Argentina's Sovereign Debt Restructuring

In December 2001, after four years of deepening recession, impending financial crisis, and mounting social unrest, Argentina's government suddenly collapsed and ceased all payments on its debt. Argentina has failed to pay before, but this time it registered the largest sovereign default in history. Total public debt grew from 62% of GDP in late 2001 to a record-breaking and unsustainable 164% following default and devaluation in early 2002. Argentina faced restructuring over $100 billion of debt owed to domestic and international bondholders, including $10-15 billion of bonds held by U.S. investors. After an extended and contentious "negotiation" period, Argentina exchanged new bonds for the old on June 2, 2005. The results were unprecedented, with the offer garnering a 76% participation rate (far below the more standard 90%) and paying only 26%-30% of the debt's net present value to most bondholders (nearly half the historical minimum of 50%). Sovereign defaults are typically worked out in what amounts to a consensual understanding between creditors and debtors, 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. In this case, Argentina argued that its debt was simply too big to repay and rebuffed both private creditors, and at times, the IMF, even "suspending" its agreement at one point. In the end, a mutually agreeable resolution failed to materialize, leading to a default that was not only unprecedented for its lengthy resolution (over three years), low recovery rate (30% of NPV), and large residual holdout (24% of creditors), but for the process that stretched (creditors would say flaunted) the guidelines of sovereign debt negotiations. This applied to both informal negotiation guidelines understood to be in play by bondholders, and a more formal understanding as embodied in the IMF's policy of lending into private arrears. Other countries may look to Argentina as a model for reneging on sovereign debt, but the cost of Argentina's financial collapse in long-term social and economic terms has been devastating. For investment firms and individual holders of Argentina's debt, the huge loss taken on the default is also a highly negative precedent. Since the debt restructuring, Argentina has repaid the $9.8 billion it owed the International Monetary Fund (IMF) and seeks to normalize relations with the private international financial markets. Still, there is outstanding litigation against Argentina by the 24% of bondholders who refused to accept the restructuring, and re-engaging the international capital markets has had only limited success. Litigants' lack of success when faced with a determined defaulting country has already led to the adoption of collective action clauses as standard provisions in emerging market debt and the Argentine default will continue to have widespread implications not only for creditors, but for Argentina's long-term financial sustainability, developing country debt markets, guidelines for future sovereign debt restructurings, and IMF policies. In support of U.S. congressional interest in developing country financial crises, this report analyzes Argentina's debt restructuring. It will not be updated.