The Philippine government announced in 1983 that it could no longer meet its foreign debt obligations of $24.4 billion, requesting a moratorium. This was due to extensive borrowing in the 1970s that caused debt to increase 27% annually between 1973-1982. Negotiations began with creditors like the IMF for rescheduling loans. However, the Philippines was found to have underreported its total debt and reserves, complicating matters. While agreements reduced payments, they required austerity measures that hurt the economy. Efforts to lower debt in the 1980s included debt conversion programs, but debt levels remained roughly the same through the Aquino administration in the late 1980s.

1. Philippine External
Debt

2. Philippine External
Debt• On October 17, 1983, it was announced that the Philippines
was unable to meet debt-service obligations on its foreign-
currency debt of US$24.4 billion and was asking for a
ninety-day moratorium on its payments. Subsequent
requests were made for moratorium extensions. The action
was the climax of an increasingly difficult balance of
payments situation. Philippine development during the
decade of the 1970s had been facilitated by extensive
borrowing on the international capital market. Between 1973
and 1982, the country’s indebtedness increased an average
of 27 percent per year. Although government to government
loans and loans from multilateral institutions such as the
World bank and Asian Development bank were granted at
lower-than-market rates of interest, the debt-service charges
on those and commercial loans continued to mount.

3. • In 1982, payments were US$3.5 billion, approximately the
level of foreign borrowing that year and greater than the
country’s total debt in 1970. The succeeding year, 1983,
interest payments exceeded the net inflow of capital by
about US$1.85 billion. In combination with the downturn in
the world economy, increasing interest rates, a domestic
financial scandal that occurred when a businessman fled the
country with debts estimated at P700 million, escalating
unrest at the excesses of the Marcos regime, and the
political crisis that followed the Aquino assassination, the
debt burden became unsustainable.
• The Philippines had turned to the International Monetary
fund (IMF) previously in 1962 and 1970 when it had run into
balance of payment difficulties. It did so again in late 1982.
An agreement was reached in February 1983 for an
emergency loan, followed by other loans from the World
Bank and Transnational Commercial Banks. Negotiations
began again almost immediately after the moratorium
declaration between Philippine monetary officials and the
IMF.

4. • The situation become complicated when it came to light that
the Philippines had understated its debt by some US$7
billion to US$8 billion, overstated its foreign-exchange
reserves by approximately US$1 billion, and contravened its
February 1983 agreement with the IMF by allowing a rapid
increase in the money supply. A new standby arrangement
was finally reached with the IMF in December 1984, more
than a year after the declaration of the moratorium. In the
mean time, additional external funds became nearly
impossible to obtained.
• In each of these arrangement with the IMF, the Philippines
agreed to certain conditions to obtain additional funding,
generally including devaluation of the peso, liberalization of
import restraints, and tightening of domestic credits (limiting
the growth of the money supply and raising interest rates).
The adjustment measures demanded by the IMF in the
December 1984 agreement were harsh, and the economy
reacted severely.

5. Because of its financial straits, however, the government saw
no option but to comply. Balance of payments targets were
met for the following year, and the current account turned
positive in FY 1986, the first time in more than a decade. But
there was a cost; interest rates rose to as high as 40 percent,
and real DNP declined 11 percent over 1984 and 1985. the
dire economic situation contributed to Aquino’s victory in the
February 1986 Presidential Election.
• When Marcos fled to the United States later that month, the
Philippine external debt had grown to over US$27 billion.
The countries most immediate concern was with meeting
debt-service payments. Reduction in the size of the debt was
a longer term issue. Debt serving, US$3 billion in 1986, was
a drain on both the country’s foreign-exchange earnings and
its investible surplus. Technocrats in the national economic
and development authority recommended declaring another
moratorium, this time for two years, to allow the country a
breathing space.

6. measures were introduced in congress in 1986 and
subsequent years to cap annual debt-service payments.
The Aquino administration and the Central Bank, however,
consistently resisted both tactics, opting instead for a
cooperative approach with the country’s creditors.
• Some of the government and government-guaranteed debt
was incurred under questionable circumstances, and there
were persistent demands for repudiation of those loans that
could be shown to be fraudulent. In November 1990, the
Freedom from Debt Coalition a nongovernmental
organization, presented findings from its investigation on 6
potentially fraudulent loans worth between US$4 billion and
US$6 billion, respectively. The largest, a US$2.5 billion loan
for the construction of the Bataan Nuclear Power Plant,
involved allegations of irregularities in bidding procedures
and design, overpricing and kickbacks.

7. The Aquino government previously had filed a civil suit in
the Unites States against Westinghouse Corporation, the
corporation with which the Marcos government had
contracted to build the Nuclear power plant, but the
Philippines continued to pay interest payments on the
Nuclear Plant loans of US$ 300,000 per day while the case
is under litigation. In response to the coalition’s findings,
however, the president said that the country would not pay
fraudulent loans, a statement interpreted as a major policy
change.
• Government negotiators dealt mainly with three groups of
creditors in their efforts to reduce the burden of debt
servicing. The first, and in some ways the most important,
was the IMF, because its approval was considered
necessary to conclude arrangements with other creditors.
The second was the Paris Club, an informal organization of
official creditors. The third group was the commercial bank
creditors, numbering 330 as of 1990. bank negotiations
generally were with the twelve-member bank advisory
committee, chaired by Manufacturers Hanover Trust.

8. • The standby agreement that the Marcos government has
negotiated with the IMF in 1985 was discontinued shortly
after Aquino assumed office. The agreed-upon with respect
to government spending and increases in the money supply
had been widely exceeded as Marcos dipped into
government coffers in a desperate effort to win the 1986
election. In addition, the government wished to negotiate a
more growth-oriented arrangement. An agreement on
repayment terms for US$506 million of loans was concluded
8 months later in October 1986. In January 1987, an
agreement was reached with the Paris Club to stretch out
over ten years, with a 5-year grace period, US$870 million
of loans that were have to been paid in 1987 and the first
half of 1988.

9. • The IMF accord also triggered the release of US$350 million
in new loans by commercial bank creditors that had been
held up when the agreement with the IMF broke down in
early 1986. In March1987, the Philippines and the twelve-
bank advisory committee came to terms on the rescheduling
of the country’s US$13.2 million debt to private banks and a
reduction in the rate of interest. Signing of the agreement
was delayed, however, by a group of creditor banks lead by
Barclays Bank of Britain, who demanded that the Philippine
government guarantee the US$57 million debt of private
fertilizer firm, Planters Product, Inc. an accommodation was
not reached until December 1987.
• A second round of negotiations began in 1989. the Paris
Club restructured US$2.2 million of debt coming due
between September 1988 in June 1990. the IMF and
commercial bank agreements allowed the Philippines to
undertake, in early 1990, a three-pronged program under
Brady Plan guidelines.

10. • First, the government used funds from the World Bank,
IMF, and other sources to repurchase US$1.31 billion of
government debt from private banks at the 50 percent
discounts at which they were selling on the secondary
market, which action reduced the country’s debt by some
US$650,000, and, in the process, the number of creditor
banks fell from 483 to 330. second, debt coming due
between 1990 and 1994 was rescheduled. Last, some
eighty banks subscribed to US$700 million in new loans.

11. • Brady Plan. A plan proposed by United States Treasury
Secretary Nicholas Brady for lending by the International
Monetary fund, World Bank and creditor governments to
finance debtor country purchase of their foreign-currency
debt at the discounted prices at which the debt instruments
were trading in secondary markets.
• The Secondary Market is the financial market in which
previously issued financial instruments such as stock,
bonds, options, and futures are bought and sold. Another
frequent usage of “Secondary Market” is to refer to loans
which are sold by mortgage bank to investors.
• The primary issuances of securities or financial instruments,
or the Primary Market, investors purchase these securities
directly from issuers such as corporations issuing shares in
an IPO or Private placement, or directly from the federal
government in the case of treasuries. After the initial
issuance, investors can purchase from other investors in the
secondary market.

12. • In July 1990, it was reported that the IMF had reviewed
Philippine economic performance and found it “favorable”
for the period between October 1989, when the loan
agreement was reached, and March 1990. By September,
however, the situation had turned around. Agreed-upon
targets had not been met with respect to the sizes of the
Government budgetary deficit, the trade balance, or the
country’s international reserves. As a consequence, the
IMF had refused to release the September tranche
(installment of funds to the Philippines). In turn, manila
canceled the 1999 standby agreement and reopened
negotiations with the IMF. A new agreement was
announced in early 1991. it involved a three-year credit
package, totaling US$375 million, only one-third of the
US$1.17 billion loan package suspended the previous
September. Among other things, the agreement required
the Philippines to implement new revenue-raising
measures by the end of August 1991.

13. • As a consequence of the country’s failure to meet the
September standby agreement targets, the commercial
banks in February 1991 refused to disburse the last
US$115 million of the US$706 million credit line agreed to
in early 1990. At a meeting with Filipino officials, the bank
advisory committee also declined to discuss providing
some US$500 million in new funds. In February 1991 the
Philippines indicated that it would approach multilateral
financial institutions such as the World Bank and the Asian
Development Bank for co-financing, in return for which the
Philippine government would give up the possibility of
rescheduling.

14. • Efforts to reduce the external debt included encouraging
direct investment in the economy. In August 1986, the
Philippines initiated debt-equity conversion program, which
allowed potential investors who could acquire Philippine debt
instruments to convert them into Philippine Pesos for the
purpose of investing in the Philippine economy. Because the
value of the debt in the secondary market was substantially
less than its face value (about half, at the time), the swap
arrangement allowed investors to acquired pesos at a
discount rate.
• Most of the swapped debt was held by the Central Bank,
which could provide the peso proceeds to retire the debt only
through issuing new money, with obvious inflationary
consequences. For this reason, the program was suspended
in April 1988. at that time, US$917 million in debt reduction
had taken place. Other issues were raises, however, about
both the benefits of the Philippines and the fairness of the
conversion program.

15. Debt-equity swaps, it was argued , amounted to a
considerable gain to investors, costing much less in dollars
than was received in pesos, if an investment had taken
place without the swap, a very large subsidy would not have
been involved. Second, a considerable portion of the
conversions appeared to have been by Filipinos bringing
their wealth back into the country. Critics questioned
whether those who engaged in capital flight should be
awarded a premium for returning their wealth to Philippines.
Their also was the question of the arbitrage possibilities of
“round tripping” whereby investors with pesos engaged in
capital flight to obtain foreign currency, which was used
through the swap to achieve a much larger amount of
pesos.

16. Alternatively, an individual with dollars would engage
in a swap and then convert pesos back into dollars
though the exchange market. Although the government
had some regulations concerning length of investment,
the process was ripe for abuse. Nevertheless, the
government resumed the program in December 1990
with an auction of US$7 million in debt paper. The new
program was reported to have been altered to reduce
inflationary pressures.
• Debt swap is the conversion of old debt to either new
debt or new equity. Debt swaps can be performed by a
company for purposes of avoiding bankruptcy,
reorganizing debts, or gaining a more favorable
repayment schedule.

17. • The principal element of any debt-for-equity swap is a
restructuring of the balance sheet of a corporate debtor so
that the relevant participating creditors (often, only
financial creditors) receive equity interests in a
reorganized capital structure in consideration for reducing
their debt claims against the company. In this simplest
form, it may be a route by which a company can avoid an
imminent or prospective insolvent liquidation caused by
prolonged negative cash flows and/or balance-sheet
solvency issues. In either case this may be due to the
company’s inability to service a relatively high level of
debt, a situation which may have arisen because of the
debtor’s poor operational and financial performance.
Alternatively, such conversions have been used
opportunistically by creditors that purposefully acquire
sub-performing debt for the sole intention of gaining
corporate control of a debtor(a so called ‘loan to own’
strategy).

18. • In March 1991, Philippine officials raised the issue of
“Condonation” or debt forgiveness, of the Philippine debt
with United States officials, requesting that the United
States accord the Philippines similar treatment to that
accorded Egypt and Poland. The United States resisted the
Entreaty, pointing our whereas US$33 billion of Poland’s
US$48 billion debt was official, all but 20 percent of the
Philippine debt was owed to commercial banks.
• The Aquino administration spent an enormous amount of
time and effort negotiating with various creditor groups to
lower interest rates, reschedule the country’s debt, and
reduce the magnitude of the debt. A number of innovated
schemes were undertaken; more were discussed. It was a
process, however, that essentially meant running fast to stay
in place.

19. • The size of the country’s external debt in June 1990,
US$26.97 billion, was about the same as the US$26.92
billion the country owed at the end of 1985, shortly before
Aquino took office. Debt-service payments also change
very little: US$2.57 billion in 1985 as opposed to US$2.35
billion in 1990. the balance of payments pressures
remained. The growth of the Philippine economy, however,
cause the ratio of the country’s debt to GNP do decline
from 83.5 in 1985 to 65.2 in 1989, whereas that the debt
service to exports fell from 32.0 to 26.3 over the same
period. Projected debt servicing in September 1990 for the
1990s showed a rise from US$2.35 billion in 1990 to
US$3.25 billion in 1995, falling off to US$2.08 billion in
1999.