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

J. F. Hornbeck
Specialist in International Trade and Finance
June 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 left it ostracized from international credit markets for 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 April 30, 2010, Argentina announced a new $18.3 billion offer to exchange new bonds and
cash for defaulted bonds held by the so-called “holdouts.” The exchange will be open from May 3
to June 22, 2010. Two distinct offers have been made, one for retail (small) investors, the other
for institutional (large) investors. Retail investors will receive replacement bonds for the full face
value of the defaulted bonds they currently hold. Past due interest will be paid in cash.
Institutional investors will receive a discount bond equal to a 66.3% reduction in the face value of
the defaulted debt they currently hold. Past due interest will be covered by a separate seven-year
“Global” bond. Interest rates vary depending on the bond. Both groups of investors will receive a
GDP-linked security called a warrant that provides for additional payments should the Argentine
economy grow at rates higher that anticipated and stipulated in the prospectus. Analysts value the
deal at between 48 and 51 cents on the dollar, compared to 60 cents for the 2005 exchange.
For Argentina, a successful restructuring requires a sufficiently large participation rate to
eliminate most of the existing judgments and attachment orders. Argentina expects, with no
guarantee, that such an outcome will lead to 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 for this
group would allow for the total participation rate to reach the 90% threshold, including those that
participated in the 2005 exchange. If the exchange succeeds, Argentina will have completed a
sovereign debt restructuring with the deepest write-off of principal in history. Many original
bondholders were severely hurt by this deal, as was Argentina by the crisis. Secondary market
participants may see a sizable profit. 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 the use of
collective action clauses (CACs), now standard for sovereign debt, which require all creditors to
bargain collectively, with a compulsory majority decision applicable to all bondholders. It is no
coincidence that both the 2005 and 2010 Argentine exchanges are governed by CACs.
Congressional Research Service

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 ..................................................................................................... 7
Restructuring Sovereign Debt...................................................................................................... 7
Argentina’s Debt Profile and Rationale for Restructuring (Again)................................................ 8
The 2010 Exchange................................................................................................................... 10
Face Value .................................................................................................................... 11
Past Due Interest ........................................................................................................... 11
GDP-Linked Warrants................................................................................................... 12
Valuation ...................................................................................................................... 12
Outlook..................................................................................................................................... 12

Tables
Table 1. Argentina: Total Public Sector Debt, December 31, 2009 ............................................... 9
Table 2. Terms of Proposed Argentina 2010 Bond Exchange ..................................................... 11

Appendixes
Appendix. Argentina: Selected Economic Data, 2000-2009 ....................................................... 15

Contacts
Author Contact Information ...................................................................................................... 15

Congressional Research Service

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. The terms were highly unfavorable to creditors, but 76% accepted the offer.
A diverse group of “holdouts,” however, opted to litigate instead. Argentina owes these private
creditors $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 its debt burden, its unorthodox methods have left it ostracized from international
credit markets for a decade and triggered legislative action and sanctions in the United States.
The lingering effects of the debt default became a legacy problem for Argentina, but in October
2009, the Argentine government decided to restructure the remaining holdout debt. Argentina
made the necessary filings at the U.S. Securities and Exchange Commission (SEC) and its
European and Japanese counterparts for a debt exchange. Following a number of internal political
complications that delayed the process, a formal approved offer was made on April 30, with
bondholders given a seven-week period from May 3 to June 22, 2010, to exchange their bonds.
Taking into consideration all aspects of offer, financial analysts value it at 48-51 cents on the
dollar, compared to 60 cents for the 2005 exchange. It remains to be seen how large a response
this offer will bring and whether it is sufficient to allow Argentina to achieve its primary goal of
being able to renew borrowing in the international credit markets.
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. At the end of the 20th century, such a policy culminated
with the hyperinflation of 1989-90, toppling the Alfonsín government and 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
(continued...)
Congressional Research Service
1

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

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. policies
for much of the time could not be divorced from those of the IMF. Without the IMF, the

(...continued)
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
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.
Congressional Research Service
2

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

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
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. Argentina owed private investors bonds with a face value of $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

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.
Congressional Research Service
3

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

no less than 50% on the net present value of the debt. Usually, this process unfolds with the
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 with
the so-called “Lock Law” (Ley Cerrojo), which prohibited the government from reopening the
exchange or making any kind of future offer on better terms. This action served the dual purpose
of ensuring participating bondholders that they would not lose out on any better deal in the future
and prodding a relatively higher participation rate than might otherwise have been the case.9
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 unable to settle the matter fully because
$19.6 billion of bonds (24% of eligible securities) were not tendered and remained in dispute
along with accrued interest, $6.2 billion of Paris Club arrears, and $9.8 billion of IMF debt.10
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.11 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.

8 For examples of five developing country defaults (Ecuador, Pakistan, Russia, Ukraine, and Uruguay) 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 The Republic of Argentina, Registration Statement No. 333-163784, Securities and Exchange Commission,
Washington D.C., April 9, 2010, p. 4. This document also contains Argentina’s view of the crisis and 2005 exchange.
10 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.
11 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.
Congressional Research Service
4

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

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
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.12
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.13 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). In the
United States, 158 suits have been filed, 18 of which are class actions. There are an additional 34
proceedings underway at the ICSID brought by investors under numerous bilateral investment
treaties (BITs). Awards have been rendered in eight ICSID cases totaling $913 million, but none
have been “executed upon.”14 U.S. 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 $2-3 billion of principal.15 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.16

12 Jude Webber, “Argentina Mulls Delay to $6.7 billion Debt Repayment,” Financial Times, October 11, 2008.
13 Paris Club debt as of June 2010 may be closer to $7.0 billion with accrued interest, and $7.5 billion if penalties are
added.
14 The Republic of Argentina, Registration Statement No. 333-163784, Securities and Exchange Commission,
Washington DC, April 9, 2010, p. 11, and Prospectus, April 27, 2010, pp. 59-60.
15 Correspondence with U.S. Department of State, January 12, 2010.
16 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.
Congressional Research Service
5

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

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. They may represent
as much as $3 billion of defaulted bonds.17 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.18
Litigation has not resolved any claims, but has applied considerable leverage on Argentina. It has
produced $8.6 billion in legal judgments and attachment orders from U.S. courts, which has
precluded Argentina from raising funds in the international credit markets.19 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.20 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.21
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.22

17 Discussion with FitchRating, June 11, 2010.
18 Miller and Thomas, “Sovereign Debt Restructuring: The Judge, the Vultures, and Creditor Rights,” p. 1497.
19 There are 158 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.
20 Correspondence from U.S. Department of State, January 12, 2010.
21 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.
22 Correspondence from U.S. Department of State, January 12, 2010.
Congressional Research Service
6

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

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.”23 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
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.
Restructuring Sovereign Debt
A sovereign debt restructuring is a complicated matter and in Argentina’s case the government
faced three core and interrelated issues in attempting to form a strategy to: (1) negotiate a solution
with private debt holdouts; (2) repay or reschedule Paris Club debt; and (3) reengage the IMF. It
was widely believed that a successful conclusion for Argentina was unlikely without meeting all
three goals to some degree, in part because they are interrelated. 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 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, usually does not consider a formal program until the “holdout” creditors have been
offered a proposal.
The IMF review can be important in part because it can affect a country’s borrowing rates. There
was, however little hope for a clean IMF review for Argentina at this time. 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 the Appendix. By underreporting increases in price levels, the Argentine government

23 Ibid., and Mark Weisbrot, “Vulture Funds Lobby Against Argentina,” America Latina en Movimiento, August 6,
2009. http://alainet.org/index.phtml
24 Helen Parsons, Carola Sandy, and Igor Arsenin, Argentina: Rising Tide Lifts All Boats, Credit Suisse, New York,
NY, September 17, 2009, p. 1.
Congressional Research Service
7

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

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. More recently, 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 raised two important questions: was 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? As it turned out, Argentina skirted the entire issue, moving
ahead with the bond exchange without an IMF review and promising to deal with the Paris Club
at some future date.
For Argentina, a “successful” restructuring requires a sufficiently large participation rate to
eliminate most of the existing judgments and attachment orders. Argentina expects, with no
guarantee, that such an outcome will lead to renewed access to the 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.
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 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 has both the political will and financial incentives to negotiate a final solution
to its long-outstanding debt issue.
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 FY2010 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 a deficit of
-0.7% of GDP in 2009 (see Appendix). 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.26

25 International Monetary Fund, Global Markets Monitor, Argentina, December 14, 2009, p. 4.
26 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.
Congressional Research Service
8

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

Table 1. Argentina: Total Public Sector Debt, December 31, 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.
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 have 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 presented 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
strategy would have diminished Argentina’s international reserve position and allowed the
government to defer difficult decisions on fiscal adjustment.27
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

27 International Monetary Fund, Global Markets Monitor, Washington, D.C., December 16, 2009, p. 4.
Congressional Research Service
9

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

Fund, deciding that the congress must vote on the matter. President Fernández later rescinded the
original decree, replacing it with two others in an attempt to avoid a constitutional problem in
using Central Bank reserves to guarantee Argentine multilateral and private sector obligations
coming due.28
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 and volatility in the European debt
markets, however, have caused bond yields to rise, making the proposed bond swap and any
future debt offerings 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 (for detailed data, see Appendix). 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, and its
medium-term fiscal capacity remains in question unless it is able to return to the credit markets.
The 2010 Exchange
In 2009, Argentina began the initial process of setting up a new bond exchange, taking three
important steps: (1) President Cristina Fernández de Kirchner lent full support for the deal; (2) on
November 18, 2009, the Argentine legislature suspended that portion of the 2005 law that
prohibited reopening a debt restructuring offer; and (3) in December 2009, the Argentine
government filed a preliminary prospectus with the SEC, which approved Argentina’s request to
issue new bonds. On April 15, 2010, the Minister of Economy announced the key features of the
proposed bond deal. A formal offer was made on April 30, 2010. An early tender for institutional
investors opened May 3-12, 2010, while the general submission will run from June 7 to 22, 2010.
The final settlement date is scheduled for August 2, 2010.
The exchange is structured to provide two different offers, one for small retail investors, defined
as those holding less than $50,000 of defaulted bonds, and a second for institutional investors, or
those holding amounts greater than $50,000, a feature also present during the 2005 exchange. The
retail investors will receive a more generous offer to entice their support in order to ensure a
minimally acceptable overall participation rate.
The bond exchange must address two aspects of outstanding debt. First, the face (or par) value of
the bond. This term refers to the stated value on the bond when it was issued. Second, it must
address past due interest (PDI), or the interest that has accrued since the default. In each case,
both retail and institutional investors receive a bond in exchange for the defaulted debt, cash or a
separate “Global” bond for PDI, and a separate GDP-linked security called a warrant that

28 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.
Congressional Research Service
10

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

provides for additional payments under certain circumstances (see Table 2 for a summary of the
bond characteristics).
Table 2. Terms of Proposed Argentina 2010 Bond Exchange
Bond Characteristic
Retail Investors
Institutional Investors
Bond Type
Par Bond (pays ful face value)
Discount Bond (66.3% reduction from
face value)
Amount
Up to $2.0 billion
$16.3 billion
Maturity Date
December 31, 2038
December 31, 2033
Annual Interest Rate
2.5%-5.25% increasing over time
8.28%
Past Due Interest
cash payment
Separate 2017 Global bonds @ 8.75%
GDP-linked warrant
yes, expiring by December 15, 2035
yes, expiring by December 15, 2035
2005 GDP Warrant Payments
no
no
Bank Commission
0.4%
0.4%
Source: Securities and Exchange Commission, Amendment #5 to Argentina 18-K, filed April 19, 2010 and
Prospectus Directive filed April 27, 2010, pp. 11, 33-42, and 106-112.
The total value of the new securities offered is $18.3 billion, $17.6 billion to cover principal and
$0.7 billion to cover unpaid interest accrued as of December 21, 2001, the point of default. The
$17.6 billion dedicated to principal actually covers the face value of defaulted debt, including the
heavily discounted (reduced) value of the bonds owed to institutional investors, plus the PDI on
bonds owed institutional investors (retail investors will receive cash for PDI, see below). There is
a limit of $2.0 billion of par bonds, there is no limit on the issuance of discount bonds beyond the
total $18.3 billion of total securities as defined in the prospectus.
Face Value
Retail investors will receive a par bond to compensate them for the full face value of the
defaulted bonds they hold. Total par bonds are limited to $2 billion. Institutional investors, by
comparison, must accept a discount bond reflecting a 66.3% reduction in the face value of the
defaulted bonds they hold. In each case, new bonds will be issued in exchange for the old ones,
with the discount bond for institutional investors maturing in 2033 and carrying an annual interest
rate of 8.28%. Par bonds for retail investors will mature in 2038, and carry a sliding annual
interest rate beginning with 2.5% for the first 9½ years, 3.75% for the next 10 years, and 5.25%
for the final 9½ years. Interest is paid semi-annually.
Past Due Interest
Retail investors will be paid PDI in cash, covering interest from December 31, 2003 up to
September 30, 2009. PDI for institutional investors will be covered by a par “Global” bond
maturing in 2017 with interest paid in semi-annual interest payments, carrying an interest rate of
8.75%. It will cover interest from December 31, 2003, through December 30, 2009.
Congressional Research Service
11

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

GDP-Linked Warrants
Both retail and institutional investors receive GDP warrants, which are securities that may be
traded separately from the bonds to which they are attached. A warrant is a promise to make a
particular offer under certain circumstances, often issued in connection to bonds to make them
more attractive to investors. In this case, Argentina promises to make additional payments on the
new bonds in the event that the Argentine economy grows faster than a predetermined and stated
rate for any given year, as defined in the prospectus. The warrant is meant to compensate for
bonds outstanding in December 2001 and interest accrued to December 30, 2001, but payment in
any given year is based on better than expected economic performance in the previous year,
which provides additional public revenue to the Argentine government. This feature turned out to
be a particularly attractive feature of the 2005 exchange because Argentina emerged from its
crisis with six years of high economic growth (see Appendix), well above projected rates. It
remains to be seen if this trend can be repeated.
Investors had hoped that the new deal would include the equivalent of past payments on warrants
issued in the 2005 exchange, arguing that like past due interest, they are entitled to compensation
from Argentina’s better-than-expected fiscal position arising from very strong past economic
growth. Argentina decided not to include such payments, reasoning that the holdouts had declined
to participate in that growth. The absence of these payments raised concern in the investment
community over the attractiveness of the exchange.
Valuation
In the arcane world of bond valuation, analysts estimate the value of the proposed exchange for
discount bonds at between 48 and 51 cents per dollar value of the bond. These numbers compare
unfavorably with the 60 cents on the dollar valuation of the 2005 exchange, which included a
better than expected performance because of GDP-linked warrants.29 Analysts estimate that
inclusion of past payments of GDP warrants would have added 7 cents on the dollar to the offer.
The defaulted bonds are currently trading around 49-50 cents on the dollar in the market, nearly
four times their lowest trade level of 11 cents recorded in September 2008.30
Outlook
Argentina is completing the restructuring of the largest and most controversial default on
sovereign debt in history, largely on its own terms. There is 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 to those investors that chose to “hold
out” for a better future result.

29 Igor Arsenin and Carola Sandy, Argentina's Debt Swap Offer: Good Enough, Credit Suisse, New York, April 15,
2010, p. 1.
30 International Monetary Fund, Global Markets Monitor, April 16, 2010, p. 5.
Congressional Research Service
12

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

Argentina kept its promise by offering a new bond exchange that is valued below the 2005 offer.
Much of the defaulted debt, however, has been trading on the secondary market, at prices as low
as 11 cents on the dollar, so there may be opportunity for many institutional investors, including
the “vulture funds,” to gain on a transaction broadly valued at between 48 and 51 cents on the
dollar. The 2010 offer may draw sufficient support to exchange most of the remaining defaulted
debt. Analysts estimate that this outcome could lead to over 90% of the total 2001 defaulted debt
being exchanged, if the 76% tendered in the 2005 workout is included.
There is a high probability that a small percentage of investors will not accept these terms and
prefer to let the litigation option play out. Court reactions to these holdouts are not easy to
predict, but technically any judgments against Argentina would still be in place for untendered
defaulted bonds.
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
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 indefinitely. If the new debt exchange allows Argentina access to international
credit, the bonds likely will carry higher interest rates than those of many other countries. Such a
result seems like an undesirable 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 fiscal necessity and the international markets that appeared to have the greatest leverage on
Argentine decision making.
Creditors also clearly suffered, with the exception of those with the patience and willingness to
accept the risk of purchasing 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. They have become the “market standard” for sovereign bonds governed by the laws of
New York, typically where foreign debt is placed in the United States, including Argentina’s.31
While it is not possible to compensate most of the original bondholders of defaulted Argentine
debt, it is likely that CACs and other bondholder cooperation mechanisms will improve chances

31 Michael Waibel, “Opening Pandora's Box: Sovereign Bonds in International Arbitration,” The American Journal of
International Law
, vol. 101, no. 4 (October 2007), p. 736.
Congressional Research Service
13

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

for better outcomes in future sovereign debt restructurings. CACs may help investors negotiate
for better returns in the case of a future default and also likely reduce the holdout problem,
eliminating the need for “vulture” funds, which often trade on the losses of other creditors and
employ a strategy that can impede movement toward early resolution. Developments that
improve investor coordination and more equitable outcomes in future defaults may be the major
legacy of the Argentine debt crisis. It is no coincidence that both the 2005 and 2010 exchanges
are governed by CACs.
Congressional Research Service
14

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

Appendix. Argentina: Selected Economic Data, 2000-
2009

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 1.4 -0.7
Primary
Fiscal
Balance
(%)
0.4 -1.3 0.7 2.8 5.3 4.4 4.0 3.2 3.3 1.5
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 (%)

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
Internat’nal 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 and Government of Argentina, Ministry of Economy
and Public Finances (for debt figures).
Notes
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.

Author Contact Information

J. F. Hornbeck

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


Congressional Research Service
15