From Theory to Practice and Back: Evidence on Public-Private Partnerships in Crises

To find out if this scheme is consistent with the empirical reality we first chose to discuss it with financial market, legal, and policy experts in New

York and Washington, D.C., who had been actively involved in past debt workouts over the past thirty years. In a series of semistructured interviews we were trying to find out if our suggested “timeline approach” matched with the insights of former “architects” of major deals between debtor governments and their private creditors. The interviews largely supported our three phases and the efforts taken by both sides during each of the phases. At the same time, the discussions emphasized our initial impression that it is extremely difficult to track informal contributions by the private sector based on publicly available records of past crises.

Another insight from the interviews stands out. All experts agreed on the leading role of governments in debt crises and the power they have to either initiate public-private cooperation or to actively reject it. In other words, when it comes to interactions between private creditors and governments, the latter seem to be sitting in the driver’s seat whereas the creditors tend to merely react to what they find. Even more notably, the majority of our interview partners come to the conclusion that there is considerable variance in government behavior toward creditors. We therefore decided to start by focusing on government behavior if we want to get a better understanding of creditor-government cooperation. The idea is to analyze the process of debt negotiations by concentrating on patterns of government behavior and, in the next step, to search for determinants for these patterns.

For this purpose we engaged in extensive case study research of all major debt restructuring episodes between governments and their private creditors since 1980. We base our analysis on more than 20,000 pages of secondary information from financial press archives, relevant academic contributions, and policy reports on past crises. The approach we chose for evaluating the debt negotiation process was to categorize government behavior and track particular types of actions in each of the crises episodes. We thus coded an “Index of Government Coerciveness,” which measures the degree of aggressiveness in government actions in nine separate categories.

The index is based on but goes beyond the previous attempts to categorize debt crises (Cline 2004; Roubini 2004) and the criteria of “fair debt restructuring” and “good faith efforts” in crisis resolution outlined in key policy reports in the past decade (IIF 2006; IMF 1999a; 2002). Each of the nine subindicators of our “Index of Government Coerciveness” captures observable coercive actions that governments impose on their international creditors (banks and bondholders). The index consists of four criteria of payment behavior and five criteria of negotiation behavior.6

Overall, this approach yielded a large number of new insights and stylized facts on government actions (summarized in Enderlein et al. 2010). Government behavior and rhetoric show a large variability, ranging from very uncooperative to very smooth crisis resolution processes. In particular, we found serial patterns of coercive government behavior and conflict during crisis resolution. Countries with governments that adapted a conflictive stance in the 1980s debt crises also tended to show unilateral government behavior in restructurings of the 1990s and in more recent cases (e.g., Argentina or Peru). This finding confirms and extends the prominent concept of serial defaults proposed by Reinhart et al. (2003).

All in all, we found that debtor governments are the key actors in enabling PPPs in the context debt crises. If they chose to act unilaterally, for example by declaring a stop on external debt payments, little room remains for a constructive private sector involvement. The next question is why some governments adopt a cooperative attitude toward their international creditors, while others show a very aggressive stance. In the second part of this chapter we therefore go on to explain the difference between a conflict-riddled debt restructuring process such as Argentina (2001-2005), where the government refused to engage in negotiations, froze payments for four years, and enforced a fully unilateral debt restructuring deal, and a cooperative crisis resolution case such as Uruguay (2003), where the government was able to restructure its debt in only three months, in agreement with creditors and without missing any payments. With a view to the theme of this collected volume, the key focus here lays on the quality of governance.

 
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