Academic journal article Current Politics and Economics of South and Central America

Argentina's Defaulted Sovereign Debt: Dealing with the "Holdouts"*

Academic journal article Current Politics and Economics of South and Central America

Argentina's Defaulted Sovereign Debt: Dealing with the "Holdouts"*

Article excerpt


In December 2001, Argentina suffered a severe financial crisis, leading to the largest sovereign debt default in history. In 2005, Argentina abandoned negotiations to restructure the debt and made a unilateral offer on terms highly unfavorable to creditors. Still, $62.3 billion of the $81.8 billion in principal owed was exchanged. A diverse group of -holdouts" representing $18.6 billion did not tender their bonds. Argentina completed a second bond exchange in 2010, capturing another $12.4 billion of defaulted bonds (for a total of 91.3% of the original defaulted debt). At the close of 2010, Argentina reported that it owed private investors $11.2 billion ($6.8 billion in principal, $4.4 billion in interest). Including additional interest, holdout creditors estimate they are now owed as much as $15 billion. Argentina also owes the Paris Club countries $6.3 billion in principal plus past due interest and penalties. The U.S. portion is estimated at $550 million.

Argentina does not recognize the private holdout debt in its official statistics and legislation bars the government from making further offers to the holdouts. U.S. responses have been varied. Many of the -holdout creditors" have brought claims against Argentina in U.S. federal court totaling $1.3 billion, resulting in judgments and attachment orders.1 Recent court decisions have left Argentine central bank assets in the United States immune from attachment, but subject to an appellate decision expected on February 27, 2013, the Argentine government could be compelled to pay litigant holdouts their full $1.3 billion claim. The U.S. government has also taken action and punitive legislation against Argentina has been introduced in the last three congresses.

Papers filed in appellate court on February 1, 2013, present the Argentine government's argument that it would not be able to fulfill a court order requiring full payment to litigant holdouts. The government did suggest, however, that it could arrange to reopen the previous bond exchange to allow holdouts who did not participate in it to reconsider their position. Some have suggested that this may be an acceptable option, but the issue remains unresolved.2 This report reviews Argentina's financial crisis, the bond exchanges of 2005 and 2010, ongoing litigation, prospects for a final solution, related U.S. legislation, and broader policy issues.


Argentina's 2001 debt crisis resulted from many factors. For the most part, Argentina overborrowed and fell victim to its own economic policies, but this was 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 financial crisis, unprecedented default, and a controversial restructuring scheme.

The 2001 Financial Crisis

Argentina's 2001 financial crisis had its roots in a history of periodic macroeconomic policy problems, the Achilles' heel of Argentine economic strategy for much of the 20th century. Argentina has long relied on fiscal largesse as a basic policy tool, covering its shortfalls by expanding the money supply. These policies led to recurring bouts of high inflation and indebtedness, typically followed by temporary efforts to stabilize prices. Toward the end of the 20th century, Argentina experienced hyperinflation that eventually toppled the Alfonsín government in 1989, bringing Carlos Menem to the presidency, along with his well-known minister of economy, Domingo Cavallo.3

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). …

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