Argentinas Sovereign Debt Restructuring

CRS Report for Congress
Argentina’s Sovereign Debt Restructuring
Updated May 5, 2006
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

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.

A Summary of Argentina’s Sovereign Debt.............................1
Resolving Sovereign Defaults........................................4
Argentina’s Debt Restructuring Strategy................................7
The Dubai Proposal............................................8
The “Final” Buenos Aires Offer..................................9
IMF Program “Suspension”.....................................10
Concluding the Restructuring Agreement..........................11
Outlook and Implications...........................................13
Argentina ...................................................13
The IMF....................................................14
U.S. Policy..................................................15
Emerging Markets and Debt Restructurings........................16
List of Figures
Figure 1. Global Distribution of Argentine Debt to Be Restructured..........3
List of Tables
Table 1. Argentina’s Sovereign Debt..................................2
Table 2. Argentina: Selected Economic Indicators.......................4

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.1 Argentina has failed to pay before, but this time it2
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 of3
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%).
Since the debt restructuring, Argentina has also 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. 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.
A Summary of Argentina’s Sovereign Debt
Prior to the debt restructuring, the Argentine government owed $194.6 billion
in bonds and loans, a vast amount by any measure. The debt portfolio can be
classified into three categories based on how the debt was managed (see Table 1).

1 For details, see CRS Report RS21072, The Financial Crisis in Argentina, by J. F.
Hornbeck, and also, Blustein, Paul. And the Money Kept Rolling In (And Out): Wall Street,
the IMF, and the Bankrupting of Argentina. New York: Public Affairs. 2005.
2 In fact, from 1824 to1999, Argentina’s sovereign debt was “either in default or undergoing
restructuring a quarter of the time” and it has had at times by far the lowest Institutional
Investor rating of all major emerging market economies. Reinhart, Carmen M., Kenneth S.
Rogoff, and Miguel A. Savastano. Debt Intolerance. Brookings Papers on Economic
Activity. William C. Brainard and George L. Perry, eds. Washington, D.C. 2003. pp. 6-7.
3 Debt restructuring implies a formal change in the contractual arrangements of the debt,
such as reducing the face value of the debt and issuing new bonds with lower interest rates
and longer maturities — usually at a sizable loss to bondholders.

First, performing debt refers to debt that continued to be serviced, or was never in
arrears. Second, non-performing debt yet to be restructured refers to debt not
included in the restructuring effort, but that has not been serviced either. Third,
restructured non-performing debt comprises the multitude of bonds that were subject
to the restructuring offer. This third category included principal and so-called past
due interest (PDI), or interest that accrued, but had not been paid. Historically, PDI
in sovereign debt workouts has been repaid in full, either up front, or as a new bond
issue separate from the principal due (often referred to as a PDI bond). How PDI is
handled is an important part of any sovereign debt restructuring.
Table 1. Argentina’s Sovereign Debt
(prior to the June 2, 2005 restructuring)
($ billions)
Debt CategoryAmountPercent
Performing Debt:84.743.6
International Financial Institutions (IMF, World Bank)(32.7)
Guaranteed Loans(12.9)
Provincial Bonds(10.0)
Non-Performing Debt Yet to Be Restructured:6.73.4
Bilateral (including Paris Club)(4.8)
Commercial (mostly banks)(1.4)
Past Due Interest (PDI)(0.5)
Restructured Non-Performing Debt:103.253.0
Past Due Interest (PDI) (through June 2004)(21.4)
Total Public Debt194.6
Data Source: Government of Argentina and various news sources. *Bonos del Gobierno Nacional -
National Government Bonds.
Performing debt included all debt owed to the international financial institutions
(IFIs); BODENs, or bonds issued to compensate banks and depositors for the peso
devaluation; guaranteed loans for sovereign debt previously restructured during the
final attempts to avoid default in 2001; and provincial debt that the federal
government assumed after the crisis. Except for the obligations owed to international
organizations, most of this debt was held by Argentines and has been fully “pesified.”
This means that the non-IFI bondholders already reduced their claims, when in 2001
their bonds were restructured, and again in 2002, when their dollar-denominated
bonds were converted to devalued pesos (pesified).4
The government of Argentina reasoned that both the IFIs, which continued to
lend to Argentina, and those creditors who participated in the “voluntary”
restructuring and “pesification” of debt, should not have been further penalized
because they were actively engaged in helping Argentina solve its financial problems.
In fact, there was little room for restructuring this debt without reigniting a crisis.
Defaulting on the IFIs was not a realistic option. Their debt is considered “senior”

4 Credit Suisse First Boston. Emerging Markets Daily Latin America. March 7, 2003, p. 2.

to all other and is always repaid in full, except under the rarest of circumstances.
Such a default would have placed Argentina in a small group of countries completely
shut off from external capital. Nor was there much room to restructure most of the
domestically held BODENs. Many were placed with depositors and financial
institutions, under some government pressure, so a default or write-down could have
jeopardized the banking system. Restructuring BODENs held by public sector
pension funds would have been politically unfeasible for similar reasons.5
This left two categories of non-performing debt that had to take the brunt of the
write-down. The smaller of the two was $6.7 billion of mostly bilateral debt owed
directly to countries (Paris Club) and some commercial bank loans. Argentina has
yet to deal with the Paris Club. The important figures for understanding the debt
workout are those summarized in the third group, restructured non-performing debt.
This involves $81.8 billion worth of bonds at nominal or face value that Argentina
did not honor after the December 2001 default and accrued interest of $21.4 billion.
Therefore, for purposes of discussion in this report, the total value of the restructured
debt to be evaluated is $103.2 billion ($81.8 + $21.4 billion), or only 53% of total
public debt.
Figure 1. Global Distribution of Argentine Debt to Be
Much of the debt subject to restructuring, unlike the performing debt, was held
by foreign private parties. As seen in Figure 1, Argentines were still the most
heavily exposed, owning 47% of the total face value. Second in order were the
European retail (private) investors who held 35% of the bonds concentrated in
Switzerland, Italy, and Germany. U.S. money manager, insurance, and institutional

5 Gallagher, Lacey. Argentina Debt Restructuring: Past or Future? Credit Suisse First
Boston. August 20, 2003. pp. 13,15, and 23.

accounts held 12% of the debt or $10-15 billion, including funds that purchased
highly discounted debt on the secondary market. The last 6% was held by Asian and
Latin American creditors. Bonds were issued in seven foreign currencies, mostly in
the U.S. dollar, yen, euro, lira, and deutsche mark.
Resolving Sovereign Defaults
When a country becomes insolvent and defaults on its debt, a general framework
for analyzing its options points to three critical responses. First, the country must
adjust policies. This includes correcting fiscal and current account deficits, as well
as structural imbalances, which in Argentina’s case involved the banking sector,
utility regulation, and federal-provincial fiscal relations. Second, emergency
financing is needed. Third, debt must be restructured to achieve long-term financial
sustainability.6 Traditionally, the IMF has played a decisive role in all three.
Table 2. Argentina: Selected Economic Indicators
1999 2000 2001 2002 2003 2004 2005
Real GDP Growth (%)-3.4-0.8-4.4-
Primary Budget Surplus-0.80.4-
(% of GDP)
Current Account Balance-4.2-3.1-
(% of GDP)
Gross International27.126.914.910.514.119.620.7
Reserves ($ billion)
Debt (% of GDP)47.450.862.2164.2144.5133.980.0
Poverty Rate (%)27.129.735.453.054.7 — —
Per Capita GDP ($ 000)
Data Source: IMF. Argentina: Staff Report for the 2005 Article IV Consultation. May 31, 2005.
p. 38&40, and news accounts. Primary surplus is for consolidated (federal and provincial) accounts.
First, as seen in Table 2, Argentina dealt with the fiscal adjustment by
increasing taxes and reducing expenditures, which combined with the return of robust
economic growth in mid-2002, allowed Argentina to move toward large primary
budget surpluses. This is the surplus that exists after all public expenditures have
been met except for interest on debt. The primary surplus is a direct measure of a
country’s fiscal capacity to service its debt, and theoretically, is available entirely for
debt service. It may be increased by raising taxes or reducing spending in other areas
of the budget. The correction of the current account balance from deficit to surplus
points to the reversal of borrowing abroad and the generation of foreign exchange
available to repay foreign obligations and rebuild international reserves.

6 Roubini, Nouriel and Brad Setser. Bailouts or Bail-Ins? Responding to Financial Crises
in Emerging Economies. Institute for International Economics. Washington, D.C. August

2004. p. 119.

Structural adjustments proved to be more elusive. Usually the IMF helps
define the macroeconomic framework for achieving these policy adjustments. As a
third party, the IMF can lend credibility to the targets, from which both debtors and
creditors should be able to develop “realistic expectations” regarding the debt
workout.7 The IMF cannot dictate policy, but theoretically, it can exert leverage
through its lending authority. With the IMF involved in setting policy goals, the
hardship linked to adjustments (especially fiscal) may be politically more palatable
for the debtor country if promoted as necessary measures to achieve long-term
recovery, rather than simply appeasing creditor demands for greater repayment. In
addition, creditors may be more accepting of the implied recovery rate on debt.
Second, the IMF is the last source of emergency financing for a country in
default. Specifically, IMF policy allows “Fund lending into sovereign arrears to
external private circumstances in which: (a) prompt Fund support is
considered essential for the successful implementation of the member’s adjustment
program; and (b) the member is pursuing appropriate policies and is making a good
faith effort to reach a collaborative agreement with its creditors.”8 IMF assistance
provides breathing room for a financially troubled country as it attempts to recover.
Third, the IMF also has a role to play in restructuring the debt. Although it does
not participate directly in debt restructuring negotiations, by setting the policy
adjustment guidelines and providing emergency financing, the IMF acts as an
“official arbiter” and obviously has an influential role in encouraging consensual and
expeditious negotiations. It also has interest in a quick resolution as a creditor, and
in the case of Argentina, was one of the largest.
The major dispute between the Argentine government and its creditors involved
differing perceptions of the country’s ability versus willingness to service its debt.
Argentina insisted that not all residual financial resources available for debt (the
primary surplus) should be so used. The country’s massive economic downturn
resulted in a 50% poverty rate, with real per capita GDP retreating to levels not seen
for 30 years. Argentina deemed social programs and domestic investment critical for
its economic recovery and political stability. Under these circumstances, it is a
serious political (some would say moral) decision to determine the percentage of
public resources that should be spent on social programs versus debt reduction, a
decision that also hinges on a defaulting country’s bargaining power.9
This is where Argentina and its creditors were unable to come to terms. While
it was widely understood that Argentina would not be able to repay its debt in full,

7 Roubini, Nouriel and Brad Setser. The Reform of the Sovereign Debt Restructuring
Process: Problems, Proposed Solutions, and the Argentine Episode. Journal of
Restructuring Finance. Vol.1, No. 1. 2004. p. 181.
8 IMF Board Discusses the Good-Faith Criterion Under the Fund Policy on Lending into
Arrears to Private Creditors. Public Information Notice No. 02/107. September 24, 2002
and Fund Policy on Lending into Arrears to Private Creditors — Further Consideration of
the Good Faith Criterion. July, 30, 2002. pp. 6, 15, and 19-20.
9 For a sympathetic view of Argentina’s dilemma, see Roubini, and Setser, The Reform of
the Sovereign Debt Restructuring Process, p. 182.

the question remained, what amount (and conditions) would satisfy both creditors
and the Argentine government? This problem was never satisfactorily resolved in
part because the traditional arbitration role of the IMF was compromised.
Countries in default come to an agreement with creditors or, like Argentina, risk
costly, prolonged litigation and ostracization from financial markets. There are no
formal rule books for how to proceed, but all parties are usually best served by
avoiding a protracted and confrontational negotiation. Negotiations may include
formal meetings between creditor committees and government advisory groups, less
formal consultation arrangements, or even less structured communications. Part of
the process is assessing the market value of the defaulted debt, one important
The process can be lengthy and in some respects may resemble more of an
exchange of views than a true negotiation. Historically this has resulted in timely
resolutions and a greater than 90% bondholder participation rate, with Argentina
clearly being the exception. Widely accepted basic guidelines suggest that creditors
should be treated equally in terms of taking losses, although domestic and foreign
debt tend to be treated differently, and that the government in default should make
every reasonable effort to pay as much as it can. These generalities obviously allow
for a great deal of leeway for interpretation in individual debt negotiations.10
Sovereign debt workouts typically involve issuing new debt for old, under more
lenient conditions that allow a country eventually to recover its financial standing in
the international community. Recovery rates have varied, depending on the
circumstances of each case. Since 1990, for example, a sample of nine Latin
American sovereign debt restructurings indicates that the reduction in the value of
the debt (often referred to as “the haircut”) ranged from 0% to 45%, with an
unweighted average of between 35%-40% (considerably more generous than
Argentina’s final offer of a 70%-74% reduction, see below).11
Clearly there is room for different resolutions, but the important goal to achieve
for Argentina was long-term debt sustainability. This may be defined as an overall
debt burden being “consistent with the country’s overall capacity to make
payments.”12 The concept implies that the debt payment schedule must be reduced,
smoothed out, and extended so that the country can afford payments under reasonable
economic assumptions. It is in the creditors’ interest to get a country to pay as much
as possible within this constraint. To ignore it is to risk a future default and starting
over again.

10 Roubini and Setser. Bailouts or Bail-Ins?, pp. 167 and 174 and Global Committee of
Argentina Bondholders (GCAB). Roadshow Presentation. July 2004. pp. 12-13. This
document may be found at []. pp. 12-13.
11 Ibid., GCAB.
12 Roubini and Setser, Bailouts or Bail-Ins?, pp. 20 and 172. The authors note that in
addition to the debt size, important factors include the coupon rate, a country’s ability to
adjust policies, and the amount of debt issued short-term and in foreign currencies.

Argentina’s Debt Restructuring Strategy
Argentina’s default was unprecedented in size, leading to a highly complex and
contentious debt restructuring process. Significantly, because only 53% of
Argentina’s debt carried the burden of restructuring, the write-down had to be huge
for Argentina to achieve its debt sustainability goals. Notwithstanding Argentina’s
predicament, creditors argued that Argentina was not absolved of its responsibility
to negotiate and devise a restructuring plan that would allow Argentina to reduce its
overall debt, treat multiple creditors in a nondiscriminatory fashion, and minimize
the potential for lengthy and costly law suits.
Restructuring over 100 bonds denominated in seven currencies and governed
by the laws of eight legal jurisdictions greatly complicated the task. For example,
debt falling under British and Japanese law operates under collective-action clauses,
which makes for relatively easier resolution by allowing a majority of bondholders
to make binding decisions for all. Collective-action clauses did not apply to debt
governed by U.S. (New York), German, or Italian law. The result was multiple class-13
action and individual law suits filed in the United States and European countries.
Argentina initially juggled its debt dilemma by putting off private bondholders
to negotiate with the IMF. In fact, bondholders did not have their first real contact
with Argentine authorities until March 2003, 15 months after the crisis began. At
that time, Argentina intimated that all debt would not be treated equally, with foreign
bondholders expected to take the largest debt write-down. Details of Argentina’s
offer, however, would not surface for another six months. While negotiations with
creditors remained stalled, on September 10, 2003, Argentina entered into a new
controversial three-year $12.6 billion IMF stand-by arrangement, replacing a recently
expired seven-month interim arrangement. Following tense negotiations, the IMF,
with strong support from the United States, acquiesced to what some characterized
as a “soft” agreement with Argentina after it missed a $2.9 billion payment, putting
it technically in arrears with the IMF for one day.14
The IMF agreement provided the necessary policy framework for formal
negotiations with private bondholders to begin. Importantly, this framework was
limited, and included accepting Argentina’s formal offer to commit to a primary
fiscal surplus of 3% of GDP for 2004, although it would devote slightly less than that
to actual debt payments.15 The IMF interpreted this effectively as a minimum for
Argentina’s commitments to debt service, but in retrospect, creditors correctly saw
it as more of long-term maximum that signaled they should expect a larger debt
write-down than initially anticipated. In setting what many viewed as a low primary
surplus target, the IMF lost credibility with creditors, who thereafter cast doubt on

13 Pruitt, Angela. Argentina’s Debt Workout Is Complex. The Wall Street Journal, March

12, 2003. p. B9C.

14 Munter, Paivi. Argentina Disappoints. Financial Times, September 17, 2003. p. 51.
15 Latin American Weekly Report. September 7, 2004. p. 5. By comparison, Brazil has
operated with a 4.25% (or higher) primary surplus in recent years to deal with its large
sovereign debt.

the IMF’s ability to serve as a catalyst for a timely and collaborative debt
restructuring process.
The Dubai Proposal
Shortly after the IMF program was in place, Argentina turned to bondholders,
making an initial offer on September 22, 2003 at the IMF-World Bank Annual
Meetings held in Dubai, the United Arab Emirates. It was widely interpreted as an
offer to pay 25 cents on the dollar of the principal value of the debt, with no
recognition of past due interest, an unprecedented stand. On a net present value
(NPV) basis, financial institutions estimated this to be a 90% rather than 75%
reduction in the value of the bonds.16 Argentina argued from the outset that this was
consistent with the 3% primary surplus target, a controversial position given that
strong economic growth supported a much larger surplus. By December 2003, even
the IMF recognized that Argentina could muster a higher primary surplus and make
good on a greater portion of its defaulted debt.17
The Dubai proposal met with resistence from creditor groups, their
governments, and the IMF. Initial speculation that the offer was only a bargaining
ploy soon gave way to a sense that Argentina was sincere and unlikely to change its
position. Bondholder groups immediately rejected the Dubai offer and the IMF
delayed the first quarterly IMF program review over the lack of movement on debt
negotiations. IMF reviews are required for a country to remain in good standing and
to receive the next disbursement of funds. Great Britain, Italy, Japan and other
members representing 35% of IMF votes then registered their dissatisfaction
formally. In a highly unusual move, they abstained from what is typically a pro
forma vote to continue lending to a country that has met its economic targets.18
Nonetheless, Argentina had enough votes to survive the first IMF review, but
the second was also problematic because of a $3.1 billion payment due to the IMF
on March 9, 2004. Argentina continued to meet its macroeconomic targets as set out
in the IMF arrangement, but the IMF pressured Argentina over its lack of “good
faith” effort in debt restructuring negotiations and its failure to make headway on
microeconomic reforms, especially on utility pricing, banking regulation, and
restructuring the provincial-federal fiscal arrangement that had contributed to the

16 The net present value (NPV) of an investment considers the time value of money at an
assumed discount rate. The present value of cash outflows (funds loaned) is compared to
the present value of cash inflows (principal and interest payments) over the life of the
investment. The loss is the NPV difference between what would be paid on the initial bonds
compared to what would be received from the replacement bonds at lower yields and longer
17 Latin American Brazil and Southern Cone Report. IMF Reprises Role of Villain in
Argentina. December 23, 2003. p. 12.
18 Dow Jones Newswires. Big Abstentions in IMF Vote Put Argentina Under Pressure.
January 29, 2004.

crisis in the first place. The IMF also required that Argentina negotiate a final debt
agreement acceptable to at least 80% of the bondholders by September 2004.19
Despite IMF pressure, creditors complained that Argentina continued to meet
with them only on its own terms, effectively “dictating” its position rather than
offering an exchange of terms. Many meetings were held in Buenos Aires, which
increased creditor costs and ran counter to historical precedent. In response, many
refused to meet with the Argentine debt consultation groups; others pressed for
injunctions in U.S. courts to have liens placed on Argentine-owned property in the
United States. Argentina also took a hard stand with the IMF, declaring it would
refuse to make the scheduled $3.1 billion payment unless it could be assured that the
IMF would approve the second review and the related disbursement of funds needed
to cover that payment.20
These events led to an unusual standoff and highlighted not only the fact that a
large debtor, like Argentina, wields its own leverage against lenders, but that the
IMF, with $15 billion invested in Argentina, had its own interests at stake in keeping
Argentina from falling into arrears. To the extent that this was a motivating factor
for IMF actions, it worked against private bondholders who had hoped that the IMF
stand-by arrangement would be an effective inducement for Argentina to improve its
debt restructuring offer. In the end, a compromise was reached in which Argentina
agreed to negotiate formally with all creditors, but it did not change its fundamental
offer with respect to the depth of the debt write-down or increasing its financial
commitment beyond the 3% primary budget surplus. The IMF was criticized in the
press and by investment firms for failing to deal more strictly with Argentina, which
again became the central issue of the third review scheduled for June 2004.
The “Final” Buenos Aires Offer
Argentina began seemingly earnest negotiations with bondholder groups in
April 2004, but bondholders again contested this process. In the middle of a series
of meetings, which bondholders again characterized more as presentations than
negotiations, Argentina unexpectedly canceled further talks and tabled its final offer
on June 1, 2004. A formal 18-K/A filing was made with the U.S. Securities and
Exchange Commission (SEC) on June 10, outlining the provisions of this
agreement.21 Bondholders rejected this “unilateral” offer even before it could be fully
analyzed, arguing that Argentina had failed once more to live up to its IMF-imposed
commitment to make “a good faith effort to reach a collaborative agreement.”
The Buenos Aires offer differed by recognizing past due interest through the end
of December 2001, provided at least 70% of the bondholders agreed to the
arrangement. In addition, GDP-linked payments were attached to all bonds, which

19 Reuters News. IMF Gives Argentina Debt Ultimatum. March 7, 2004.
20 Thomson, Adam. Argentina on the Edge. The Financial Times. March 8, 2004. p. 17.
21 SEC. Form 18-K/A. Annual Report of the Republic of Argentina. Filed June 10, 2004
and Gallagher, Lacey. Argentina: What’s New in the 18-K. Emerging Markets Sovereign
Strategy Daily. Credit Suisse First Boston. June 15, 2004.

stipulated that Argentina would increase payments should economic growth exceed
predetermined baselines. This provision was predicated on strong and sustained
growth of the Argentine economy, which could not be guaranteed, and in any case,
bondholder groups found it to be a marginal increase at best and unattractive for
those unwilling or unable to wait years for the full valuation of this option to be
real i z ed. 22
Many features of the Dubai proposal were retained so that the debt write off still
amounted to 75% of outstanding debt, but on a present value rather than nominal
basis. This arrangement would have allowed President Kirchner to save face by still
claiming a 75% write-down in debt, while improving the offer to bondholders
considerably over the Dubai proposal. The huge loss to bondholders, however,
would still have been unprecedented, and the offer was widely rejected.
The timing of the offer was also interesting, coming before the June 2004 IMF
review. Argentina needed to represent itself as making good faith negotiations with
creditors in order to remain in good standing with the IMF. While the June offer was
undeniably more generous than the Dubai proposal, creditor groups, led by the
Global Committee of Argentine Bondholders (GCAB), complained that it was a
unilateral proposal presented as a final ultimatum and lobbied to have Argentina
declared in breech of IMF conditions. They also returned to the courts and responded
with a counter proposal that would have: 1) shortened maturities; 2) included a down
payment; and 3) raised the overall recovery rate from 25% to 55-60% of the original
debt value.23 This action was based on the robust growth of the Argentine economy
that the GCAB argued should allow for higher payments on debt.
IMF Program “Suspension”
The IMF has a policy of remaining neutral in debt negotiations, but through its
review process, effectively served as an arbiter between Argentina and its
bondholders, whose respective assumptions regarding Argentina’s ability to repay
creditors proved irreconcilable. The IMF and any leverage it had was sidelined in
August 2004, however, when Argentina announced it would “suspend” its IMF
agreement, thereby giving up temporarily access to further borrowing.24 It was clear
at that point that Argentina was out of compliance with the IMF arrangement,
including the commitment to enter into “good faith” negotiations with creditors.
Argentina was effectively playing off against each other the three pillars of crisis
resolution (policy adjustment, IMF financing, and debt restructuring). It reasoned
that, for the short term, it needed the time and freedom from IMF conditionality to
finish negotiations with creditors more than it needed IMF financing.

22 Ibid, p. 2.
23 GCAB reportedly represented 75% of foreign bondholders. See [].
24 Argentina used this term and it may be said that both the review process and IMF
disbursements were “suspended,” but technically the agreement was still in effect and
Argentina knew it could restart the review process, as have other countries in the past.

In addition, Argentina requested, and was granted on September 17, 2004, an
extension by the IMF on payments amounting to $1.1 billion of some $2.5 billion due
in the final quarter of 2004, further relieving it temporarily of IMF pressure.25
Argentina pledged, nonetheless, to stay current with its other IMF payments, which
was not a burden in 2004 given its improved international reserves position. This
strategy, however, could not be continued indefinitely. Argentina needed to conclude
an agreement with bondholders that would allow it to deal with the IMF.
Concluding the Restructuring Agreement
After securing SEC approval, Argentina opened the bond exchange on January
14, 2005, allowing a six-week window for bondholders to respond to an offer that
was only slightly better than the one made in June 2004. The Argentine government
made clear that this would be the only offer and that holdouts risked remaining
permanently in default. The Argentine legislature codified the point on February 9,
2005, when it passed a law prohibiting the government from reopening the exchange
offer or making any kind of future private settlement. Argentine officials were
prepared to accept as little as a 50% participation rate, much below the 90%
historical minimum usually strived for, and even farther below the 95-98% standard
actually achieved in recent restructurings.26
The offer closed on February 25, 2005, and the Government of Argentina
announced on March 18, 2005, that 76% of creditors had agreed to the terms.
Although the actual settlement was scheduled to occur on April 1, last minute legal
efforts by holdout creditors delayed the transfer of bonds and cash payments until
June 2, 2005. Of the $81.8 billion face value of bonds, $62.2 was tendered, leaving
$19.6 billion (24%) in the hands of holdout groups. A total of $35.2 billion of new
bonds was issued to replace $103.2 billion in total debt (including interest), reducing
Argentina’s debt by $68 billion. An additional $6-7 billion in past due interest (PDI)
not recognized by the Argentine government also remains unpaid.
The exchange involved a menu of three securities options, with fully capitalized
PDI distributed as part of the discount and quasi-par bond offers, carrying various
interest rates. All securities have collective action clauses and were issued in dollar,
yen, euro, and peso denominations, subject to the laws of the United States, Japan,
Great Britain, and Argentina, respectively. The following details apply:27

25 These are so-called “expectation basis payments,” which may be rolled over for one year.
See IMF. IMF Executive Board Extends Argentina’s Repayment Expectations and
Argentina: Projected Payments to the IMF. On Argentina page at [].
26 This includes restructurings since 1998 involving Pakistan, Russia, Ukraine, Uruguay, and
Ecuador. Porzecanski, Arturo C. From Rogue Creditors to Rogue Debtors: Implications of
Argentina’s Default. Chicago Journal of International Law. Summer 2005. p. 326.
27 Government of Argentina. Argentina Announces Results of Successful Exchange Offer.
Press Release. March 18, 2005, Tillotson, Daniel C. Emerging Market Sovereigns Market
Commentary. Wachovia Securities. January 7, 2005, and Gallagher, Lacey. Emerging
Markets Economics Daily Latin America. Credit Suisse First Boston. March 21, 2005.

!Discount bond ($11.9 billion) — existing bonds exchanged for 30-
year bonds with a 66% reduction (discount) in principal value
carrying a 4.35% coupon interest rate for the first five years, 5.0%
for years 6-10, and 8.52% for the remainder, with a 20-year grace
period on capital payments (goal — debt and debt service
!Par bond ($15.0 billion) — existing bonds exchanged for 35-year
bonds at face (par) value, hence no reduction in principal. Coupon
interest rates are 1.29% for the first five years, 2.5% for years 6-10,
3.75% for years 11-25; 5.25% for the remainder, with a 25-year
grace period on capital payment. Retail investors holding less than
$50,000 of bonds had priority, (goal — debt service reduction);
!Quasi-par bond ($8.3 billion) — existing bonds exchanged for peso-
denominated 42-year bonds, indexed to inflation, with a 31%
reduction in principal, a coupon interest rate of 5.5%, and a 32-year
grace period on capital payment (goal — reduction in debt and debt
service); and
!Detachable GDP-Linked Warrant — additional payments to be
made by the Argentine Government should annual economic growth
exceed a predetermined baseline level beginning December 15,
2006, and lasting until 2035. Coupons were detached and began
trading separately after 180 days (goal — demonstrate that Argentina
was willing to base repayment on economic performance).
Argentina offered a number of other enhancements to broaden bondholder
participation. First, the effective issue date for the new bonds was set retroactively
to December 31, 2003. The additional interest amounted to an up-front cash
payment. Second, a new “most favored creditor” clause promised that if a better
offer is made to holdouts, all creditors will be included. Some questioned the appeal
of this clause, however, given there was an important “legal loophole” in not
explicitly covering out-of-court settlements. Third, “buyback clauses” allowed funds
set aside for repayment that go unused because of holdouts to be dedicated to
repurchasing outstanding debt. Fourth, the bonds did not include once widely
anticipated and controversial “exit consents,” which would have required those
bondholders agreeing to the offer to also vote to restructure the terms of the original
bonds, limiting the rights and recourse of any holdouts to the deal.28
Most bondholders recovered between 26%-30% of the net present value of their
investment, slightly higher than earlier offers and reflective of market values, but by
far the lowest on record for a sovereign default. Peso-denominated bonds had a
higher payout. Holdout groups representing nearly $20 billion of debt are pursuing

28 Tillotson, Emerging Market Sovereigns — Market Commentary and Credit Suisse First
Boston. Visit to BA: Debt Deal Terms Unlikely to Change for Now. Emerging Markets
Economics: Argentina. November 24, 2004. Credit Suisse First Boston and Emerging
Markets Economics Daily Latin America. January 13, 2005. pp. 2-4.

litigation in the U.S. courts and have threatened binding arbitration before the World
Bank’s International Centre for Settlement of Investment Disputes (ICSID).29 They
seek full recovery of the outstanding bonds, arguing that Argentina never truly
negotiated with them, set an unacceptably low acceptance level, refused to recognize
all past due interest, offered an historically low recovery value, and underestimated
its ability to pay.30 Litigation is being considered over the February 9 Argentine law
prohibiting reopening of the exchange offer as evidence of expropriation and/or
repudiation. The law is being challenged as a violation of the U.S.-Argentina
bilateral investment treaty, a tactic that may take years to resolve. Although New
York District court has ruled in favor of numerous plaintiffs, there are no financial
assets to which to attach their claims.
Outlook and Implications
Argentina views the debt exchange as a “success,” although creditors feel quite
differently and holdouts are pursuing legal recourse in hopes that they will eventually
be rewarded. Argentina has taken other steps to normalize its financial relations. In
January 2006, it made a final $9.8 billion payment to the IMF, clearing its account.
In March 2006, the Inter-American Development Bank (IDB) approved a $500
million loan for Argentina, the first loan from an international financial institution31
(IFI) since the IMF program was suspended in 2004. Argentina is now proceeding
with its own economic policy agenda, free from unwanted guidance by the official
sector. Although the economy has been growing rapidly, rising inflation and
continued lack of progress on structural reforms raise many questions regarding its
long-term prognosis.
In hindsight, with the possible exception of some so-called “bottom feeders”
who purchase highly discounted debt prior or during defaults, it is hard to identify
any real winners in Argentina’s financial crisis, raising more questions than answered
in four major policy areas: a country’s decision to default on debt; the role of the
IMF; U.S. policy options; and codes of conduct for developing country debt
restructurings.32 These are issues that Congress has repeatedly explored in hearings
on international financial crises.
Argentina is living in the shadow of the most costly sovereign default in history.
It made a reasoned case that its debt was simply too big to repay, and combined with
its lack of progress on structural economic reforms, there was reason to believe that

29 For more information, see [].
30 Global Committee of Argentina Bondholders. Investor Roadshow Presentation. January


31 Credit Suisse. Emerging Markets Daily. March 2, 2006. p. 2
32 For a useful legal/financial analysis of this issue, see Gelpern, Anna. After Argentina.
Policy Briefs in International Economics. Institute for International Economics.
Washington, D.C. September 2005. p. 7.

the economy would have trouble achieving levels of prolonged growth in output and
revenue needed to achieve debt sustainability without a huge write-down. Even after
the restructuring, which provided Argentina with significant debt relief, the stock of
public debt exceeded 80% of GDP, although debt service has been greatly reduced
by the lower interest rates and lengthened maturities of the new bonds.33 Debt
sustainability is still not assured, but has been buttressed by other factors such as
continued strong economic performance and tax collection, as well as the beginnings
of renewed financial relationships with the international financial markets. The need
for sustained fiscal discipline is another key challenge to Argentine public policy.
The default 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 applies to both broadly understood
informal guidelines 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. Under the best
scenario, Argentina faces decades of foreign debt repayments while it tries to rebuild
an economy that has suffered through high levels of poverty, unemployment, and
For investment firms and other holders of developing country debt, the mere
thought that others might follow Argentina’s example reinforces their belief that such
a default is a highly negative precedent. Creditors vilified Argentina’s negotiating
tactics, but the financial markets appear willing to return to Argentina. It will also
be interesting to see if Argentina can avoid any future borrowing from the IMF. It
had an IMF arrangement in place continually from 1984 until January 2006, but
appears determined to remain free of IMF influence.
There are important questions related to IMF decision making. First, an IMF
audit of its own actions found that, prior to the crisis, surveillance was ineffective and
conditionality weak, while assumptions about economic growth and debt
sustainability were overly optimistic. So the Fund lent too much for too long into an
untenable situation, thereby hurting more than helping Argentina.34 The IMF
struggled with the difficult task of defining a clear threshold for insolvency — doing
so earlier would have helped Argentina. In not cutting Argentina off sooner, the
additional IMF lending only increased Argentina’s debt problem, displaced other
creditor debt for seniority in repayment, and left fewer financial resources to be used
in assisting Argentina post-crisis. This severely constrained Argentina’s debt
workout options.

33 By comparison, Brazil is also considered to have a high level of public indebtedness,
amounting to slightly over 50% of GDP, but which carries a much higher interest rate.
34 IMF. Report on the Evaluation of the Role of the IMF in Argentina, 1991-2001. June 30,
2004 and IMF Survey, New IEO Report: Watchdog Faults Argentina, but also IMF. August

9, 2004. See also Blustein, And the Money Kept Rolling In, p. 199 and elsewhere.

Second, although the IMF was virtually assured of being repaid, Argentina
repeatedly threatened to default on the Fund, lending the appearance of having undue
leverage when it came time for discussing quarterly reviews and IMF debt rollover.
Third, the IMF’s leverage proved insufficient to persuade Argentina to negotiate a
truly consensual understanding with creditors, and so the IMF lost some credibility
as the “official arbiter” of debt restructuring. In fact, the IMF was a critical factor in
supporting the 3% primary surplus target, a repayment ceiling creditors found
unacceptable. Creditors and analysts further criticized the IMF for not weighing in
clearly on Argentina’s debt repayment capacity.
Fourth, Argentina also demonstrated the now well-known lesson that IMF
financial assistance without policy reforms is insufficient to resolve a serious debt
problem. Experts on international financial crises, including those at the IMF,
understand that IMF lending should be available to countries dedicated to policy
reform and with the political will and strength to see the reforms through. In the
alternative, investor confidence and their money does not return, and the financial
crisis only tends to deepen.35 In practice, policy reform can be politically difficult,
but Argentina presents a clear case where the ultimate costs were much higher for
lending too long to a country incapable of achieving it.
Since Argentina’s restructuring, the IMF has sought to modify its policies to
limit the possibility of repeating such a prolonged and painful debt workout. It seeks
to provide clearer rules for: 1) limiting borrowing from the Fund; 2) providing better
oversight and monitoring; 3) improving options for policy support without lending;
and 4) reevaluating the “good faith criterion” in the context of resolving sovereign
debt arrears.36
U.S. Policy
The Argentine situation points to the evolution of an interesting policy dilemma
for the United States, as well. The United States government, including the
Congress, is concerned with the treatment of U.S. investors abroad, but in the case
of Argentina, the official U.S. response was limited mostly to communications
through the IMF. This is consistent with a philosophy supporting market solutions,
particularly in light of the moral hazard criticism made against earlier bailouts. It
may also reflect a priority for concerns over international financial stability and IMF
liquidity, which may be at odds with supporting the interests of private bondholders.
Historically, this too is an interesting outcome.
During the Latin American debt crisis of the 1980s, the solvency of U.S.
creditors was of paramount concern for the U.S. government and so they had the
upper hand in negotiating sovereign restructurings. By the 1990s, however, Congress
in particular began to raise concerns over the large financial assistance provided to

35 Eichengreen, Barry. Financial Crises and What to Do About Them. New York, Oxford
University Press, 2002. pp. 62-63.
36 See International Monetary Fund. The Managing Director’s Report on Implementing the
Fund’s Medium-Term Strategy. April 5, 2006. IMF website, and Taylor, John. Loan
Rangers. Wall Street Journal, April 19, 2006. p. A12.

financially troubled countries. By the time Argentina defaulted, the pendulum
appears to have swung in the opposite direction, with little interest in the official
sector, and particularly the United States, directly intervening in debt workouts.37
Since taking office, the Bush Administration has made clear that the United
States would no longer support large sovereign bailouts, but instead allow markets
to resolve these financial disruptions. This commitment, however, proved easier to
articulate than enforce. Although the Bush Administration did not jump to the
bilateral rescue of Argentina as the Clinton Administration had with Mexico in 1995,
it has made smaller efforts with Uruguay, for example. More to the case at hand,
when Argentina repeatedly sought help from the IMF, the United States proved to be
one of the strongest voices of support, despite the silence emanating from the U.S.
Treasury. Therefore, any criticism of the IMF’s response to Argentina cannot be
divorced from U.S. policy, which when faced with this serious developing country
financial crisis, was not in a position to steer the parties away from a costly and
prolonged resolution and which has been criticized for its overall lack of leadership.38
The U.S. Congress also chose not to exercise its voice strongly, paying more
attention to the economic crisis in Argentina than the actual debt restructuring. In the
one hearing on Argentina’s debt, U.S. investors were afforded little sympathy by
Members and witnesses alike, and much more concern was directed at the potential
loss of credibility in international financial markets and the role of the IMF. Little
doubt was left that the time had passed when official government action would be
sanctioned to support U.S. private investors in cases like this.39
Emerging Markets and Debt Restructurings
Investors paid a heavy price in the Argentine default, including those in the
United States who sought a bigger role from Congress and the U.S. Treasury in
seeing that their rights and investments were honored. U.S. bondholders hoped to
have the United States weigh in officially on the restructuring agreement, either
through its voice at the U.S. Treasury or the IMF. The United States carries much
weight at the IMF and can send a strong signal as to whether IMF reviews will be
supported. Given the limitations of litigation against sovereigns, this was the primary
leverage available to influence Argentina’s decisions, and the United States was not
perceived as pursuing this option with any zeal. The message sent was that the
creditors were on their own to deal with the Argentine government. Some analysts

37 For a discussion of the 1980s debt crisis and the role of banks, governments, and the IMF,
see CRS Report RL30449. Debt and Development in Poor Countries: Rethinking Policy
Responses, by J. F. Hornbeck.
38 Blustein, And the Money Kept Rolling In, p. 157 and Porcecanski, From Rogue Creditors
to Rogue Debtors, p. 327.
39 U.S. Congress. Senate. Hearing Before the Subcommittee on International Trade and
Finance. Committee on Banking, Housing, and Urban Affairs. One Hundred Eighth
Congress. Argentina’s Current Economic and Political Situation, focusing on the Bilateral
Relationship Between the United States and Argentina. March 10, 2004. S. Hrg. 108-879.

have criticized strongly the G-7 countries and the IMF for not weighing in more
heavily in support of investors’ rights.40
As for sovereign debt restructurings, the process is already changing. Given
litigants’ lack of success when faced with a determined defaulting country, the
markets have already adjusted by adopting collective action clauses as standard
provisions in emerging market debt. Other changes are being discussed in the
financial community to evaluate options for imposing some form of enforced
guidelines or code of conduct on countries reluctant to meet their contractual
obligations.41 As far as designing and creating an international bankruptcy agency,
there remains little enthusiasm for resurrecting this idea after the Sovereign Debt
Restructuring Mechanism (SDRM) promoted by the IMF failed to take hold.42
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 again trying to reinvent the international financial
architecture with some type of statutory sovereign bankruptcy option. But the
Argentine case was not resolved to the mutual satisfaction of all parties, with a
quarter of the bondholders opting for costly litigation, despite the uncertainty of
outcome. The success of this litigation may yet influence the future of debt
workouts, 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
within the existing unenforceable system in finding a quick and consensual solution,
leaving all parties worse off.

40 Porzecanski, ibid., pp. 330-32.
41 For example, the Institute for International Finance, Inc., which represents large financial
institutions, has developed principles for “fair” debt restructuring.
42 For background, see CRS Report RL31451, Managing International Financial Crises:
Alternatives to “Bailouts,” Hardships, and Contagion, by Martin W. Weiss and Arlene