Is a “rollover” the same as a debt default? When the US rolls over its debt is it a polite word for a default? The reason I ask is because I found the following in “The Prize” The Epic Quest For Oil money and Power" by Daniel Yergin
The author states on page 713 (concerning Mexico’s debt restructuring negotiations with the US Federal reserve)
“Silva Herzog (Mexico’s Finance Minister) flew back to Mexico City in an uproar. He went on television for forty-five minutes with a blackboard but no written speech to explain what was happening, and then came up to New York City the following friday to meet with the Federal Reserve and representatives of terrified banks to work out a restructuring of mexico’s debt. What had been devised was a debt moratorium. But nobody wanted ti call it that;instead, they called it a “rollover”. It was a polite way to say, that at least in part, Mexico had defaulted.”
Fundamentally, no, it’s not. A debt is “rolled over” if, when it’s due for payment, the lender makes a new loan which is used to repay the old loan. The borrower meets his obligations under the old loan, so no default. He is, of course, liable to repay the new loan, but usually on new terms and a new repayment schedule.
It’s not a default becuse it happens by agreement between the lender and the borrower, and it involves the old loan being repaid when due. And sometimes its entirely routine; there are many situations where everybody involved with a loan fully expects that, at maturity, it will be rolled over. But sometimes - by no means often, but sometimes - a rollover happens because, if it didn’t, there would be a default, and both parties are anxious to avoid this. And sometimes the lender comes under a degree of pressure, either from the borrower or from others with an interest in the borrower’s financial health, to agree to the rollover. So some rollovers are little more than a device to avoid a technical default. But, even then, they are not, technically, a default.
As he said, for political reasons some loans are rolled over when the borrower is in deep trouble and cannot repay the loan now and im many cases is unlikely to ever be able to. The slang term for this is “extend and pretend”. It’s widely believed there are a lot of these loans outstanding in Europe & Japan right now.
As mentioned, rolling over debt is a routine occurrence. It’s only a default when it’s not voluntary, ie the lender is presented with: ‘accept this new security (bond, loan, whatever the form may be) as repayment for the old, or else declare default and see what you can get then’.
Events of default by borrowers with debt ratings are ‘refereed’ by the rating agencies giving the rating. They say when a roll over has enough of an element of ‘or else’ to count as a default. And as a general rule if any borrowing is declared in default, they all become legally in default, not just the particular one over which the default arose. Lending or bond agreements generally spell this out. In case a borrower has no public rating (the vast majority by number of borrowers, though borrowers with ratings represent a lot of the $ value of debt markets), then the loan agreement might specify a methodology to determine an event of default.
I’d also add that the term ‘roll over’ is a bit ambiguous. For example in case of a government issuing bonds to the public market, it’s not necessarily clear or relevant which particular new bonds replace which particular old bonds. And the issue of default is completely moot if the new bonds are offered to everyone, the new lenders might be different than the old. Potential gray areas about roll over as it relates to default would be in cases where the borrower asks the same lender to provide a new loan to pay an old one, and then, especially in case of govt or other large borrowers (if you owe the bank $100,000 they own you, if $100mil maybe you own them) it might not be clear whether the ‘negotiation’ has some element of coercion, with the leverage being the bank management’s reluctance to recognize a bad debt, and/or ‘encouragement’ by the bank’s government regulator to smooth things over on behalf of the borrower, or of general financial stability. But again, these smoothing over processes can be upset to a degree if rating agencies review the deal and say ‘no that’s a default’, even though the debt was rolled over and lenders nominally are whole. The Greek debt restructuring of a few years ago was a ‘voluntary exchange’ of old bonds for new ones (with heavy pressure by Euro zone govt regulators on their banks to agree to it) which the rating agencies deemed a default.