PDF _ RL32637 - Argentina?s Sovereign Debt Restructuring
10-Oct-2004; J. F. Hornbeck; 19 p.

Update: December 22, 2004

Abstract: In December 2001, after four years of deepening recession and mounting social unrest, Argentina?s government collapsed and ceased all debt payments. Argentina has failed to pay before, but this time it registered the largest sovereign default in history. Argentina must restructure over $100 billion owed to domestic and foreign bondholders, including $10 billion held by U.S. investors. A final offer made in June 2004 amounted to a 75% reduction in the net present value of this debt, and although an improved offer is expected by year-end, it is still the largest proposed write-down in the history of sovereign restructurings, which foreign bondholders have rejected.

Regardless of how Argentina?s debt is finally resolved, it will likely represent an unprecedented loss for bondholders. This will have widespread repercussions not only for creditors, but for Argentina?s long-term financial sustainability, developing country debt markets, guidelines for future sovereign debt restructurings, and the International Monetary Fund (IMF). All of these issues have been the subject of congressional hearings focused on evaluating the causes and ongoing repercussions of Argentina?s financial crisis.

Argentina must settle with foreign bondholders if it is to return to the sovereign debt market, which will be necessary for financing investment in long-term growth. Argentina has made a reasoned case that its debt is simply too big to repay; nonetheless, the default is not only unprecedented for its low recovery rate, but also for the process that has stretched (creditors would say flaunted) the guidelines of sovereign debt negotiations. This applies 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.

Argentina?s experience raises important questions in at least three major policy areas: country decisions to default on debt, codes of conduct for emerging market debt restructurings; and the role of the IMF in helping resolve financial crises. Although other countries may look to Argentina as a model for reneging on sovereign debt, the cost of Argentina?s financial collapse in long-term social and economic terms has been devastating. For investment firms and other holders of emerging market debt, there is no denying that the huge loss taken on a default like Argentina?s is a highly negative precedent.

The fact that debt workouts are being completed, even if not always smoothly or in a timely fashion, may suggest that the ?market system with IMF assistance? approach is still preferable to taking another shot at reinventing the international financial architecture, including creating some type of sovereign bankruptcy option. But should the Argentine case fail to be resolved to the mutual satisfaction of all parties, it could reinvigorate interest in a systematic and internationally recognized debt restructuring system, because as Argentina has shown, once insolvency occurs and debt becomes far too large to manage, there may be little incentive for countries to work with the existing unenforceable system in finding a quick and consensual solution. This report will be updated periodically.

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Topics: International Finance

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