! .t r ,_. "1 : :: .,,~-:.; ~:;. . ~~~~::. ·l r : ... . 'ITERHATIOlTAL BANK FOR RECOfSTRUCTIOlJ AlJD ~LVELOPiiEIIT 1 66876 E1.'"TE1l.ITAL DEBT OF CHILE Economic Departnent Date~ J.pril 19,. Prepared by: James J. L;ynch Copy Po. _ .. :¡ COHTEllTS Summary I. Historioal Revie'l-1 of Elcternal BorroHing II. Default and Its Causes III. Course of Default IV. Final .t~djustment of External Debt v. Outstanding Long-term External Debt ru1d Servioe Charges Appendioes SUllllARY During the 19th century Clúle issued sterling bonds equivalent to about $300 million in the London market. From 1915 to 1930, Chile borroued about the sa.11e amount in the Hew York marl:et. By December 31, 1929 Chile 1s long- term external direct debt \-Tas 0278 r,úllion, of uhich ~)153 mi.llion uas out- standing in sterlinc ru1d the balance in u.s. dollars. In addition, [;Uaranteed issues totalling ~130 1:1illion Here outstanding, ~~4.8 mi.llion in sterling, 02.8 mi.llion in Suiss franos and ~~122 mi.llion in U.S. dollars. Thus the total direct ond guaranteed e:h.'"ternal debt outstanding ruüounted to ~~408 mi.llion. It is estiuated that less than 10% uas held internally; the rest Has held mainly in the United States, the United Kingdom and S'tritzerland. Chile met its external obli[;ations condstently from about 1834 until 1931, uhen the drastic decline in Chile' s t¡.¡o 1nain expo:rths, copper and nitrates, vith their crippling inpact on foreign exchanc;e reserves and on domestic finance, led the Govern.1ent to arder a tvro-year l;J.oratoriurl on all foreign debt. A debt readjust¡:1ent phm uas announced in 1935, providing that as from January 1, 1935 receipts to tbe Chilean Governr.10nt from its participation in the profi ts (25% of ¡;rosn profi t) of ·t;he Chilean 11i trate and Iodine Soles Corporation, from income taxes on the copper co111panies and, later, from duties on petrolew.1 imports for 'Ghe nitrate nnd copper inC:ustries, uould be set aside for the service of bonds of the external public debt of the Republio and the municipalities. Fifty per cent of such receipts Here to be used for interest payments and the balance, less expenses, for the retirement of bonds by direct purcbase. Under tbe 1935 debt adjustuent plan, Hhich continuad in operution through 1948, on each $1,000 bond (uhich under the old contract uould have called for interest payr:1ents of around (,60 per year) about $13 per year Has paid for interest. The pay:nents ranged from ~t4.74 in 1935 to a high of ~~20o93 in 1938. From the inception of this plan through February 1, 1949, the total receipts used in servicing the external debt ru:1ounted to about Ül05 million, of uhich ~~50 núllion vlas paid in inte:rest aad approx:lmately ($25 r~úllion in retiring an estimated ~~168. 7 million par amount of bonds. In July 1948 a permanent debt adjustr,lEmt plan \-laS offered ·t;o the bondholders calling for a par for par e::rchange of the old bonds for neH bonds maturing on January 1, 1994 uith interest beginning January 1, 1948 at 1-1/2%, rising gradually to 3% for 1954 and thereafter. Through 1953 an a.-rmual sinking fund of ~;;2.5 million (1%) l:IOuld be applied proportionally arnong dallar, sterling and .Suiss franc issues. It is estimated that in 19/¡.9 the outstanding external lonc;;-term debt of Chile uill be $310 milliono Total service pay::lents uill runount to about (~21.3 million in that yeQr, declining gradually to $8 million in 1971. In 1973 payments drop sharply to $1.3 million, The major portian, ~>16 million, of these service payments is on the eJ~ernal dallar debt, the balru1ce being payable mainly on sterling and S\.Jiss franc bonds. I. Historical Review of External BorrO'uinf! 1. The first external loan of Chile, aroounting to I.l million, uas floated in the London m~lrket ill 1022. From thc, t; c.~ate to 1895, a to·tal of Isl2 million princi1;al runount uas borroued abroad. Dl1ring 1885 and l8C6 all outstonding balances Here refunded into a 4-1/2% obJ.igation. From th2t tiue to 1912 other loans tot~üling over I.50 mi1lion Here contra.cted. After 1912 forei¡:n borrouin{> uas halteél. and uas not resuued until 1921. 2. Prior to tlle ndoption of the Constitution inl8.33, interest on ·t,he first loan rer:1ained unpaid for a t:ilne due to in-bern2.l strife but later this loo.n uas funded nnd discharged. From that time tbrou:)1 1930, Hi th the e:mc)tion of the period folloHing the 1879...1883 Har of the Pncific, uhen amortization charces Here temporarily suspenc1ed ui th the consent of the bonilllolders, all external borrouine; uas punctuclly serviced. 3. From 1920 on 1 finru1cing by Chile ¡.ms nainly done in the Heu Yor~: marh;t by issuing doll2r bonc~s. It is estin12tec' that from 1915 J;;o 1930 dallar bondf3 totalling over $300 nillion uere issued. rational issues of Chile 8.ccounted for over $185 n1illion, uith coupons betFeen 6~~ and 7¡;; municipal issues, vith 7% coupons, occounted for over '::;21 million, rmd cor- porate issues, ::;overm:1cmt [;Uaranteed vri·t,h coupons betue~n 65~ anü 6-3/M;, uere issued in the oDount of over i.~90 million. 4. The national and I::lunicipal lo~ms uere re:~orted to be r"''rtly for the purpose of refunding short-terru loans, crecJ.i ts, anc:. Treasury no·bos, but principally for public lJOrks eme. in~)rove1.1ents, includinc cons~ruction of roads and highHays, sanitary uorlcs and uater cup~1lies, port facilities, harbar inprovernentc;, ec1uipnent for state railucys anc1 irrie:;<:,tion. The cor- porate issues of the :·.1ortgage 1x,l1l:s uere for Ewldnc l'1ort::?ae:e loo~¡s. 5. The public é'.ebt oi' Chile, uhich 2t the end of 1926 amomY~ed to ~~323 million, incluc:.in[:, debts cucrc.nteed lYJ t:1e Governnent, incrc<:tseél. to (?456 million b¡ ·blle end of 1929. The trectest incree.se 1-r:· s in tl1e e::cternal debt, uhich rose fron Ul94 nillion to './:?.79 million, cbout L,4;~. The internal debt and r;uoranteed debt also incrensed, 907~ and 2135; res)ectively. Total public debt outstnncl.ing at the encl of 1926 and 1929 1ras as follous: -2- Ta!:M.2 ,¡ Publie Débt:. tin dollars) J&_c. 31. 1926 P.ec • .31 1 1922 External Sterling 153,418,757 Dollars 125.,,..123, 95Q Total external 19.3,93A,767 278,612,707 Internal (pesos 6 pence) .29 ,L,.lJ.JL~ 214,955,9]).¡. .318,0.30,525 Sterling .31,062 ,1~07 4,851,971 Dollars 70,752,915 122,39.3,996 &'uiss francs 2,789,912 Pesos (6 pence) __2.¿)0,637 _7,331,091 Total [JUaranties 107,8.39' 959 137,866,970 322, 795,!672 6. As can be seen from the table above, a shift tool: place fror.1 Brit;ish sterling issues to iln.erimm dol1a1~ louns. In 1926 the ste:c1inc ob1ica·cions of Chile represented 507~ of the total, including guarantees, llnd dollar ob1i- cations 42% of the total; in 1929 the percentages \-Jere 35% ~md 54~~' respec- tively. 7. The proportion of' the tot<ü de bt held internally had also increased durine thio period, f'rom 6.5% to e.round 10%. 8. In 19.30 a further increase took place in the externa1 dol1ar ob1i- gations of Chile and its municipalities araounting to around ~?27 mi1lion. II. J2§f<.m1 t and I;t..§.. .Couses l. }.fter having met external oblit:;ations consistently from about 18.34, excep·i:; f'or 2 period follouing the 1879-1883 vlar of the Pacific, Hhen amor- tization charges uere tenl)Orari1y suspended vri th the consent of the bond- holders, e. portial morD.'Gorium on vll foreie;n c1e b·t payuents Has declared on July 30, 1931, and on :"ue;ust 13, 19.31, the governnent orclered a complete moratorium on al1 foreign debts. 2. Chile is primarily a minera1-produci~g co1111try and the economic He1fare of the nation dependa to a large e¿'tent u~;on the output, exports and prices of copper and nitrates. Consequently, tl:.e severe depression lrhich set -.3- in after the co11apse of the copper and nitrate narkets in 19.30 profoundly aff'ected Chile's capacity to meet her foreic,n obligations • .3. Betvmen 1929 and 1932 total Chilean exports fe11 in volume from 5,885,000 metric tona to 8L,5,000 netric tona.. Their va.lue in 1929, 1:1hen copper and ni trates together Here 91% of the total, uas '!;27? mi1lion, 1-rhile by 1932.it had declined to $22 million. Nitrate e}qJorts dropped from 2.9 mi1lion metric tons to 24.3,000 metric tona {from $127 million to $7 million) betlTeen 1929 and 1932. Copper exporta fell during the .same period from 414,000 J.netrio tona to 126,000 metric tons ($12.3 million to $15 nrlllion). At the same time, the inflou of foreign capital, uhich had reached a total of $2.32 nrlllion in 1929-.30, dropped to $16 r.úllion in the follouing tvro yeexs and vanished ccrnpletely in 1933. 4. The impact of the decline in exporta on the economy \·TaS even nore serious than the figures indicate, in .spite of the fact that importa vmre corresponding1y reduced. This was because, o1though Chile had (except in 1930) a favorable trade balance, substantial portions of the export proceeds of the foreign oopper and nitrate companies are not normally available to finance imports or to mect debt inte:cest and amortization payments as \Jell as other external financial obligations, since they are used to meet various requirements of the companies. 5. As a result of the collapse of foreign trade, the gold and foreiGn exchange reserves of the Central Bank of Chile were heavily reduced, from 445 million gold pesos in 1929 to 7? million gold pesos in 19.32, and conJIJer- cial p~nents fell into arrears. 6. The impact on c1omestic finance 'l.·ras just as serious. In 1929 customs receipts aocounted for over 505~ of govern:rnent revenues. By 1932 revenues from export duties had practically disappeared and import duties uere only 40% of the 1929 1evel; total govermnent tax revenues dropped from 1,234 million pesos in 1929 to 515 mi1lion in 1932. Búdget deficits nounted and betvreen 1929 and 1933 the domestic debt of Chile increased al.rnost four tines, from 323 mil1ion pesos to 1, 256 nrlllion pesos. III. Course of Defau1t 1. Upon default in 1931, Chile declarad a tvo-year moratorium on all foreign debt payments. This Has subsequently extended unti1 superseded by the Debt Adjustment Plan of 1935. 2. Par-tial payments t-1ere rüade in 1931 and 1932. No debt paytlents a:t all \Tere made in 1933 and 1934. In 1935, as shOim in Table II, payraents Here resmned at an overall rate of about one-tenth of the original contractual basis, 3. In that year, under La11 Ho. 5580, the Public Debt il.j_"Jortization Insti- tute, \Jhich had been set up in 1932 for the p1,1.rpose of servicing the interna.1 debt, consolidating and establishing the service of the short-term external debt and reesta.blishing the service of the consolidated external debt, uas authorized to rene"t-1 the service of the bonds of the e:k'iernal public debt, direct anc1 indirect, of the Hepublic of Chile and of the municipalities. The readjustment plan provided that, beginning Jm1uary l, 1935, receipts to the Chilean Government from its participation in the profits of the Chilean Iiitra.te and Iodine Sales Corporation (25% of cross profits), from -4- income taxes on the copper companies~ Dnd, later, fro:m étuties on petroleum importad for the nitrate and copper industries, Fould be set aside for the service of bonds of the external public debt, direct and indirec·~, o;f the states and the municipc.lities; 50% of such receipts uere tr.: be used for in- terest payments and the balance, less expe¡1ses, for the retire;Jent of bonds by direct purcha se belou par in the lnro.~ket or by drauinc; at par if the bonds were quotec1 at par or above. 4. The net effect of carrying out the 1935 debt adjusti1ent plan, lJhich continued in operation frora 1935 through 1948, uas that for each (;>1,000 e:;:- ternal publicly issued bonc:, Fhich under the old contracts Hould have called for interest payi.lents of around ~>60 per year, about Cl3 per year uas paid for interest. The eJt1ounts rapged from ::;;4, 75 in 1935 to a high in 1938 of $20.93, &;radually declining to ~11.26 in 194.4, rising to $14.15 in 1946 and declining again to around $10.30 for 19L}7 anO. ~pll.09 for 1948. The latest interent payment, in 1~49, of ;;>11.09 under the 1935 plan provided a return of only 1,04% of par. ~wing the past 10 years interest payrJents averaged 1.5% aru1ually. Total service, including the amounts actually spent for bond re-purchases, avervged 1.90%, 5. Had a~l assigned funds been used to retire bonds, total service uould have been 2,9%. From the :inception of the debt acljustnen·!j plan on Janu::!ry 31, 1935, t:n oueh February 1, 1949, total receipts for use in servicing amoU11ted 1 to around ~~105 raillion, of Hllich (~50 million uas paid in interest. ApproY...i- mately (/25 million was used to retire bonds in -Ghe foll01!ing estumted original principal a1i10Ul1ts: u.s. issues r;>139 million, sterling issues ~:~26.5 million, 8uiss franc issues ~~3.2 million, equivs.lent to approxinately ~;il68.7 million retired for an expencliture of 025 million, 6. Interest on the e~cternal debt has been paid in accordance uith the terrns of the 1935 debt adjust1:1ent plan. Regnlar omortization, hot-Jever, 111as interrupted in ·che yeo.r 1939, uhen a goverru,1ent. decree provided for tem;_;orary assig,nment of 8.1-nortization funds for ¡ econstruction of the zone devastated 1 by the enrthqual::e of January 1939. Through 19!:-5, ~:)23.6 r,lilli0l.1 uere thus diverted from the c~ebt service, A nu111ber of neu taxeo uhich uere imposed in adclition to the taxes on copper existing at the tir.1e of the 1935 debt acree- ment 1·lere not a~)plied to debt; servioe, despi te the objections of the boD..c1- holc1ers tha·t this c1.id not conform to the 1935 aereenent. An ano.lysis of the addi tional taxes indicttes the lil:elihood thot the bondholders could ri¿;ht... fully object only to those provisions of Latv Ho. 7160 of January 20, 1Sl.2, uhereby a cei1ing uas in effect established on incone ta::able m1der the pro- visions of the LavT 5580. Profi ts above the ceilin(?; uere spli t bet\Jeon the copper com;_Janies ¡;md the Goverru.1ent. The Council of Foreisn Bonclholclers, London, 11ade representations to the Governuent to the effect that Chile should aH;er the neu lau or compensate ·che bondholders by addin:, 'Go the assignec1 revenues an am.ount eque;L to the reduction in revenu.es caused by the neH· 1a11. 7. On .darch 7, 1946 a decree uas issued to app1y ac;ain all receipts as- signad to arnortization to the retiring of bonds as provicled under the 1935 debt adjustuent plan, Initia1 reotitution of divertec~ funds uan o.lso provided by this decree and has been partially carried out. - 5- Table II E:cternal De bt Pavments of Chile (ex~ding inter-gov~nmental loans) (u.s.(~ million) Estimat.ed Oricinal Actual ~tractual Basis Amounts Paid 1929 38.0 38.0 1930 JG.o 38.0 1931 39.0 28.0 1932 40.0 18.0 1933 AO • 5 o 1934 L.1.3 1 o 1935 41.0 4 ..1 * 1936 40.0 4.9 * 19.37 39.0 6.1 * 1938 38.0 14.1 * 19.39 37.0 5.9 'l~ 1940 36.0 5.7 * 1941 35.0 5.2 * 1942 .34.0 5.6 i~ 194.3 .3.3.0 4.8 * 1944 32 ...0 4.5 * 1945 31.0 5.0 * 1946 .30.0 J. 7.3 * 1947 29.0 l. 5.1 * 1948 28.0 .t. 5.2 * * Based on payraent under the 1935 debt adjus·Gm.ent plan. J. Ex:cluding $.3,000,871 app1ied to retem.ption from accurnulated runo:rtization funds in 1946 and z:,475,000 in 191¡.7; 1948 fic;ures are not available. IV. FinE1.1 .Adjustmel);y of txternal ~ l. A neu e:cce:rnal c1.eh:~ service <::greenent, ratified b".¡r the Chilean Con- creas in JUly 1948, calls for the outstandinc e:¡rbernal publicly-isr..mod se- curi ti es to be e:::changed for an equal principal mnotmt of neírl bonds .maturing January 1, 1994, uith interest accr1úng from Jcnuary 1, 191:.8 at 1-1/2); for the first year, 2% for 1949-50, 2-1/2% for 1951-5.3 and .3% for 1954 and thereafter. Through 195.3 an ru111ual sinl:in.r.;, fund of ()2,531,000 (1¡~) Hould be app1ied proportionally ffi'Jong the dallar, sterling and Suiss franc issues. 0\mers uho did not assent to the plan of 1935, or 1:ho assented late, are to be issued non-interest bearing cel·tificates to the exten·G of payments 1~1ade under the 1935 plan. (For further Cetails see Appendb: III) The c,eneral reaction of the various bondholdersr protec-Give groups and investuent advisory services has been favorable, the fee1ing being that the 1948 plan provided a more equitab1e basis of pa~1nent than the 1935 plan. -6- 2. Under the neu 1948 debt adjust:c.lent plan the averar.:,e annuo.l rate of interest during the life of the conds uill vorl~ out to 2,835;. This, plus sinldng fund pay¡nents beginninc Jo.nue.ry 1, 1951,, Hill meJ;:e the total fixed service 4% of the outstonding principal aJ.nour1t of neu dallar bonds. There... fore, total yearly payraents under the neu debt adjustuent plan should amount to around ~?8 1'1illian, 3. As direct oblic;ations of the governuent, the neu external bonds uill be bac~:ed by all public revenues, 1rhich uill include the extraardinary pro- perty ta."C that has in recent years been diverted for internal purposes. V. M.:S~Ganding Long-t.su::rn Externa]., D~and. §2:rv_i~...Q.h§.rges 1, It is estir.1ated that in 1949 the autste.nding e::cternal long-tenn debt of Chile -vrill be in tl1e aaount af :;;;310 million. :uaortization payuents uill aroount to around 010 million and interest pay.. :.m~ts to a;11.3 million, u total of ()21.3 million. Total service pay¡·Jents are expected to decline gro.dually from that level starting in 1952, llhen they auount to (>18,1 million, to 1972, uhen total service paynents are estimated to arao1.mt to ~~8 million. In 1973 these pay¡nents drop sharply ·!;o ($1.3 millian. 2. The majar portian of t.he service payments is due to intererc;t