Bolivia - Debt

Debt

Bolivia was the first country during the Great Depression to default on its foreign debt, and not until 1971 did the government return to international capital markets for financing. External financing, mostly newly generated petrodollars, quadrupled during the 1970s as political stability and economic growth improved Bolivia's creditworthiness. As foreign financing dried up in 1978, foreign banks also negatively reassessed Bolivia's ability to service more debt. In 1984 Bolivia became the first Latin American country to declare an official moratorium on debt payments to commercial banks, and it continued to withhold payment through 1988. Bolivia, however, maintained a good repayment record with official creditors, such as the IMF and World Bank, recognizing they were its lenders of last resort.

By the late 1980s, Bolivia had accrued one of the highest per capita debts in Latin America. The country's total external debt amounted to US$4.6 billion in 1986, or slightly more than its GDP for that year. Its debt-servicing requirements amounted to US$161 million in 1986, creating a debt-service ratio (debt as a percentage of exports) of approximately 24 percent. Fortunately, about 90 percent of the country's debt was long-term liability. The structure of the country's debt changed drastically during the decade. Official multilateral and bilateral creditors composed 42 percent of total debt in 1980, compared with over 75 percent by 1988. Of the eighteen most heavily indebted developing countries tracked by the World Bank, Bolivia had the second lowest percentage of its debt with official creditors. The rapid changes in the structure of the liability were caused by the discontinuation of new private loans, large increases in official lending, and the government's purchases of its private debt in 1988. Argentina and Brazil, two of the developing world's largest debtor nations, were the country's largest bilateral lenders.

Despite unsteady relations with its commercial creditors, Bolivia achieved at least six debt reschedulings or deferments from 1980 to 1988. These agreements typically included longer grace periods, extended repayment schedules, and, occasionally, lower interest rates. As the Bolivian treasury reportedly neared depletion during the 1980s, such measures had become absolutely necessary in order to maintain the country's solvency. Most of the reschedulings occurred in the multilateral forum of the Paris Club, a clearinghouse for private and certain public debt negotiations. Outside the Paris Club framework, Bolivia also rescheduled its US$900 million bilateral debt with Argentina in 1987 on very favorable terms, including a fifteenyear grace period and a twenty-five-year repayment timetable. According to Bolivia's minister of finance, the reschedulings reduced the country's debt-service burden by 50 percent beginning in 1988.

In addition to rescheduling, the Paz Estenssoro government sought to reduce its debt through complex international financial schemes. In 1988 Bolivia negotiated a debt-purchase arrangement with commercial creditors, many of which had already written off or substantially reduced the value of the loans on their books. In order to forestall a complete loss on their loans, bankers agreed to a program whereby the Bolivian government purchased its debt on secondary markets, where such liabilities are traded, for 11 percent of its face value, or at an 89 percent discount of the original debt. A special escrow fund administered by the IMF and financed by donations from West European and Latin American governments enabled Bolivia to pay for the discounted debt. By June 1988, Bolivia had acquired nearly 50 percent of its private debt through buybacks and sought to obtain the remainder of the debt by the end of 1989. Another debt-management approach adopted by Paz Estenssoro, a debt-for-equity swap, allowed commercial banks to exchange a predetermined value of the debt for equity in a Bolivian enterprise, usually a semiautonomous one slated for privatization. The government's third debt-reduction approach, a much smaller operation, allowed a United States environmental organization to purchase US$650,000 of Bolivian debt at an 85 percent discount in a "debt-for-nature" swap and receive B250,000 to manage a 135,000-hectare wildlife preserve in Beni Department.

As a result of the country's aggressive debt-management program, Bolivia actually lowered its liability in 1988. Furthermore, it became the only Latin American nation to avoid exporting capital during the debt crisis. Instead, it obtained more external financing, although solely from public sources, than it paid out in interest and principal on its debt. Debt management, however, remained a controversial political issue, especially for critics of the military governments in the 1970s that accumulated the bulk of the liabilities. Restructuring or repayment of that debt was perceived by some as legitimizing gross economic mismanagement. The debt was considered negotiable enough that Roberto Su�rez G�mez, Bolivia's reputed "King of Cocaine," even offered to pay off the country's multibillion-dollar debt in the early 1980s to avoid extradition.

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