Argentina’s Defaulted Sovereign Debt:
Dealing with the “Holdouts”

J. F. Hornbeck
Specialist in International Trade and Finance
February 17, 2010
Congressional Research Service
7-5700
www.crs.gov
R41029
CRS Report for Congress
P
repared for Members and Committees of Congress

Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”

Summary
In December 2001, following an extended period of economic and political instability, Argentina
suffered a severe financial crisis, leading to the largest default on sovereign debt in history. It was
widely recognized that Argentina faced an untenable debt situation that was in need of
restructuring. In 2005, after prolonged, contentious, and unsuccessful attempts to find a mutually
acceptable solution with its creditors, Argentina abandoned the negotiation process and made a
one-time unilateral offer on terms highly unfavorable to the creditors. Although 76% of creditors
accepted the offer, a diverse group of “holdouts” opted instead for litigation in hopes of achieving
a better settlement in the future. Although Argentina succeeded in reducing much of its sovereign
debt, its unorthodox methods have left it ostracized from international credit markets for nearly a
decade and triggered legislative action and sanctions in the United States.
Argentina still owes private creditors $20 billion in defaulted debt and $10 billion in past-due
interest, as well as $6.2 billion to Paris Club countries. Of the disputed privately held debt, U.S.
investors hold approximately $3 billion. The more activist investor groups have lobbied Congress
to pressure Argentina to reopen debt negotiations. Some Members of Congress have introduced
punitive legislation in both the 110th and 111th Congress, but to date it has not received any
legislative action. Nearly five years after the original debt workout, however, a confluence of
circumstances has persuaded Argentina to restructure the holdout debt, particularly the need to
secure long-term public financing.
On December 16, 2009, Argentina filed a registration statement and prospectus to issue $15
billion in bonds, the proceeds of which will be used to finance an exchange of defaulted debt. The
terms of exchange were not included and are not expected until March 2010 at the earliest. Some
analyses speculate that the structure of the new exchange will be similar to the one offered in
2005, which would entail a discount of 65% from the face value of the bonds, with past due
interest capitalized and financed separately. Given that Argentine law prohibits the new exchange
from offering better terms than the 2005 offer, and that bondholders who participated in that
exchange benefitted from additional payments based on Argentina’s strong economic growth, it
appears likely that the new offer will be the less favorable of the two.
For Argentina, a successful restructuring requires a sufficiently large participation rate for the
courts to set aside existing judgments and attachment orders. This action would allow Argentina
renewed access to the international credit markets. Historically, sovereign debt workouts with at
least a 90% participation rate have achieved this goal. Since holdouts compose 24% of the
original bondholders, a 60% participation rate of this group would allow for the total participation
rate to reach the 90% threshold. If the exchange succeeds, Argentina will have completed a
sovereign debt restructuring with the deepest write-off of principal in history. The original
bondholders were severely hurt by this deal, but so was Argentina by the crisis. It appears that
nothing can be done for the original investors who have traded their bonds. If there is a legacy to
the Argentine case, it may be in the changes to bond contracts that seek to improve outcomes for
creditors. One option is collective action clauses (CACs) in bonds, which require all creditors to
bargain collectively, with a compulsory majority decision applicable to all bondholders. This
provision may allow for more coordinated creditor responses, which could increase their
bargaining leverage, allow for more equitable treatment of all bondholders, and lead to a far
quicker resolution to any future sovereign default.

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Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”

Contents
Introduction ................................................................................................................................ 1
Background to the Current Debt Restructuring ............................................................................ 1
The 2001 Financial Crisis...................................................................................................... 1
The Debt Restructuring of 2005 ............................................................................................ 3
U.S. Responses to Argentina’s Debt Repudiation................................................................... 5
Private Sector Responses................................................................................................. 5
U.S. Government Responses ........................................................................................... 6
Legislative Responses ..................................................................................................... 6
Argentina’s Debt Profile and Rationale for Restructuring (Again)................................................ 7
Restructuring the Holdout Debt ................................................................................................... 9
The 2009 Proposed Exchange ................................................................................................... 11
Outlook..................................................................................................................................... 11

Tables
Table 1. Argentina: Total Public Sector Debt, 2009...................................................................... 7
Table 2. Argentina: Selected Economic Indicators ....................................................................... 8

Contacts
Author Contact Information ...................................................................................................... 12

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Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”

Introduction
In December 2001, following an extended period of economic and political instability, Argentina
suffered a severe financial crisis, leading to the largest default on sovereign debt in history. In
2005, after prolonged, contentious, and unsuccessful attempts to find a mutually acceptable
solution to restructuring the debt, Argentina abandoned the negotiation process and made a one-
time unilateral offer on terms highly unfavorable to creditors. Although 76% of them accepted the
offer, a diverse group of “holdouts” opted instead for litigation in hopes of achieving a better
settlement in the future. Argentina still owes private bondholders $20 billion in defaulted debt and
$10 billion in past-due interest. It is also in arrears to the United States and other governments on
$6.2 billion in loans. Although Argentina succeeded in reducing much of its sovereign debt, its
unorthodox methods have left it ostracized from international credit markets for nearly a decade
and triggered legislative action and sanctions in the United States.
The lingering effects of the debt default have become a legacy problem for Argentina, but
circumstances have evolved to a point where the government decided in October 2009 to
restructure the remaining holdout debt. Argentina has made preliminary filings at the U.S.
Securities and Exchange Commission (SEC) for a debt exchange, and although there a number of
internal political complications that may delay the debt swap, it is expected to move forward in
the first quarter of 2010. This report provides background, analysis, and implications of
Argentina’s proposal to resolve its defaulted sovereign debt.
Background to the Current Debt Restructuring
Argentina’s 2001 debt crisis resulted from many factors. For the most part, Argentina fell victim
to its own economic policies, but these were compounded by questionable lending and policy
advice by the International Monetary Fund (IMF), a global recession, and international credit
markets determined to chase high-yielding debt with inadequate regard to risk. Together, these
factors propelled Argentina toward a position of unsustainable debt that ended in an
unprecedented default and restructuring scheme.
The 2001 Financial Crisis
Argentina’s 2001 financial crisis has its roots in a history of untamed fiscal policy, the Achilles’
heel of Argentine economic strategy for most of the 20th century. Argentina has long relied on
fiscal largesse as a basic policy tool, covering its shortfalls by printing currency or relying on
more creative alternatives to expand the money supply. This approach to fiscal governance, as
would be expected, led to recurring bouts of high inflation and indebtedness, typically followed
by temporary efforts to stabilize prices. In the 20th century, this policy culminated with the
hyperinflation of 1989-90, which toppled the Alfonsín government, bringing Carlos Menem to the
Presidency along with his well-known Minister of Economy, Domingo Cavallo.1

1 Gerardo della Paolera, Maria Alejandra Irigoin, and Carlos G. Bózzoli, "Passing the Buck: Monetary and Fiscal
Policies," in A New Economic History of Argentina, ed. Gerardo della Paolera and Alan M. Taylor (Cambridge:
Cambridge University Press, 2003), pp. 72-74. Inflation hit a high of nearly 200% per month in 1990 and as noted by
(continued...)
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The Menem-Cavallo cure for chronic inflation was the now infamous “convertibility plan.”
Enacted on April 1, 1991, it set the stage for the crisis that would emerge a decade later. The plan
legally guaranteed the convertibility of pesos to dollars at a one-to-one fixed rate and limited the
printing of additional currency only to amounts supported by its reserve position (which could
fluctuate with the amount of dollars entering or leaving the country). Upholding this promise,
however, required that monetary and fiscal policies also be constrained—the money supply could
not be expanded to cover deficits. Therefore, to preserve this system, deficits either had to be
eliminated or financed through debt.
At first convertibility worked well; it forced fiscal and monetary discipline on the government,
which combined with strong economic growth, reduced inflation and debt service. Cracks in
Argentina’s economic policy, however, soon began to appear. The main problem was that fiscal
deficits were not contained at either the provincial or national levels to thresholds required to
support the convertibility plan. By 1993, debt began to grow, compounded by the practice of
rolling it over. From 1995 to 2001, the debt service ratio grew from 30% to 66%.2 The Argentine
peso soon became greatly overvalued, reducing Argentina’s competitiveness and ability to export,
with predictable declines in public revenue.
Fiscal balances further deteriorated with a strengthening dollar (to which the peso was linked),
competitive devaluations by its major regional trading partners (most importantly Brazil), and
falling commodity prices. Argentina was already entering a four-year recession when the global
downturn arrived in 1999, causing public revenue to fall further. The weaknesses of the
convertibility plan’s strict policy constraints were now exposed. It has been likened to a
straitjacket precisely because the Argentine government had no policy room to address the
recession. The convertibility plan, by definition, prohibited devaluing the peso to increase
exports, and excessive debt eliminated the option for a fiscal stimulus to counter the economic
downturn. The third option, reducing government spending, only guaranteed a deeper recession.
By this point, there was already little chance of Argentina avoiding financial disaster.3
In retrospect, it is also clear that in addition to Argentina’s policy choices and an increasingly
hostile global economy, actions by the international community were complicit in deepening the
severity of Argentina’s financial crisis. Global credit markets lent generously to Argentina, even
after risk factors began to rise to worrisome levels. Investment bank and credit agency reports
overstated Argentina’s strengths.4 Also, the IMF agreed to numerous lending arrangements made
between 1991 and 2001 based on promised changes in Argentine policies and economic
assumptions and projections that ranged from being overly optimistic to unrealistic. U.S. policy
for much of the time could not be divorced from those of the IMF. Without the IMF, the
convertibility plan would have collapsed much sooner. By its own admission, the IMF made
repeated mistakes in surveillance, conditionality, and economic analysis that resulted in lending

(...continued)
these and other authors, high inflation is costly. It reduces the real value of money with the resulting loss of purchasing
power equivalent to a large “inflation tax” on society as a whole.
2 Ibid., and CRS Report RS21072, The Financial Crisis in Argentina, by J. F. Hornbeck. Debt service ratio = public
sector debt/exports.
3 Ibid, pp. 2-4. Argentina required a more, not less, competitive exchange rate to attract foreign currency needed for
debt service. As long as the peso was pegged to an appreciating dollar, this was not possible, and with the addition of a
procyclical fiscal policy, Argentina eventually was unable to cover its debt obligations.
4 Paul Blustein, And the Money Kept Rolling in (And Out): Wall Street, The IMF, and the Bankrupting of Argentina.
(New York: Public Affairs, 2005), pp. 5-8, 31-35, 198-200.
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too much for too long into an untenable situation. Many economists would later argue that
Argentina would have been better off had the IMF ended its support and pushed for debt
restructuring much earlier.5
Notwithstanding the many factors that compounded Argentina’s financial problems, the
government’s economic policies were the major cause of the economic crisis. Faced with the
unsustainable situation described above, and falling international credibility, Argentina was
unable to roll over its debt. Financial panic and political unrest ensued. On December 20, 2001,
President de la Rua resigned and six days later, a new government defaulted on Argentina’s
sovereign debt. Soon thereafter the government abandoned the convertibility plan and devalued
the peso. The Argentine default left the government in arrears with a number of international
creditors. It owed private investors $81.8 billion, the Paris Club countries $6.2 billion,6 and the
IMF $9.8 billion. Addressing the large private-sector debt was Argentina’s most pressing
problem, which was undertaken in a highly unusual manner.
The Debt Restructuring of 2005
The severe financial crisis hit Argentina hard. Between capital flight and the large peso
devaluation, much of the country’s wealth evaporated nearly overnight. Poverty and
unemployment skyrocketed, leading to street protests and political unrest. As Argentina turned to
address its debt problem, it argued that bondholders would have to share in the misery that
affected the whole country, and that the government had a moral duty to ensure this outcome. It
was, as many argued, a matter of equity that the write-down on bonds be historically high,
particularly given that continued lending from the IMF, investment banks, and foreign
governments at a time when it was clear that Argentina faced an impending crisis had only
compounded the financial problems. Perhaps most importantly, Argentina was simply in no
position to repay such massive debt.7
A sovereign default means the government is no longer willing or able to pay the debt it has
incurred in the international markets. Sovereign defaults occur periodically and are typically
worked out in what amounts to a consensual understanding between creditors and debtors. This
type of understanding usually takes the form of a debt restructuring, which involves a formal and
legal change in the contractual arrangements of the debt, such as reducing the face value of the
obligations, issuing new bonds with lower interest rates and longer maturities, and capitalizing
overdue interest, usually at a sizable loss to bondholders. Historically, a “successful restructuring”
typically has had a 90% or greater participation rate (there are always some holdouts) by offering
no less than 50% on the net present value of the debt. Usually, this process unfolds with the

5 The dominant view at the IMF, despite some strong internal opposition, was that the IMF could not abandon
Argentina for fear of being viewed as the cause of its economic collapse. Ibid, pp. 100-106, 134, 140-41, 157 and CRS
Report RL32637, Argentina's Sovereign Debt Restructuring, by J. F. Hornbeck.
6 The Paris Club is a voluntary, informal group of 19 creditor nations who have agreed to act with a common approach
to negotiate debt relief for developing countries unable to meet their external obligations. Members of the Paris Club
agree to restructure and/or reduce official debt owed to them on a case-by-case basis, provided certain conditions are
met. See, CRS Report RS21482, The Paris Club and International Debt Relief, by Martin A. Weiss.
7 Juan Pablo Bohoslavsky and Kunibert Raffer, "¿Qué Hacer con los Reclamos de los Acreedores Holdouts?,"
Economía, January 24, 2008 and Universidad de Buenos Aires. Plan Fénix. La Argentina y su Deuda Externa: En
Defensa de los Intereses Nacionales
. July 2004. http://www.econ.uba.ar/planfenix.
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assistance of the IMF in setting macroeconomic targets that form the basis for a mutual
understanding of a country’s ability to repay its debt.8
Argentina began the debt restructuring process in 2002, negotiating with the IMF and investors
for three years to find a solution that it felt was commensurate with its deeply diminished
economic and social reality. Facing a huge debt burden, Argentina adopted a hard line toward all
parties, insisting on a large write-down of principal for private creditors and postponing action on
Paris Club and IMF debt. After years of negotiation, which were criticized by both sides,
Argentina eventually determined that it had reached an impasse with creditors and decided to act
on its own. It suspended its agreement with the IMF and filed for a one-time unilateral offer with
the SEC to settle with private creditors. The Argentine legislature codified this commitment,
passing the so-called “Padlock Law” (Ley Cerrojo), which prohibited the government from
reopening the exchange or making any kind of future offer on better terms.
On January 14, 2005, Argentina opened the bond exchange for six weeks hoping to reach a final
settlement on the $81.8 billion face value of debt plus $21.4 billion of past due interest (PDI). The
default was unprecedented for its size ($103.2 billion), lengthy resolution (over three years), low
recovery rate (30% on a net present value basis, including PDI), and large residual holdout (24%
of creditors). Bondholders and the IMF criticized Argentina for engaging in a process that
stretched (creditors would argue flaunted) the accepted guidelines of sovereign debt negotiations.
Nonetheless, of the $81.8 billion face value of debt, $62.2 was exchanged for $35.2 billion of
new bonds. The Argentine government, however, was not able to settle the matter fully because
$19.6 billion of bonds (24% of eligible securities) were not tendered and remain in dispute along
with accrued interest, $6.2 billion of arrears to the Paris Club, and $9.8 billion owed to the IMF. 9
Argentina has addressed this remaining debt in one of two ways. In 2006, it decided to repay in
full the $9.8 billion owed to the IMF, relieving the government of any pressure to follow IMF
policy constraints. Alternatively, Argentina has so far declined to restructure or repay debt owed
to the Paris Club countries or holdouts. Holdout creditors have pursued litigation to force
repayment, with the resulting judgments and attachment orders effectively precluding Argentina
from borrowing in the international capital markets until the defaulted bonds are repaid or
restructured.10 For years, neither of these responses affected Argentina’s determination to deviate
from its policy of “financial independence.” Strong economic growth until the 2008 global
financial crisis and reliance on various stop-gap measures (details below) to meet financing gaps
have allowed Argentina to rebuff attempts at forced resolution.
Argentina made a first effort to restructure the remaining defaulted debt in September 2008. As
President, Cristina Fernández de Kirchner announced that Argentina would seek to repay the
Paris Club debt out of its approximately $47 billion of international reserves and signed an
agreement with a three-bank consortium (Barclays Capital, Deutsche Bank, and Citibank) to

8 For examples of five recent developing country defaults that had participation rates of 93%-98%, see: Marcus Miller
and Dania Thomas, "Sovereign Debt Restructuring: The Judge, the Vultures, and Creditor Rights," The World
Economy
, vol. 30, no. 10 (October 2007), p. 1497.
9 CRS Report RL32637, Argentina's Sovereign Debt Restructuring, by J. F. Hornbeck. p. 11-13 and Fitch Ratings.
Argentina: Rapprochement with Creditors and Sovereign Ratings. Special Report. November 19, 2009, p. 2.
10 Argentina’s international bonds were issued under eight different jurisdictions, including New York and a number of
foreign countries. Some 38% of the untendered bonds were denominated in U.S. dollars. Those issued under the
jurisdiction of the State of New York are subject to U.S. law. Miller and Thomas, "Sovereign Debt Restructuring: The
Judge, the Vultures, and Creditor Rights," pp. 1492-1493, 1496, and 1502.
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consider their offer to renegotiate with private holdout creditors. The simultaneous onset of the
global financial crisis, however, put an end to the potential deal and any hope of meeting short-
term financing needs with international borrowing.11
U.S. Responses to Argentina’s Debt Repudiation
Argentina owes approximately $29 billion of bond principal and interest arrears to private
investors and $6.2 billion of loans to Paris Club countries, including nearly $500 million in
arrears to the United States. Private bondholders, the United States Government, and Members of
Congress have each taken actions to encourage Argentina to repay these debts.
Private Sector Responses
In the eyes of institutional creditors, the 2005 Argentine restructuring set a precedent that could
not be condoned, even though a majority of bondholders accepted the terms. Although Argentina
continues to argue that the restructuring was a negotiated solution, it was not a mutually agreed
one. Bondholders had to accept or reject the offer with the alternative being no restitution at all.
Some holdouts sought legal remedies in the United States and other countries, as well as at the
World Bank’s International Center for the Settlement of Investment Disputes (ICSID). Creditors
argued that Argentina had not fulfilled its obligations under either the bond contracts or its
bilateral investment treaty with the United States.
Because many bonds in the hands of holdouts are still being traded, ownership is difficult to
track. They were originally marketed in local country currencies: 58% in Euros, 38% in U.S.
dollars, 2% in Argentine pesos, and the remaining 2% in other currencies. U.S. ownership is still
estimated at approximately $3 billion. Funds that have brought suit against Argentina in U.S.
courts have made claims on $2 billion of principal.12 Because most of these funds are legally
organized in countries known for their lack of financial transparency, it is difficult to state with
certainty the nationality of ownership.13
Depending on the owner of the bonds, the goal of the litigation strategy differs. Institutional funds
representing corporate and investment banks generally seek improved terms on the exchange.
Funds representing retail (individual) investors, mostly European, also have held out for a better
settlement. Hedge funds and so-called “vulture funds,” which purchase risky assets in the
secondary market at highly discounted prices, typically sue for full recovery. Their “holdout”
strategy can be highly profitable for investors with patience, realizing capital gains on
undervalued bonds, often purchased after the default, and potentially receiving full restitution of
interest and principal if the holdouts dwindle to a sufficiently small percentage of the total
unresolved debt.14

11 Jude Webber, "Argentina Mulls Delay to $6.7 billion Debt Repayment," Financial Times, October 11, 2008.
12 Correspondence with U.S. Department of State, January 12, 2010.
13 A few funds are legally incorporated in the United States, the rest in the Cayman Islands, British Overseas
Territories, Turks and Caicos, British Virgin Islands, Switzerland, and Luxembourg. Main Judgments and Pre-
Judgment Claims Against the Argentine Republic
, provided by the Embassy of Argentina, December 2009.
14 Miller and Thomas, "Sovereign Debt Restructuring: The Judge, the Vultures, and Creditor Rights," p. 1497.
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Litigation has applied considerable leverage on Argentina, resulting in legal judgments and
attachment orders that have precluded Argentina from raising funds in the international credit
markets.15 For example, approximately $105 million of Argentina’s Central Bank reserves are
frozen in the Federal Reserve Bank of New York and another $2 billion of global bonds backing
guaranteed loans are on hold at the Depository Trust Company.16 On January 12, 2010, a U.S.
judge froze $1.7 million of Argentine central bank reserves held at the Federal Reserve Bank of
New York because the Fernández government attempted to use them to guarantee payment of
debt coming due in 2010, thereby making them eligible for attachment (see below).
Because the Argentine government did not recognize any creditor groups as negotiating partners,
the hedge and “vulture” funds have also served as one form of admittedly imperfect investor
coordination. While they bring greater pressure to bear on Argentina because of their collective
action, their prolonged delaying tactics in seeking full restitution can clash with other investors
wishing to purse a settlement strategy.17
U.S. Government Responses
With Argentina’s default on Paris Club debt, including nearly $500 million owed to the United
States government, a number of sanctions have been invoked automatically as defined in U.S.
law. U.S. agencies are prohibited from lending to a country that is in arrears on its debt to the U.S.
government including the Export-Import Bank, Overseas Private Investment Corporation, and the
U.S. Trade and Development Agency. The U.S. military is prohibited from offering Foreign
Military Financing, exercising the Excess Defense Articles through 505 Drawdown authority, or
fully using the Global Peacekeeping Operations Initiative funding. In addition, all foreign
assistance is prohibited except for International Military Education and Training funding and
certain programs related to countering terrorism and trafficking in narcotics or persons.18
Legislative Responses
In Congress, some Members have responded to U.S. creditor concerns with the introduction of
punitive legislation against Argentina. The Judgment Evading Foreign States Accountability Act
of 2009 (H.R. 2493) was introduced in the 111th Congress on May 19, 2009, and driven in part by
the American Task Force Argentina (ATFA), a private lobby group representing various
constituents, including hedge and “vulture funds.”19 The bill cites Argentina’s decision to ignore
judgments against its actions as detrimental to U.S. investors and undermining the United States
legal system. The bill’s stated goal is to protect future investors by motivating those countries
identified as “judgment evading foreign states” to “raise their standards of behavior.” It would
deprive such states and any state-owned corporations from issuing debt in the U.S. capital

15 There are over 100 judgments against Argentina and many include attachment orders in which the courts can seize
funds from any future debt that might be issued by Argentina, effectively prohibiting access to the international credit
markets. A list of claims against Argentina is summarized in, Main Judgments and Pre-Judgment Claims Against the
Argentine Republic
, provided by the Embassy of Argentina, December 2009.
16 Correspondence from U.S. Department of State, January 12, 2010.
17 Amrita Dhillon, Javier García-Fronti, Sayantan Ghosal and Marcus Miller, "Debt Restructuring and Economic
Recovery: Analysing the Argentine Swap," The World Economy, vol. 29, no. 4 (April 2006), pp. 392-393.
18 Correspondence from U.S. Department of State, January 12, 2010.
19 Ibid., and Mark Weisbrot, "Vulture Funds Lobby Against Argentina," America Latina en Movimiento, August 6,
2009. http://alainet.org/index.phtml
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markets and would require that any future debt offerings carry written warnings that they have
failed to satisfy outstanding judgments against them. The bill would also require that any request
for bilateral or multilateral assistance be accompanied by a statement identifying the country as a
“judgment evading state.” To date, Congress has not acted on this bill.
Despite lack of congressional action on H.R. 2493, the Government of Argentina has expressed a
strong reaction against it, in part because it is directed at the actions of a single country and
viewed from Argentina, amounts to a threat of imposing economic sanctions. The Argentine
embassy has indicated that passage of such a bill could lead to a deterioration of bilateral
relations, although there has been relatively little attention paid to the legislation in general.
Argentina’s Debt Profile and Rationale for
Restructuring (Again)

As may be seen in Table 1, the portion of “holdout” debt plus that owed to the Paris Club
represents currently 21% of Argentina’s total public sector debt. For eight years, Argentina has
been unable or unwilling to find a solution that would restructure this portion of debt, but
circumstances have changed. Argentina may have both the political will and financial incentives
to negotiate a final solution to its long-outstanding debt issue.
Table 1. Argentina: Total Public Sector Debt, 2009
(in $ billions)
Debt Category
Amount
Percent
Performing Debt:
133.9
79.0%
Bonds and Bills
91.2

Loans and Other
42.7

Other 0.5

Nonperforming Debt:


Private (“holdout”):
29.2
17.3%
Falling Due
5.2

Past Due:


Principal 15.0

Interest 9.0

Paris Club:
6.2
3.7%
Principal 5.1

Interest 1.1

Total Public Sector Debt
169.8
100.0%
Total Public Debt/GDP
59.4%

Data Source: Institute of International Finance and Government of Argentina, Ministry of Economy and Public
Finances.
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There are three major incentives for Argentina to resolve its outstanding debt issues. First, in the
medium to long run, Argentina, like many countries, will need to borrow in the international
capital markets. Although its financing gap for fiscal year 2010 is reportedly covered, the steep
decline in 2009 fiscal revenue relative to expenditures points to a deteriorating fiscal position.
The fiscal balance has fallen from a surplus of 1.4% of gross domestic product (GDP) in 2008 to
an expected deficit of 1.5% of GDP in 2009 (see Table 2.) By initiating a restructuring process
now, when financial requirements are not an immediate threat, Argentina may have the time to
make the political and financial arguments for reengaging the international credit markets at
reasonable rates.20
Table 2. Argentina: Selected Economic Indicators

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
GDP
Growth
(%)
-0.8 -4.4 -10.9 8.8 9.0 9.2 8.5 8.7 7.0 0.7
Overal
Fiscal
Balance
(%)
-3.6 -6.8
-2.0 0.9 3.7 2.1 1.9 1.1 1.2 -1.5
Primary
Fiscal
Balance
(%)
0.4 -1.3 0.7 2.8 5.3 4.4 4.0 3.4 3.3 1.0
Inflation Rate INDEC (%)a
-0.7 -1.5 41.0 3.7 6.1 12.3 9.8 8.5 7.2 5.5
Inflation Rate others (%)a

15.0
25.0
17.0
Current
Acct
Balance
(%
GDP) -3.1 -1.4 8.5 6.3 2.1 2.9 3.6 2.8 2.1 nab
International
Reserves
($
bn) 32.5 15.3 10.4 13.8 19.3 27.3 31.2 45.7 46.2 47.5
Public
Debt
(%
GDP)
45.7 53.7 166.4 138.7 127.3 73.9 64.0 56.1 48.8 59.0
International bond Issues (mn)c

13,468
2,711 0 100 200 540 1,896
3,256 65 nab
Source: United Nations Economic Commission on Latin America and the Caribbean (ECLAC). Estudio
Económico de América Latina y el Caribe 2008-2009, July 2009, Credit Suisse, Argentina, an Improving Story,
September 24, 2009, Government of Argentina, Ministry of Economy and Public Finances (for debt figures).
a. Instituto Nacional de Estadistica y Censos – Argentina’s official government statistical office, which has
come under criticism for grossly understating inflation rates since 2007. Adjusted inflation rates have been
added on the line below to reflect private sector estimates of annual inflation rates since 2007.
b. na = not available
c. Includes sovereign, financial sector, and other commercial debt.
Second, opportunities for ad hoc financing may be limited. In the absence of access to
international capital markets, Argentina has met its financial needs by placing debt with domestic
government agencies, restructuring domestically held debt, selling bonds directly to the
government of Venezuela, and nationalizing private pension funds. In a recent example, on
December 14, 2009, President Fernandez attempted to create a $6.6 billion Bicentennial Fund for
Stability and Debt Reduction. The fund would set aside money to guarantee early repayment for
debt coming due in 2010. While on the surface it may seem to reinforce Argentina’s commitment
to meet its debt service, it presents numerous problems because the commitment would be
financed from Central Bank reserves, which the government would purchase with 10-year
government bonds. In addition to undermining the independence of the Central Bank, this

20 The official Argentine position stresses that the need for financing is not the major incentive for restructuring its
debt, but fiscal reality argues to the contrary. Ministerio de Economía y Finanzas Públicas. Boudou Explicó en
Diputados los Alcances de la Suspensión de la Ley Cerrojo
. October 28, 2009.
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strategy diminishes Argentina’s international reserve position and allows the government to defer
difficult decisions on fiscal adjustment.21
Using Central Bank reserves to guarantee debt payments is an unusual move and was challenged
by both the president of the Central Bank of Argentina, who refused to transfer the funds, and the
Argentine Congress. President Fernández responded with a presidential decree dismissing the
Central Bank President and he resigned his position on January 29, 2010. Nonetheless, the
Argentine courts suspended application of the presidential decree to finance the Bicentennial
Fund, deciding that the congress must be consulted on the matter. Resolution of the status of the
presidential decree awaits the next session of congress, scheduled to begin in March 2010.22
A U.S. federal court also ruled that the attempted use of Central Bank reserves to meet current
fiscal obligations in effect meant that the President viewed the Central Bank as capable of acting
as a financial agent of the Argentine Government. Therefore, the court also ruled that Central
Bank reserves would be subject to attachment. This action caused markets to be less, rather than
more assured of Argentina’s institutional guarantees to meet its financial obligations.23
Third, market conditions are favorable for placing debt. Interest rates are low by historical
standards and liquidity is high and there may be ample appetite for Argentina’s higher yielding
bonds. Recent uncertainty surrounding the Bicentennial Fund, however, have caused bond yields
to rise, making any proposed bond swap relatively more expensive for the Argentine government.
By some measures, Argentina is also in better financial shape to address repudiated debt than it
was during the 2001 crisis or the 2005 restructuring. Argentina has a positive current account
balance and has increased its international reserves from $10.4 billion in 2002 to $47.5 billion in
2009. During the 2003-2008 economic recovery, Argentina had an average annual growth rate of
8.5% and the increased revenues have until recently allowed it to maintain a primary surplus of
2.8% or higher (see Table 2). The primary surplus reflects the fiscal surplus after non-debt
expenditures have been paid, and so is a measure of resources available exclusively for debt
service. Because of the global financial crisis, however, the primary surplus fell to 1.2% of GDP
in 2009, levels inadequate to reduce Argentina’s total public debt. Still, Argentina is financially
stronger than during the 2001 crisis, perhaps suggesting that the imperative and opportunity for
restructuring defaulted debt may have converged.
Restructuring the Holdout Debt
A sovereign debt restructuring is a complicated matter and in Argentina’s case the government
must address three core and interrelated conditions: (1) negotiate a solution with private debt
holdouts; (2) repay or reschedule Paris Club debt; and (3) reengage the IMF. A successful
conclusion for Argentina seems unlikely without meeting all three goals to some degree, in part
because they are interrelated in many ways. First, the Paris Club generally does not entertain a
sovereign debt restructuring proposal without the debtor country undergoing an Article IV review
of its economy (standard practice for all IMF country members), and having an IMF lending

21 International Monetary Fund, Global Markets Monitor, Washington, D.C., December 16, 2009, p. 4.
22 Jude Webber, "Argentina Debt Battle Intensifies," Financial Times, January 11, 2009, p. 3 and Volkel, Christian,
“Government Appeals Against Suspension of Argentine Debt Payment Fund, IHS Global Insight, February 8, 2010.
23 Carlos Pagni, "Reviewing the Payment with Reserves for Fear of an Embargo," La Nación, January 11, 2009.
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program in place. Among other goals, the Article IV review provides one presumably unbiased
assessment of Argentina’s economic health and ability to repay its debt, although Argentina has
been particularly distrustful of the institution since the 2001 crisis. The IMF, however, is unlikely
to consider a formal program until the “holdout” creditors have been offered a proposal.
The IMF review is important in part because it may affect Argentina’s future borrowing rates. A
clean IMF review, however, is not guaranteed. Among other issues, the IMF has registered grave
concerns over the politicization of Argentina’s economic data reporting. The national office of
statistics, Instituto Nacional de Estadística y Censos (INDEC), has been criticized in particular for
misrepresenting national inflation data.24 The discrepancy can be seen in Table 2. By
underreporting increases in price levels, the Argentine government can reduce public sector costs
by, for example, having lower inflation-based price adjustments where applicable and borrowing
domestically at artificially lower nominal interest rates. Correcting data reporting is important for
making a valid assessment of Argentina’s ability to pay future debt obligations. In recent months,
INDEC has been reforming its statistical reporting methods, but recent estimates suggest it is
capturing only 70% of total inflation25 and the IMF is unlikely to provide a fully positive review
of Argentina if this problem is not corrected.
These issues raise two important questions: is Argentina willing to accede in whole or in part to
these requirements, and if so, what is the sequence that would make the most sense to ensure that
all three conditions are met? Press reports suggest Argentina is prepared to agree to an IMF
Article IV review, but is not interested in establishing a formal lending arrangement. This could
delay or inhibit IMF and Paris Club support for a restructuring proposal.26
Three major actions have been completed that allowed the new bond exchange to move forward:
(1) President Cristina Fernández de Kirchner has lent full support for the deal; (2) on November
18, 2009, the Argentine legislature suspended that portion of the 2005 law that prohibits
reopening a debt restructuring offer; and (3) in December 2009, the Argentine government filed a
preliminary prospectus with the SEC to issue bonds to cover the cost of retiring defaulted debt.
Argentina is likely to consider a future exchange “successful” if it can entice a participation rate
that will set aside most legal judgments, which would allow for its renewed access to
international credit markets. Historically, sovereign debt workouts that involve a 90% voluntary
participation rate or higher have been able to achieve this goal. A participation rate of 60% or
higher of the holdout group would allow for the total participation rate, including the 2005
participants, to reach this threshold. Reportedly, the three-bank consortium organizing the offer
represents 40%-50% of the holdouts. Therefore, Argentina would need only an additional 10%-
20% of holdouts to reach this goal. Given that there are many funds that have acquired their
Argentine bonds in the secondary market at highly depressed prices, it is possible that they would
be willing to exchange these bonds, allowing the 90% threshold to be achieved.

24 Helen Parsons, Carola Sandy, and Igor Arsenin, Argentina: Rising Tide Lifts All Boats, Credit Suisse, New York,
NY, September 17, 2009, p. 1.
25 International Monetary Fund, Global Markets Monitor, Argentina, December 14, 2009, p. 4.
26 Credit Suisse, Argentina: Friendlier Noises, September 1, 2009, p. 3.
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The 2009 Proposed Exchange
On December 16, 2009, Argentina filed a registration statement and prospectus at the SEC for the
issue of $15 billion in bonds. If approved by the SEC and the bank consortium that represents a
large portion of holders of defaulted debt, the proceeds would be used to retire the last of the
outstanding defaulted debt. The terms of exchange were not included and are not expected to be
finalized until March 2010 at the earliest. Given that Argentine law still prohibits any new
exchange from offering better terms than the 2005 offer, it is uncertain how investors will
respond.27
Press reports speculate that the structure of the new exchange will be similar to the one offered in
2005.28 If so, it would include a menu of bonds (discount, par, and possibly some type of quasi-
bond option) that would provide an average discount of approximately 65% on the face value of
defaulted bonds. This amounts to the issuance of approximately $7 billion of new bond debt to
retire $20 billion of existing defaulted bonds. Past due interest may be fully capitalized and could
be financed with these or separate bonds. Many sources cite the possibility of creditors having to
accept $1 billion of new debt to provide Argentina with new funds.
If similar to the 2005 offer, bond maturities could vary from 7 to 25 years, or more. In addition,
there is speculation that there may be a GDP warrant similar to the one offered in 2005. The
warrant would be a separate enticement attached to the bonds allowing additional payments when
economic growth exceeds pre-defined thresholds. It proved to be a valuable addition to the bonds
issued in 2005, in large part because the Argentine economy rebounded sharply from the 2001
financial crisis, a trend that may not repeat in the near future. Argentina reportedly has allotted
$15 billion in its debt schedule to finance the exchange, which may include restructuring the Paris
Club portion of defaulted debt.
Outlook
Argentina may be on the verge of finally completing, largely on its own terms, the restructuring
of the largest and most controversial default on sovereign debt in history. There was little
disagreement that in 2002 Argentina faced a desperate financial situation that required a radical
restructuring of debt, including a large write-off by bondholders. The historical precedent for such
an outcome has been set on many occasions. The Argentine debt restructuring framework,
however, involved methods, processes, and a deep discount that were notably unprecedented. In
addition, although Argentina negotiated for years with creditors under IMF guidelines, it
ultimately made a “take it or leave it” offer, with the promise that no better offer would be made.
In the end, Argentina’s debt restructuring was costly for all parties, raising a lingering question of
whether it represents a new template for debtor countries in the future. For many reasons, it
arguably does not. Perhaps the major lesson for Argentina is that a prolonged disregard for fiscal

27 The November 18, 2009 law suspending the prohibition on making a new bond exchange states, “the offered
financial terms and conditions cannot be equal nor better than creditor offers made under the debt restructuring decree
1.735/04.” See: Clarin.com. Piden Suspender un Año la Ley Cerrojo para Acelerar el Canje. November 27, 2009.
28 Martin Kanenguiser, "Inminente Anuncio de Canje de los Bonos que Sigue en Default," La Nacion, October 17,
2009, p. 2.
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responsibility can have dramatic long-term economic, social, and political consequences. At the
financial level, the costs to Argentina have been severe, particularly its inability to access
international credit markets. This cost was compounded by Argentina’s resorting to creative, but
unorthodox financing mechanisms that could not adequately replace conventional financial
arrangements. If the new debt restructuring allows Argentina access to international credit, the
bonds likely will carry higher interest rates than those of many other countries. This situation
does not seem like a desirable model for other countries contemplating a sovereign default.
The Paris Club so far has also been a loser in this case. The Argentine case demonstrates that
national governments may be limited in their efforts to influence a sovereign nation that is
determined to delay or deny debt repayment. For the United States, neither sanctions nor
legislative proposals have had any noticeable influence on Argentina, and actually may have
reinvigorated Argentina’s resolve to stay the course of default as long as possible. In the end, it
was the international markets that appeared to have the greatest leverage on Argentine decision
making.
Creditors also clearly suffered, with the exception of “vulture funds” and others able to gain on
trading highly discounted debt in the secondary markets. Creditors as a whole are best served by a
quick and mutually-agreed debt workout, which historically has led to better and more equitable
terms than those offered by Argentina. The lack of collective action presented a serious problem
in this case. The financial markets have since responded in ways that seek to avoid a second
occurrence of a prolonged, costly, unilateral workout.
The most important development along these lines is the adoption of collective action clauses
(CACs) in virtually all sovereign debt. These clauses allow for a majority of bondholders to
bargain collectively and require a minority holdout group to capitulate to the majority negotiated
solution. While it is not possible to compensate most of the original bondholders of Argentine
debt in this case, it is likely that CACs and other bondholder cooperation mechanisms will
improve chances for better outcomes in the future. CACs may help investors negotiate for better
returns in the case of a future default and also eliminate the need for “vulture” funds, which often
trade on the losses of other creditors and employ a holdout strategy that can impede movement
toward early resolution. Developments that improve investor coordination and more equitable
outcomes in future defaults may be a major legacy of the Argentine debt crisis.

Author Contact Information

J. F. Hornbeck

Specialist in International Trade and Finance
jhornbeck@crs.loc.gov, 7-7782


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