Chilean Debt

Given the heavy emphasis on the role of the private sector in Chilean development, the government took the position at the outset of the debt crisis that a large portion of Chile's external debt--private sector debt--was not its problem. Chilean debtors and their foreign commercial bank creditors had to work things out themselves. The banks, which viewed their debtor to be the country as a while, did not agree. Consequently, all credit, including critical short-term trade lines, was swiftly shut down.

The government then changed its mind. The Chilean negotiating team worked skillfully to secure deals with Chile's commercial bank creditors that provided balance or payments financing, postponed payments of principal, and lowered interest payments--elements which other Latin American debtor countries pursued after 1982. Agreements with the IMF and the World Bank played an integral role in these deals. The bulk of the deals, which included agreements with official creditors, occurred in six phases spanning from 1983 to 1989.

As to Chile's financing gap, commercial bank creditors agreed to lend $3.165 billion in new loans pursuant to agreements signed in 1983, 1984, and 1985. The banks did not contribute new loans to help cover the financing gap for 1987 and 1988. Instead, they agreed to re-time interest rate payments on new loans and to restructure debt falling due between 1988 and 1992 from semi-annual to an annual basis. Critical short-term trade credit facilities amounting to approximately $6.7 billion were signed in 1983, 1985, 1987, and 1989.

The rescheduling of public sector and publicly-guaranteed private financial sector foreign debt to commercial bank creditors, covering approximately $8.95 billion in payments originally scheduled to mature during the years 1983-1991, occurred in 1983, 1985, and 1987. In 1985, 1987, and 1988 the restructuring and new money agreements were amended, in part, to reduce interest payments and re-time them.

With the emerging idea of using a "menu of options" to allow commercial bank creditors to pick from a variety of debt or debt service reduction options, Chile and its commercial bank creditors agreed in 1988 to various measure intended to more flexibly manage Chile's foreign debt. First, Chile could use reserves from its Copper Stabilization Fund to buy back up to $500 million of foreign debt at a discount. Second, Chile could prepay foreign debt in pesos to those creditors that agreed to new loans. Third, Chile could guarantee up to $500 million in new loans from the banks, with new loans receiving priority in repayments. Finally, a portion of the "old debt" could be swapped at a discount for new debt.

As to official creditors, Chile restructured debt through the Paris Club twice during the 1980s. In 1985, Chile's BAC, as well as the World Bank and the IMF, insisted that Chile could meet its financing needs in part by restructuring official foreign debt, seventy percent of which was owed to the United States and Japan. Accordingly, Chile rescheduled $223.8 million on payments falling due in 1985 and 1986, resulting in $150 million in debt service relief for those years. Chile returned to the Paris Club for the same reason in 1987, restructuring $166.4 million in 1987 and 1988 maturities.

Chile also reduced its foreign debt through a debt swap program established in 1985. The program functioned primarily through Chapters XVIII (used primarily by Chilean residents) and XIX (available to foreign investors and non-resident Chileans) of Chile's Compendium of Rules on International Exchange. Under Chapter XVIII, Chilean residents could use repatriated capital or foreign exchange to acquire discounted Chilean foreign debt (with maturities exceeding one per year). These investors then arranged prepayment with the debtor and used the proceeds for any purposes. Under Chapter XIX's debt-to-equity conversion program, a foreign investor or for an equity investment in the country, for cash, or for peso denominated notes (in the case of Central Bank debt) that could be sold in the domestic secondary market. The proceeds of such sales were used for equity investments in the country. If the foreign investor was also a creditor of the firm in which it planned to invest the proceeds of the swap, the transaction was accomplished through another investment law, D.L. 600. Chile's debt-to-equity program generated $9.7 billion in swaps between 1985 and 1990. During the first three-and-a-half years of the program the swaps accounted for twenty-nine percent of Chile's medium- and long-term debt to commercial banks.