services" by Simon Rottenberg and Bruce Yandle (Consultants), June 1987 IDP-12 "Argentina: Problems for Achieving Macro Stability" by F. Desmond McCarthy and Alfredo E. Thorne, January 1988 IDP-13 "Argentina: Towards the Yeaz 2000" by F. Desmond McCarthy, June 1987 IDP-14 "Trade Liberalizations The Lessons of Experience", Papers presented in the conference "Toward a New Trade Policy for Brazil", Sao Paulo, April 11 and 12, 1988 IDP-16 "Aspects of Privatization: The Case of Argentina 1976-81" by R. Luders (consultant), April 1988 IDP-17 "Aspects of Privatization: The Case of Chile 1974-85", by D. Hachette (consultant), April 1988 IDP-18 "Privatization in Argentina and Chile: Lessons from a Comparison" D. Hachette and R. Luders (consultants), April 1988 IDP-19 "Principles of Water Supply Pricing in Developing Countries" by Mohan Munasinghe, June 1988 IDP-20 "The Status of Energy Economics: Theory and Application" by Mohan Munasinghe, June 1988 IDP-21 "What are the Prospects for Land Reform?" by Hans Binswanger and Miranda Elgin (consultant), August 1988 IDP-24 "Managing Argentina's External Debt: The Contribution of Debt Swaps", Carlos Alfredo Rodriguez (consultant), January 1989 IDP-29 "Managing Mexico's External Debts The Contribution of Debt Reduction Schemes", Allen Sangines (consultant), January 1989 IDP-30 "Debt Reduetion Schemes and the Management of Chilean Debt", Felipe Larrain (consultant), March 1989 Debt Reduction Saems and the of Chilean Debt * Felipe Iarrain** * This paper was written as a part of the research project Managing the Iatin Jerican Debt: 2he Contribution of Debt Sap",, (I0674-36) and was partly finaoed by the research project funds. * PAntificia Universided Catolica do Chile and Harvard University. I an indebted to Edgardo Barandiaran, Juan Andrea Fontaine, Ricardo Ffrench-Davis, Paul Ievy, Ricardo Matte, Franco Miodiliani, Jeffrey Sachs, Andres Sanfuentes, Andres Velasco and to the participants of seminars at Boston University, CIEPLAN and Pontificia Universidad Catolica do Chile for their caments. I have also benefitted from the able assistance of Angel Cabrera. Table of Contents Page No. 1. Introduction................................................1 2. Background..................................................3 2.1 Chile's Foreign Debt: a Historical Perspective..............3 2.2 The Renegotiation of Chilean Debt........................... 2.3 An Attempt at Debt Reduction................................7 3. The Reduction of Private Sector Debt........................9 3.1 The Declining Share of Private Debt, 1982-88................9 3.2 Informal Schemes of Debt Reduction.........................10 3.3 Official Schemes of Debt Reduction.........................14 3.4 Concluding Comments........................................16 4. The Reduction of Public Sector Debt........................18 4.1 Public Finances and the Focus of Debt Reduction............18 4.2 Public Debt Reduction in the Thirties: Issues and Lessons..19 4.3 Current Schemes for Reducing Public Debt...................22 4.3.1 Discounted Repurchase of Public Debt.................22 4.3.2 Discounted Capitalization of Public Debt.............25 5. The Macroeconomics of Debt Reduction.......................30 5.1 Wealth and Liquidity Effects...............................30 5.2 The Domestic Financing of Debt Repurchase..................31 5.3 The Transfer Problem in Debt Repurchase....................32 5.4 The Transfer Problem in Debt Conversion....................36 Appendix: Chile's Ability to Pay and the Value of Chilean Debt.38 6. New Strategies for Reducing Chile's Foreign Debt...........40 6.1 Elements for an Optimal Strategy of Debt Reduction.........40 6.2 Discounted Securitization of Public Debt: a Copper Bond....41 7. Conclusion.................................................44 References .................................................46 1. INTRODUCTION Chile's foreign liabilities, as those of many developing countries, increased dramatically during the second half of the seventies and the early eighties. After the depression of 1982-83, the country's debt climbed over 100 percent of GDP, a combined effect of the economic crisis and of real depreciation of the Chilean gs. Since the beginning of 1985, the country's external position has strengthened significantly. The international environment has improved and there has been response from nontraditional exports and from import substitution. In 1988, copper prices reached historical peaks and the current account deficit was reduced to less than 1 percent of GDP. However, the conditions of 1988 are transitory. Copper prices are widely expected to deteriorate and interest rates are moving upwards. Foreign exchange pressures are bound to resume in the near future. Unfortunately, the external debt problem is not over. The difficulties of repayment and the growing perception tt.at the current international debt strategy is not providing a solution to the debt crisis,I have deepened tha discounts on Latin American debt. Chile is no exception to this trend. Since the midd .e of 1985, the country has formally established two market-based mechanisms to reduce its foreign debt. One allows for debt repurchase; the other for the conversion of debt into equity. By the end of 1988, US$4.2 billion of Chile's external debt were reduced through them. This corresponds to 29 percent of commercial bank debt as of December 1985, the year these operations started. This paper is focussed on the analysis of debt reduction schemes from the perspective of the debtor country. A central aspect of the analysis is the distinction between public and private debt and its relationship to the debt-reduction mechanisms that each sector has used. In particular, we analyze the current schemes of repurchase and capitalization of debt within the Chilean context. While studying the effects and results of existing mechanisms, we also explore new alternatives. The analysis considers their potential to reduce foreign obligations, the benefits that the country obtains from them and their various macroeconomic consequences. The paper is organized as follows. Section 2 provides a brief background on the accumulation of Chile's debt, the evolution of debt strategies, the regulatory framework of debt-reduction schemes and the results achieved so far. The next section is focussed on private debt and the mechanisms used for its reduction. The dividing line is between formal schemes, i.e., those established by the Central Bank to reduce debt, and informal ones, that is, those resulting from the direct negotiation of debtors and creditors outside the formal mechanisms. Section 4 is centered on the public sector, starting from an evaluation of its overall financial situation. Then, it analyzes the lessons from the experience of debt reduction in the thirties, and the existing mechanisms for reducing public 1 See Edwards and Larrain (1988) for an analysis of these issues. 2 debt. Section 5 discusses the macroeconomic effects of debt reduction schemes: their liquidity and wealth effects; the domestic counterpart of debt repurchase, which generally involves an increase in domestic liabilities; the generation of foreign assets for the repurchase of debt; and the changing pattern of financial outflows involved in debt capitalization. The next section explores a new scheme to reduce debt. A conclusion closes the paper. 3 2. BACKGROUND This section starts with a brief analysis of the process of debt accumulation during the second half of the seventies and the early eighties. Then, it discusses the main features of Chile's debt renegotiations. Finally, it presents a description of the different debt-reduction schemes and of the volumes operated through them. 2.1 Chile's ForeiUn Debt: a Historical PersRective2 Much as it occurred in other Latin American countries, Chile accumulated a substantial foreign debt in the late seventies and early eighties, which by the end of 1988 accounted for 95 percent of GDP. Even if this was a generalized phenomenon, what is peculiar about Chile was the relative participations of the private and public sectors in this process. During the second half of the seventies, Chile experienced a recovery from the steep depression of 1972-75. The recovery gave way to a boom in the period 1979-81, when a major change of expectations occurred, from a sensible assessment of Chilean prospects to the illusion of a sustained, high rate of growth.3 The boom was principally financed with foreign loans, which allowed an unsustainable expansion of private expenditure for both consumption and investment. External debt increased as a consequence of the surge in domestic demand for credit. In addition, dollar loans were made particularly attractive by the fixed exchange rate policy pursued between 1979 and 1982, which rendered those loans comparatively cheap while that policy was credible.4 Interestingly, capital flight played a very minor role in the accumulattcr of Chile's external debt. This issue has received much attention, since it accounts for a substantial portion of other Latin American countries' debt. From 1975 to late 1979, foreign borrowing by the private sector was used mainly to accumulate international reserves by the Central Bank. Later, in 1980-81, it went to finance the unsustainable path of private spending, which translated into huge current account deficits. The most comprehensive study available about Chile's capital flight5 concludes that this was not significant for the 1975-81 period, when indications exist that an unregistered private capital inflow occurred. Capital flight was more important during 1982-83 when it was estimated at around US$1 billion. Thus, it accounts for about 5 percent of the country's foreign debt, a modest figure for Latin American standards. 2 This section is partially based on Larrain (1988). 3 Barandiaran (1983) has stressed the exogenous change in expectations as an important cause of the boom. 4 Judging by the estimates of speculation against the peso, it seems that the fixed exchange rate policy was credible until late 1981. 5 Arellano and Ramos (1987). 4 The Regulatory Environment In the early stages of the military government, the access of Chilean banks to external credit was practically limited to the financing of foreign trade. Open access to outside loans was a reality only for the non-financial private sector, which between 1975 and 1978 accounted for over two-thirds of external loans. This option was limited in practice to a small group of companies which by virtue of their size or productive activities had direct relations with foreign banks. The various restrictions which banks faced for external loans were gradually lifted, and then sharply relaxed in mid-1979. For example, banks were originally constrained in that their total stock of foreign debt could not exceed 100 percent of their capital base. This limit was gradually raised to reach 225 percent in April 1979 and was effectively eliminated in April 1980. At that point the only quantitative constraint for the external liabilities of a given bank was that its overall debt-to-capital ratio could not exceed a twenty-to-one limit. The relaxatlion of restrictions on the capital account, at a time of abundant supply of international loans, closely mirrors the oehavior of the external debt of the country. As can be judged from Table 1, the country's total foreign liabilities were constant in net terms -that is, after discounting international reserves- and suffered little variation in gross levels between 1975 and 1977. This situation changed in 1978, when Chile contracted US$1.4 billion in external credits, and especially so between 1979 and 1981, the period of the boom. The Borrowers What is perhaps striking was the way in which the external borrowing was divided between the public and private sectors. Standing in sharp contrast to other Latin American experiences such as Argentina, Brazil, Mexico and Peru, more than 100 percent of Chile's net increase in foreign debt during this period was accounted for by the private economy. As evident from Table 1, net public debt shows a decline in every year between 1975 and 1980. This trend was particularly strong in 1979-80, the time of the boom. Since the gross foreign public debt rose during the period 1975-80, it is clear that more than 100 percent of the increase was used to build up international reserves, which started from a negative level in 1975. This performance of the public sector was made possible by the sharp fiscal reform started in 1974, which reversed an overall deficit of over 30 percent of GDP to a consistent surplus from 1976 to 1981. It was also a natural consequence of the military government's economic policy. Their idea was to minimize the role of government in the economy, leaving all the room possible for private agents. If these were the ones who borrowed abroad it was not dangerous, the authorities thought, because they would have carefully evaluated the uses of the funds. In contrast to this conservative public behavior, the private sector � � � � � � � � � �� � � � � � ��������������� ������������Rmm �� � �0�0 �Ф �� �� �� �"�1� �в�в � �'► �в�i �l�V �� �10 VV т � � � � �� х� �� �т, � � � � т� �� � � � Sii �i :а й � � � � � �i � й , � �^ .. ��� � � � � � � € � � � � � � . л й �� ��' д� S�e �:е :g i: r+ а ёа ;� i°. .°S � '� g .в Fi � � �е ir° � �3 � �� �� � � � � � � � � т � � � � �� h ♦л�i М � �� в�iФ Ф� Й т �� АФ в^1 гА �Ф � g � �� �� �� �� �� �� �� �� �у �� �� �� �� �� �° � �� й� н ��� � � � � � � � � � � � � � �� � :.� а �m� i в��1 т1Иq � ^ W А N � рΡQWj � рΡQ�1 �уΡ� � Ф � � в��0 в� � � в� � М в�М � М � р А F о �$ � aw� � й �ь.а м. � � � � � � � � � � � � � � � � � � � ° ��� � � �`8 -� � � �6 �� � � � � � � � � � � � � � g � �..� ��� � и V � � � � � � � � � � � � � � � 5 took advantage of the capital account liberalization and the liquidity of international markets. Private borrowing was mostlf done through commercial banks, who acted* as intermediators of funds between the international financial centers and the Chilean economy. As Table 1 shows, banks increased their foreign obligations by a mere US$500 million between 1975 and 1978, a period when most foreign loans were contracted by the non-financial private sector, and tien went on to borrow US$6 billion during the next three years. By 1981, over 65 percent of Chile's external debt was in private hands, two- thirds of it in commercial banks. However, the unsustainable path of expansion in private foreign liabilities came to an abrupt end in early 1982, as external creditors reevaluated the situation of the country even before the outbreak of the Third World debt crisis. 2.2 The Renegotiations of Chillan Debt In the midst of the generalized debt crisis of 1982 and of strong instability in d---estic policies, it became apparent that no voluntary lending would be available to cover the foreign exchange gap of the coming years. By the end of 1982, Chile faced a structure of amortizations and interest payments that were impossible to comply with using the country's own resources. The basic Chilean strategy to deal with the debt problem since 1983 has been one of cooperation with foreign creditors, within the boundaries of the international debt strategy. Chile's negotiators have bargained for the extension of repayment periods, the repricing of old and new credits, the obtention of new money to cover the payments gap and the retiming of interest payments. The country has, so far, stayed current on its debt service. Only in April 1988, debt negotiations opened the door for limited amounts of diract debt repurchase and debt securitization at a discount. Commercial banks have been represented by an Advisory Committee at the negotiating table. This has been able, in the Chiloan case, to ensure acceptance of the terms and contributions of new money from the remaining creditor banks without significant delays. Agreements with banks have always been preceded by IMF programs. In fact, banks have relied principally on the IMF to monitor the country's performance and adjustment effort. Since 1985, the World Bank has also become involved in this process. The conditionality of IMF and World Bank programs has found a st'-ostantial coincidence with the economic policies of the Chilean authorities. The most important features emerging from the subsequent rounds of negotiations with creditor banks, by far the most important creditors as a group, are: (a) The spreads over LIBOR for new money have consistently and substantially decreased, from 2.25 percent in the 1983 round, to 1.625 percent in the 1985 agreement. Once-and-for-all fees have followed a similar trend, from 1.25 percent to 0.5 percent respectively. After 1986 Chile has not requested now money. (b) The repricing principle has become part of the negotiations since 1995, 6 both for new monies provided after the 1982 crisis and for old loan.s. In the 1988 round, the spreads on all post-1982 credits were lowered to 7/8 percent over LIBOR, while spreads on older debts came down to 13/16 percent over the same basis.6 The generalized reduction of spreads and fees and the lengthening of maturities is an indication ct the banks' recognition that the conditions imposed on the first renegotiations were a significant incentive for countries to default. (c) Each restructuring has lengthened the repayment period of old debt and has provided increasingly higher grace periods. Reschedulings have not only applied to medium and long-term loans prior to the 1985 crisis, but also to new money provided since 1983. Occasionally, short-term credits have been converted to longer-term ones. (d) The amount of new credits, provided by banks has declined year after year, both in absolute terms and as a proportion of the country's financial requirements. In contrast, multilateral organizations have contributed a growing share of Chile's needs. For 1987 and 1988, no new money from commercial banks have been available. (e) The retiming of interest payments has been used as a way to finance the country's payments gap. In the 1985 agreement with commercial banks, interest payments started to be made every 180 days, instead of the previous 90 days. It implied a once-and-for-all savings of US$170 million in interest service during 1985. This principle was applied again in 1987 when the periodicity of payments was moved to 360 days. This time, the savings amounted to US$420 million in 1988. (f) The government has guaranteei private financial debt, first at no cost for foreign banks. Later on, in the 1985 round, a small fee began to be charged. Although the State has not had to respond until now for the guarantee, it has borne a substantial portion of the private debt burden through various types of debt-support programs. These issues are analyzed in the beginning of the next chapter. A summary of the main elements in Chile's debt renegotiations is shown in Table 2. 6 Trends (a) and (b) are not specific to Chile, but rather common to Latin American debtors. In the 1987 round, Argentina and Mexico got better terms on interest rate (0.125 percent less) than Chile's restructuring. This is the result of three factors: (i) Banks are more exposed to Argentina and Mexico and thus are willing to go far in order to avoid a suspension of payments, especially after Brazil's moratoria of February 1987. (ii) The US government put strong pressure on banks to sign Mexico's agreement on soft terms, whic.h in turn set a precedent for Argentina. (iii) Chile's negotiators seem to put a premium on reaching an agreement soon and thus are willing to give up marginally better conditions. However, in 1988 Chile obtained the same spreads that Argentina and Mexico received a year earlier. Table 2 TERMS OF RENEGOTIATION OF EXTERNAL DEBT, 1983-88 A. Terms for New Money (NM) NM 1983 (1)(5) NM 1984 (5) NM 1985186 (5) NM 1987188 Amount (US$ million) 1,300 790 1,085 0 Maturity (years) 7 9 10 Grace Period (years) 4 5 5 Interest rate (%) LIBOR + 2-1/4 LIBOR + 1-5/8 LIBOR + 1-5/8 or Prime + 2-1/8 or Prime + 1-1/2 or Prime + 1-1/4 B. Terms for Restructuring of Old Loans Restructurins Agreement 1983/84 (2) 1985/87 1988189 (3) Amount (US$ million) 3,140 5,940 12,490 Maturity (years) 8 12 16 Grace period (years) 4 6 6 Interest rate (2) (4) LIBOR + 2-1/8 LIBOR + 1-3/8 LIBOR + 1 or Prime + 2 Frequency of interest payments (days) 90 180 360 Source: Central Bank of Chile. (1) In November 1985 the conditions were modified to a maturity of 12 years; 5 years of grace; interest rate of LIBOR + 1-3/4 or Prime + 1-1/2. (2) In November 1985 the interest rate was changed to LIBOR + 1-3/8. (3) This agreement also changes the conditions of previous restructurings to LIBOR + 1. In April 1988 the rate was reduced to LIBOR + 13116. (4) Corresponds to the rate charged on debt outstanding at January 31, 1983, once restructured. (5) The contracts were changed on February 1987s (a) Prime rate was eliminated as a basis; (b) the new rate was set at 1-1/8 over LIBOR. On April 1988 the rate was modified to LIBOR + 7/8. 7 2.3 An Attempt at.Debt Reduction After the 1982 crisis, secondary markets for third world debt started to develop and have since experienced substantial growth. Discount on Chilean debt on these markets was over 30 percent from the outset. Thus, while interest was accrued on the full value of debt, secondary markets valued this debt at less than 70 percent. This gave an incentive for some debtors to repurchase their obligations. These developments induced the Central Bank to provide a regulatory framework for debt reduction. Formal mechanisms were established for this purpose in mid-1985. One was designed for debt repurchase by nationals; the other regulates debt capitalization by foreign investors. This schemes have been used parallel to continued renegotiations with creditors. The debt repurchase mechanism (Chapter XVIII) allows private agents to purchase debt certificates of maturity over one year in the international secondary market in order to negotiate their prepayment with the Chilean debtor. The proceeds of this operation were originally intended to reduce the local debts of the agents who bought the debt certificatet abroad. However, it was soon allowed that the proceeds could be used for any purpose. This indirect repurchase (i.e., through a third party), is a way to circumvent the sharing clause that preempts debtors from prepaying their own debt to a particular creditor, unless the same deal is made available to all foreign creditors. There are two extensions of this mechanism. Chapter XVIII Annex 4 allows nationals to purchase foreign debt of troubled local companies to be capitalized in the same debtor company. Chapter XVIII Annex 5 enables domestic mortgage debtors to purchase Central Bank debt abroad (through an intermediary) and to capture part of the discount to reduce their own local debts with the banking system. The debt capitalization scheme allows the use of foreign debt certificates -only with original maturity over one year- for external agents investing in Chile. If the foreigner plans to invest in a firm where he is a creditor, the operation involves only a debt-equity swap in the domestic firm. These operations are known as Capitalizations D.L. 600.7 The more general case is that an offshore corporation or agent brings debt of a different local firm than the one where the investment will occur. In this situation, the debt certificate will have to be negotiated bet,een the foreign investor and the local debtor. The proceeds of the sale will then be capitalized where the investment actually takes place. The legislation governing these operations is Chapter XIX of the Law of International Exchanges. A brief description of these mechanisms and their restrictions is provided in Table 3. The Results of Debt Reduction As of December 1988, swaps have reduced US$6.2 billion of Chile's foreign debt. Out of this total, the formal schemes of debt repurchase and 7 Decree Law 600 is the Chilean foreign investment statute. Lable S THE FORMAL MECHANISMS OF DEBT REDUCTION Debt Repurchase Debt Capitalization Chapter XVIII Chapter XVIII Chapter XIX Capitalization Annexes 4 and 5 D.L.600 Description Indirect debt . Repurchase of a Debt-equity swap by Debt-equity swap repurchase by company's debt by foreign investor by foreign nationals. nationals, to (debt of a different investor (debt of capitalize that firm where the the sase fire company (Annex 4). Investment occurs). where the . Repurchase of Investment Control Bank debt on occurs). behalf of mortgage debtors to reduce their local debts (Annex 5). Restrictions . No access to . No access to . Central Bank . Ides to Chapter official exchange official exchange approval needed on XIX but better rate market. merket. case-by-case beaes. legal autue (that . Need to have a . Central Bank . Profit remittances of Decree Law quota auctioned by approval needed on a only after four 0). Central Bank. (1) case-by-case heae years. (2) . Public agents (no need for a . Capital and private quota). repatriation only financial firms . Debtore not allowed after ton years. (2) not allowed to to repurchase their repurchase their debts directy. debt directly. Notes: (1) Quotas are auctioned by the Central Bank on a monthly or bimonthly beae. Initially, quotas were allocated to commercial banks according to their capital. Since September 19865, quotas began to be ouctioned among doentic banks. The quota gives the right to repurchase debt through an Itermediary. (2) Conditions are slighly stricter for portfolIo investmentes In mutual funds (Chapter XIX Annex 2): profit repatriation after five years and capital repatriation after twelve years. 8 debt capitalization account for US$4.2 billion, or 29 percent of the country's commercial bank debt outstanding in December 1985, as Table 4 shows. Informal mechanisms, which are principally direct repurchases and condonations of debts, account for the remaining US$2 billion. The private sector has been the most important user of debt reduction schemes, with almost two-thirds of the total value of operations. This helps to explain the significant decline of private debt since 1985. Including all debtors, the most significant mechanism has been Chapter XVIII, with 34 percent of the total, while Chapter XIX accounts for 30 percent. Interestingly, direct operations, condonations and other informal operations surpass Chapter XIX's value of transactions. Debt swaps have allowed a substantial reduction of US$1.77 billion in the nominal value of Chile's total external debt since 1986. Were it not for the depreciation of the US currency vis-a-vis those of other industrialized countries in the 1985-87 period, the reduction in dollar debt would have been larger (see Table 5). Toble 4 EXTE~NAI. DEBT REDCTION WY DEDTOR AND MEaHANISM (million* of U"8, accumulated a of June 1988) Forual Schm. Informal Scheme Debt Repurchae Debt Capt1allxaton Chapter Chapter C8p1t8ll8. Portfollo Total XVIII XIX Ø.L. 6N Swaps Other (1) US$ M () Public Sector S6,J 824.8 . ". 68.4 2169.6 84.9 .Finencial 643.8 6".8 6.6 81.5 298.9 1564.0 24.2 (Central Sank) (464.6) (882.4) (6.9) (26.1) (298.9) (1172.0) (aneo dol Estado) (178.7) (147.9) (6.6) (5.4) (6.9) (332.6) - .NOnfnancial 162.4 94.6 6.6 27.1 381.6 66M.1 16.7 Private Setor 1j26.2 1214.7 278.2 77.2 1161.2 4951.5 65.1 .Financlal 12386. 1218.6 166.6 79.4 75.9 2745.4 44.1 (w/pubile guaratee) (441.8) (462.4) (6.6) (31.8) (6.6) (985.5) (no public guarantee) s794.2) (781.1) (16W.5) (89.1) (76.6) (189.9) .Nonfinancial 89.2 1.2 122.7 6.8 186.2 186.1 21.6 Tota i 219. 1839.6 2732 186.8 1841.6 822. 190.6 Source: Central Sank ef Chile Note: (1) Includeo Chapter XVIII Annex 4 end Annex 5. (2) Includes dlrct repurchas@ end condonatlonu (the diroct buyback ef Control Bank døbt lo counted here). Table 5 ESTIMATED EFFECT OF DEBT REDUCTION OPERATIONS ON CHILE*S EXTERNAL DEBT, 1985-88 (US$ millon) 1985 1986 1987 1988 1. Potential sources of increase 1,599 1,477 1g408 359 in gross foreign debt . Current account deficit 1,329 1,137 808 170 . Valuation effects (1) 270 340 600 189 2. Non-debt sources of financing 524 191 -525 -841 . Foreign investment (cash) 62 57 97 140 . Use of reserves 99 228 -46 -625 . Other (2) 363 -94 -576 -356 3. Increase in foreian debt before debt-reduction operations 1,075 1,286 1*933 1,200 4. Value of debt-reduction operations 330 984 1,979 2,928 5. Final effect on the dollar value of the foreign debt 745 302 -46 -1,728 6. Stock at end of year 20.404 20,706 20,660 18,932 Sources Central Bank of Chile and calculations of the author. Notes (1) Effect of foreign currencies' fluctuation on the dollar value of Chilean debt. (2) Residual variable. 9 3. THE REDUCTION OF PRIVATE SECTOR DEBT The basic organization for this section and the next one can be seen from Table 4. Our aim is to highlight the crucial distinction between private and public debt; in each case, we will differentiate between formal and informal operations. Alternatively, the analysis could have been organized by mechanism of debt reduction, giving a lower emphasis to the public/private dichotomy. This chapter focuses on private debt and starts with an analysis of its sharp decline since 1982. It goes on to study the different schemes of debt reduction used by the private sector. 3.1 The Declining Share of Private Debt, 1982-88 From 1982 to 1988, a dramatic change has occurred in the structure of the country's foreign obligations. In 1981 the private sector accounted for 65 percent of Chile's total external debt and the remaining 35 percent was in public hands. By the end of 1988 these figures have been more than reversed, with almost 70 percent of total debt belonging directly to the public sector (see Table i). This process has been the result of a set of factors: (a) The country has been unable to generate a surplus in the trade of goods and non-factor services to cover interest payments on international loans. Up to 1987, this magnitude never covered half of the annual interest bill, which currently stands at about US$1.9 billion. Thus, Chile has had to resort to foreign borrowing to bridge the gap. Since the private sector has, to a large extent, lost access even to the "involuntary" loans of the post- 1982 period, the external gap has been mostly covered with loans to the public sector. In particular, all new money provided by creditor banks has been lent to the Central Bank of Chile. This institution has experienced the highest increase in foreign debt of the post-1982 period (around US$4.7 billion). All in all, the public sector's debt has risen by about US$7.8 billion after 1982, while private debt has declined by US$4.8 billion. (b) The relative (and absolute) decline of private foreign debt has also been due to the differential use of debt-reduction mechanisms. Almost two- thirds of debt reduction correspond to private sector operations. (c) The public sector absorbed directly private foreign liabilities in the banks' intervention of January 1983. (d) A minor counterweight to this process was the privatization of US$388 million of public debt, due to the divestiture of 5 big state enterprises (CAP, CHILGENER, CHILMETRO, ENAEK and ENTEL). The guarantee over private debt A careful look at Table 1 shows that the 70-30 distribution of foreign loans between the public and private sectors underestimates the overall public share in the country's debt burden. The guarantee over private debt increases the potential cost of debt service for the public sector. 10 The bank interventions and closures of January 1983 had serious effects on the public responsibility over Chilean debt. The authorities had expected that the foreign banks would stand in line as any other creditor, to try to recover whatever was possible out of the almost US$4 billion of external debt that the intervened and closed banks held. But the foreign banks were unwilling to accept this argument and the Chilean negotiators were unable to impose it. Thus, the State of Chile became the new creditor for the US$360 million of debt of the closed banks. Moreover, it agreed to guarantee the financial sector's foreign debt as it became due. In every subsequent round of reschedulings, the public sector guaranteed a new portion of private financial debt. The stock of publicly guaranteed liabilities grew every year during 1982-86, as shown in Table 1. By the end of 1988, debt swaps have decreased potential government liabilities by reducing US$935 million of publicly guaranteed private debt. Until 1985, the State of Chile received no compensation from the creditor banks for this service. In November of that year, for the first time, foreign banks agreed to pay a small fee for this service. Up to now, the State has not had to respond explicitly for its guarantee. However, as Ffrench-Davis and De Gregorio (1985) have argued, the public sector has in practice borne substantial part of the cost of private sector's debt obligations through different types of debt-support programs, without which the State guarantee would have surely had to be effected. Their financing led the public sector to increase its foreign liabilities well beyond what would have been needed in their absence. These programs have been a crucial part of the government's strategy to deal with the financial crisis. The most important among them have been the preferential exchange rate for dollar debtors, the subsidized restructurings of domestic liabilities and the Central Bank's purchase of commercial banks' bad loans. 3.2 Informal Schemes of Debt Reduction Private debc declined after 1982, both in absolute and relative terms. By the end of 1988, only US$5.7 billion of private liabilities were outstanding, half of this guaranteed by the State. However, only medium and long-term debt with commercial banks is currently subject to debt reduction. It is interesting to notice the sharp decline in private commercial bank debt since 1982 (see Table 6). Most of the external credits of the 1977-82 period were obtained from foreign banks; by 1982 these institutions accounted for 91 percent of the private sector's medium and long-term external liabilities. After that, the creditor banks have been engaged in a systematic effort to decrease their exposure. Their outstanding loans to the private sector have declined by over US$4.4 billion since 1982. By the end of 1988, the potential for reduction in private debt is focused only on US$3.3 billion out of its total of US$5.7 billion. Two-thirds of this belongs to the financial sector, almost all of it guaranteed by the State. The development of secondary markets provided an opportunity for private debtors to attempt repurchasing their debt. However, the Central Bank of Chile maintained legal control over foreign exchange transactions, restraining widespread participation of domestic agents in these markets. In Table 6 MEDIUM AND LONG TERM PR7VATE DIST BY CREDITOR (US$ million, ?ear and) Multilateral Government Commercial Institutions Agencies Banks Suppliers (1) Other (1) Total 1982 0.0 13.2 7,755.7 443.2 445.7 8,567.8 1983 0.0 10.7 7,372.8 326.4 432.3 8,142.2 1984 10.9 9.6 7,344.6 252.6 445.2 8,062.9 1985 19.0 8.1 6,463.5 166.9 472.2 7,129.7 1986 23.5 14.6 5,692.9 175.3 463.3 6,369.6 1987 75.0 25.3 4,225.0 245.2 569.5 5,140.0 1988(2) 96.0 52.3 3,339.3 276.4 637.5 4,401.5 MEDIUM AND LONG TERM PRIVATE DEBT WITH COMMERCIAL BANKS Financial Non-financial Total Guaranteed Non-iuaranteed 1982 0.0 4,971.0 2,784.7 7,755.7 1983 1,401.0 3,394.1 2,577.6 7,372.8 1984 1,700.8 3,368.7 2,275.1 7,344.6 1985 1,995.1 2,690.6 1,777.8 6,463.5 1986 2,928.8 1,296.0 1,468.1 5,692.9 1987 2,669.5 501.6 1,053.9 4,225.0 1988(2) 2,049.7 149.2 1,140.4 3,339.3 Source: Central Bank of Chile Note: (1) Suppliers debt and "other" debt belong only to the non-financial sector. (2) Prel4minary figures. 0 11 spite of this, some local debtors started to repurchase their liabilities, escaping the control of the authorities. These direct operations could be done in a number of ways. For example, a domestic debtor prepaid its debt in local currency (which was allowed by the Law of International Exchanges) and the creditor bought dollars in the parallel market and sent them abroad. Alternatively, the local debtor could directly repurchase its liability abroad, without giving notice to the Chilean authorities. Although these operations are not outright illegal, they are also not strictly legal, since they are not specified in the Law of International Exchanges. In fact, there is no consensus among lawyers about their legal status. The information available about these direct, informal operations is incomplete. Condonations, direct repurchases of debt and even direct conversions are grouped under the category "other" by the Central Bank, but their breakdown in not available. It appears that some 85 percent of the operations under "other" correspond to direct repurchases at a discount.8 The total value of private debt reduction through these transactions was US$1.16 billion as of December 1988, or 18 percent of private liabilities with commercial banks9 (see Tables 4 and 6). Almost all these operations are concentrated on the non-financial sector. This stems from the tight control exercised over financial corporations, which are forced to pay the Central Bank a fee for debt repurchases through the scheme of Chapter XVIII (see Section 3 in this chapter). Non-financial firms are much more difficult to control and thus are better able to avoid the payment of the fee. The US$1.16 million figure only includes the operations recorded by the Central Bank. But it is widely recognized that other direct transactions may have occurred beyond the knowledge of the monetary authority. For example, many "back-to-back" loans came to Chile, which were granted after an equivalent deposit was made in the lending bank abroad with offshore funds of the local debtor. After 1982, it is highly probable that the loan was paid with the offshore deposit. The debtor, however, might have not told the Central Bank about the transaction, both to avoid potential legal problems, and to maintain the access to foreign exchange at the official rate to repay the "debt". In fact, it is extremely difficult for the Central Bank to learn about direct repurchases if the local debtor does not inform them about the operation. Thus, debt repurchases are, in all likelihood, larger than those reported in Table 4, but there is no clear way to estimate the bias. Among the most important private informal operations known are those of INDUS, CCU and Gildemeister. In all these cases the companies faced imminent insolvency if forced to service their outstanding liabilities. The foreign debt reduction was part of an overall restructuring of their obligations. 8 See Fontaine (1988). 9 The base for this figure is the stock of debt as of December 1985, the year formal mechanisms were started. This base date will be kept in what follows. 12 CCU (the biggest Chilean brewery) obtained a gradual condonation of US$66 million of debt. This will occur over ten years, starting in 1987, at the same time that the remaining debt of the company is served. Gildemeister (a machine supplier) converted US$30 million of foreign debt into preferred stock. This was the outcome of a direct negotiation between the company and its commercial bank creditors. A less important informal mechanism used to reduce private foreign debt is portfolio swaps. Through this operation, a domestic bank trades in an external asset (i.e., a debt of a foreign company) for debt of a Chilean entity held by an offshore bank. In this way, gross -but not net- Chilean liabilities are reduced. The total value of these transactions amount to less than US$100 million. The Debtor's Decision to Reduce Foreign Debt From a debtor's point of view, the reduction of foreign debt almost always implies an increase in domestic liabilities, because the debtor has to give something in exchange for the foreign obligation. This is true for both the public and private sectors. To put this in a simple framework, assume that the debtor is risk neutral and that there are only two periods: the present (period 1) and the future (period 2). Ruling out default, the debtor faces two choices. He can keep the foreign debt (D*) and service it in the future at a cost (C*) of: (1) C* - E2 P2 D* + i* E2 D* where i* is the external interest rate (LIBOR plus some spread); E is the official exchange rate in period 2; and P is the effective amorlization price of the debt in the future as a percent of par value. Equation (1) assumes that the discount is obtained on the principal, while interest is paid in full. This seems to be appropriate for the Chilean case, where most debtors are current on their interest payments. However, for debtors who have suspended the service of interest, it is more likely that C* - (1 + i*) E2 P2 D* ; that is, the discount applies for both the interest and the principal. Alternatively, the debtor can repurchase his debt today at a price P incurring in a domestic liability. For this he will need to buy dollars n the parallel market at the rate E' Thus, the cost of an equivalent amount of domestic debt is (2) C - (1 + i)D - ( + i) E'1P 1 D* where i is the domestic (nominal) interest rate. Assuming that he wants to minimize the cost of servicing the debt, he will repurchase the foreign debt only if C < C*, that is (3) (1 + i) E' P D* < E2 P2 D* + i* E2 D*, or 13 (4) (1 + i) < (E2 / Eel) ((P2 + i*) / P1] Thus, the debtor will repurchase his foreign debt if the domestic interest rate exceeds the external interest rate corrected by the expected depreciation of the currency (E2/E' )10 and the expected increase in the market price of the foreign debt (PP ). The incentive for repurchase will be higher, the lower the domestic reiatve to the foreign interest rate, the greater the expected devaluation of the currency and the bigger the expected increase in the market price of the debt. Informal operations are mostly done by non-financial private firms. With information about the relevant variables, we can attempt an exercise based on equation (4). Consider the debtor standing at the end of the year, deciding whether to repurchase his foreign debt. Suppose that he expects the conditions for the next year to prevail in the future (or, alternatively, that he has a one year horizon to settle his debt). He knows the long-term domestic interest rate that applies to him, and the current E and P. He can also make a good forecast of the future exchange rate (E2) based on the passive-crawl rule, which corrects E in the difference between local and foreign inflation. In case he won't have access to the official market (if his debt is not due next year), the relevant rate is E'2, the parallel market's. Although endogenous, the future price of his debt (P2) is more difficult to predict. For simplicity, we will take the actual values of E2 and P2. This amounts to assuming perfect foresight, or to an ex-post evaluation of the convenience of repurchase. The calculations presented in Table 7 show that non-financial private debtors have been, in general, paying a premium to repurchase their foreign debts. This is mostly explained by two factors: domestic real interest rates are higher than foreign rates and the secondary market price of debt has been falling. For those with access to the official market for principal repayment in the next period, the calculations consistently indicate that it was more convenient to keep their foreign debts. For those who did not (and thus would have had to use the parallel market), the figures indicate that the moment to repurchase was at the end of 1987, when the difference between domestic and foreign real interest rates was low and the price of debt was fairly stable. Why, then, did non-financial debtors actively repurchase their foreign obligations? One reason is to avoid the exchange rate risk; so far, the passive crawl has been maintained, but there is no future guarantee about it. Other reason might be a difference in perceptions, whereas domestic debtors are more optimistic about their future than foreign creditors and thus expect P to increase (so far, this has not been the case). 10 Notice that it is the future official rate and today's parallel rate that matter. 14 Tat.17 THE CONVENIENCE OF REPURCHASE FOR A NON-FINANCIAL DEBTOR (1 + i) (E2/E'1P2*)/P1) (A) (B) 1985 1.248 1.147 1.211 1986 1.276 1.098 1.152 1987 1.187 1.147 1.309 1988 1.219 1.085 1.238 Note: (A) Debtor with access to the official exchange market for principal repayment in the next period. (B) Debtor without access. (1) All variables as of December of each year. *(2) Interest rates: i is the preferential bank loan rate; i is LIBOR + spread on public debt + 0.5 percent. (3) Prices: P1 and P2 are the secondary market prices of Chilean debt (no information is available on prices for private non-financial debt). (4) The assumptions for 1989 are: P stays the same; domestic inflation of 15 percent; foreign inflation of 5 percent; parallel market rate depreciates the same as official exchange rate. 3.3 Official Schemes of Debt Reduction The main official de)t-reduction schemes are those of repurchase under the general regime of Chapter XVIII and capitalization under Chapter XIX, whose regulations were described in the previous chapter. However, there is nothing inherent to them that will make them applicable only to private debt. Both pubic and private debts can be reduced through them. There are two other formal mechanisms which have, in practice, been used only to reduce private liabilities. These are capitalizations through D.L.600 and operations through Chapter XVIII Annex 4 (see Table 3). Capitalizations D.L.600, i.e., capitalizations of foreign liabilities in the debtor company, are bound by the same restrictions as Chapter XIX, but have a better legal status. The total accumulated value of these operations was US$273 million in December 1988, about 4.2 percent of private bank debt. Chapter XVIII Annex 4 has allowed nationals to capitalize local firms with financial problems through the conversion of debt certificates of the respective firms, bought at a discount abroad. The main advantage of this operation is avoiding the payment of the Central Bank fee which applies for the regular Chapter XVIII. In summary, it is a debt-equity swap for domestic investors, without allowing them repatriation rights. This mechanism has been a vehicle for financial restructuring of domestic firms holding foreign debt. Once the board of directors of the company affected agrees to perform 15 this operation, the opportunity is given for each stockholder to capitalize the company according to each own's share of the equity capital of the firm. In some cases, this has implied the participation of a big number of small investors. The principal operation performed up to now under this mechanism has been that of INFORSA, a major forest company, in January 1988. This transaction, extinguished foreign debt for US$38 million. The repurchase of debt certificates from external creditors was done at an average price of 65 percent and the net discount obtained by the debtor company was 19 percent of face value. Other operations are Banco Osorno (US$6.6 million in October 1926) and Banco Sudamericano (US$5 million in November 1987). CTL, an industrial company, reduced US$5 million of external debt in January 1988, capitalizing at a discount of about 20 percent over face value. Overall, US$147 million of private debt had been reduced through its use. However, the regular mechanisms of Chapter XVIII and Chapter XIX account for the bulk of private debt reduction. Repurchases through Chapter XVIII had an accumulated value of almost US$1.2 billion as of December 1988, about the same than capitalizations through Chapter XIX (see Table 4). Thus, the two main formal schemes have implied a direct reduction of 37 percent in private bank debt. If we consider all formal debt reduction mechanisms, these have been able to take off US$2.8 billion of private liabilities, or 44 percent of this sector's debt with commercial banks. Chapter XVIII and Chapter XIX are, in practice, only relevant for private financial debtors because they involve a Central Bank control over the transaction that can only be effective for tightly regulated banks. At the same time, the restructuring agreements with private foreign creditors prevent Chilean banks from repurchasing their debts directly. Thus, it is not surprising that 95 percent of debt reduction in the private financial sector has come through formal schemes. In contrast, almost 85 percent of private nonfinancial operations have been informal. Notice, from Table 4, that practically no Chapter XIX operations have been done by the private non-financial sector. It would be mistaken to conclude that no capitalization involving private non-financial assets has occurred. What the figures say is that no operatiou =nder Chapter XIX has involved the reduction of private non-financial debt. But many transactions have implied redemption of other debts (public or private financial), with the proceeds of those operations being invested in private real assets. Thus, Chapter XIX figures reflect the domestic counterpart of a debt capitalization, but -in the majority of the cases- not the destiny of the investment itself. The Central Bank of Chile controls these transactions through two different ways: (i) it authorizes operations involving Chapter XVIII Annex 4, Chapter XIX and Capitalizations D.L.600 on a case-by-case basis, upon discretion; (ii) it controls the volume of formal debt repurchases through monthly (or bimonthly) auctions of quotas to use the Chapter XVIII mechanism. 16 The incentive for a Chilean bank to repurchase its debt can also be judged with the help of the simple framework in the previous section. Notice, though, that P is the price that the debtor pays on the repurchase, which is now substantially different from the one received by the creditor, due to the Central Bank fee (Chapter XVIII) or to foreign investment subsidies (Chapter XIX) and intermediaries fees. This was not the case in direct repurchases, where the discount went to the debtor. However, equation (4) is still applicable under the values of the variables which apply to financial intermediaries. As Table 8 shows, private financial debtors have also been paying a premium to reduce their foreign obligations. Once again, because domestic real interest rates are higher than foreign rates, and because the effective repurchase price has been going down, as the secondary market prices have fallen. This is clear all along for thol4e who had access to the official market for principal repayment in the next period. For those who would have had to use the parallel airket, it looked convenient to repurchase only at the end of 1987. The reasons of banks to repurchase their debts has to be looked beyond this framework. They may want to use debt reduction programs while they last, if banks think they won't be permanent; they might want to show an accounting profit to "improve" their earnings; or they may be more optimistic than creditors about the prospects of secondary market prices (an optimism which, so far, has not shown on the price trends). Table 8 THE CONVENIENCE OF REPURCHASE FOR A FINANCIAL DEBTOR (1 + i) (E2/E'l)[(P2+i*)/P1] (A) (B) 1985 1.242 1.077 1.138 1986 1.257 1.160 1.215 1987 1.176 1.130 1.290 1988 1.203 1.026 1.171 Note: (A) Bank with access to the official exchange market for principal repa3aent in the next period. (B) Bank without access (relevant E2 is E'2)* (1) All variables as of December of each year. (2) Interest rates: i is the 1-3 year bank deposit rate; i is LIBOR + spread on publicly guaranteed debt. (4) Assumptions for 1989: idem as in Table 7. 17 3.4 Concluding Comments While most foreign debt was private at the beginning of the crisis, the situation has been fundamentally reversed. By the end of 1988, the public sector held directly 70 percent of Chile's external debt. The country's private debt, at only 30 percent of the total, is still much more significant than that of other economies in the region. However, a crucial distinction must be made within the private sector. Almost 90 percent of financial obligations are guaranteed by the state, while corporate debts bear no such protection. The guarantee means, in principle, that it is the debtor's responsibility to serve its debt. But if it becomes unable to do so, the government will have to respond. The relationship between the government and the failed debtor would be regulated, in principle, by regular bankruptcy proceedings. Therefore, financial debt is ultimately the responsibility of the state, while corporate debt is not. Moreover, publicly guaranteed debts have the exchange rate guarantee of the Central Bank. All in all, a high 85 percent of Chile's foreign debt was public -or had the state guarantee- by the end of 1988. This is a long way from the 35 percent represented by public and publicly guaranteed debt in 1981. Not surprisingly, financial companies are tightly regulated by the Central Bank and the Superintendency of Banks and Financial Institutions. Private non-financial debtors have a less stricter regulation. The state-financed debt-support programs and the economic recovery, have clearly improved the situation of both financial and non-financial private debtors. The corporate sector is fundamentally sound and particular foreign debt problems have been handled on a case-by-case basis with substantial flexibility, including partial debt forgiveness and direct capitalizations in troubled companies. This approach and the relatively low level of private non-financial external debt imply that the corporate sector is unlikely to become a burden for the country or the public sector. However, the situation of the private financial sector is not as bright. It still appears that the banking system could not meet its foreign obligations without new restructurings and continuous government help (e.g., the cartera vendida program). This places a clear potential burden on the public sector. 18 4. THE REDUCTION OF PUBLIC SECTOR DEBT As noted, the public sector has become, by far, the most important debtor in Chile. The government is responsible -directly ox indirectly- for 85 percent of the country's foreign debt. This chapter focuses on the potential and desirability of reducing public sector debt through existing schemes. It also assesses the results achieved up to date. 4.1 Public Finances and the Focus of Debt Reduction Chile's fiscal situation at the onset of the debt crisis was quite strong, in sharp contrast to other Latin American countries. The major restructuring of the public sector after 1973 (due to drastic cuts in the public payroll, a tax reform, self-financing of public enterprises, etc.) and the reduction of inflation, brought about a persistent consolidated surplus from 1976 to 1981, as analyzed in Larrain (1988). In addition, the effect of devaluations in Chile were more beneficial to public finances than in other countries, because the government was -still is- a heavy copper exporter and the level of foreign debt was relatively low at the onset of the crisis. The economic crisis and the social security reform of mid-1980 deteriorated the fiscal position and deficits reemerged in 1982. However, the initial strength in public finances, the significant foreign exchange earnings and the subsequent fiscal austerity, made it possible to keep the deficit under tolerable levels. It were precisely these strengths that enabled the public sector to spend major resources, in the order of US$6 billion11, to solve the financial crisis of the private sector without destabilizing the economy. Although our focus is on external debt, a careful analysis of the public sector must also consider its internal debt. The reemergence of fiscal deficits and the transfers to the private sector in the post-1981 period, made public liabilities climb again. As shown in Table 9, public foreign debt has increased by almost US$8 billion since the end of 1981, in spite of almost US$2.2 billion in debt reduction through swaps (see Table 4). Domestic liabilities of the public sector have gone up by about US$7 billion t the same period. The bulk of this figure (around US$6 billion) corresponds to the Treasury Bond of the Central Bank. Accountingwise, this is a Central Bank asset and a Treasury liability and thus it should be netted out. We have kept it on economic grounds, because this bond was used only to balance the Bank's assets and liabilities after the losses of the debtors' support programs. Since the Bond pays 0 real interest rate, the Central Bank has an asset which does not provide a real return, coupled with expensive liabilities. The public budget, accordingly, has started to suffer a serious burden from interest payments. Unfortunately, the only available information about the budget refers to the consolidated nonfinancial public sector, which has declined from 4.3 percent of GDP in 1984 to less than 0.8 percent in 1987; preliminary figures for 1988 show a small surplus, based on unexpectedly 11 See Larrain (1988). Tsbl. 9 TOTAL PUBUC SECTOR DEBT