Debt RestructuringRestructuring of debt capital
How is a debt rescheduling?
Europe's stabilization mechanisms should make it possible to repay the countries' debt. Failure to implement such policies may require some governments to reorganise their debt. Inheritance restructuring procedures of this kind do not differ so much from the stages used by highly leveraged firms and individual borrowers, although on a different magnitude. Debt restructuring re-financing, haircuts and " re-profiling " of debt restructuring is a procedure aimed at reducing the magnitude or costs of debt in order to minimize the burden of insolvency - or " failure " as it is sometimes called when applying to a state.
This rescheduling can be carried out in many ways. Countries can repay their debts by taking out a new credit on more favourable terms, e.g. over a longer period of period, possibly at a lower interest will. Alternatively, it is possible to convince the country's lenders - the so-called bondholders, since public debt is usually in the shape of loans - to come to an agreement to receive a lower proportion of their debt.
During 2002, Argentinian debt owners were given 25% to 35% of the full value of their debt, an example of a cut. In the Financial Times' lingo for the Eurozone debt crunch, it means the same thing as a "soft restructuring" in which investor agrees to modify the conditions of the bond - often by extending the debt repayment time.
Debt restructuring is more frequent than you might think. Just like debt fighting states, debt fighting corporations and individual debt fighters can take refuge with their borrowers so that they can keep working financial. Even though the law varies from country to country, sometimes corporations go into sequestration so that they can act until they are resold and the creditor repay at least part of their debt.
An individual may be able to negotiate conditions with a lender or be deemed unable to pay. As with the industry and country test, businesses and individual borrowers can perform a pre-loan test to make sure that no more debt is raised than can be paid back, even in unforeseen situations. Part of the rationale behind the attention that government debt attracts is that unlike individual debtors, nations cannot go bust.
Country debt issues can have significant economical and fiscal impacts that can spread through many different nations over many years (so-called contagion). Thus, for example, a failure of Russia's debt in the latter 90s was an important factor in the reported breakdown of the Wall Street Long Term Capital Management hedge funds, the rescue of which in turn disturbed them.
Due to the complexities and serious implications of debt rescheduling, intergovernmental bodies such as the IMF can coordinate negotiation and organize credit to make sure that debt is paid back in a way that is satisfactory to all parties.