Argentine Debt Restructuring

Argentine Debt Restructuring

Argentina went through the the worst economic crisis in the South American country history beginning in the mid-1990s, with full recession between 1999 and 2002; though it is debatable whether this crisis has ended, the situation has been more stable, and improving, since 2003.

Argentina defaulted on part of its external debt at the beginning of 2002. Foreign investment fled the country, and capital flow towards Argentina ceased almost completely. The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly, producing higher-than-average inflation.

Large-scale debt restructuring was needed urgently, since the debt had become unpayable. However, the Argentine government met severe challenges trying to refinance its debt. Creditors (many of them private citizens in Spain, Italy, Germany, Japan and other countries, who had invested their savings and retirement pensions in debt bonds) denounced the default; the Italian government lobbied against Argentina in international forums. Vulture funds who had acquired sovereign bonds during the critical moments, at very low prices, asked to be repaid immediately.

The state had no spare money at the time, and the Central Bank's foreign currency reserves were almost depleted. (Moreover, whatever amount left was needed to control the availability of dollars in the local market, in order to prevent further devaluation of the peso.) For four years, Argentina was a pariah, effectively shut out of the international financial markets.

Even as the economic situation improved, the amount of the debt was still the largest defaulted debt in history (about 93 billion USD), and Argentina was in no position to pay without sacrificing essential parts of its budget.

The Argentine government kept a firm stance, and finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25–35% of the original) and at longer terms. Among these bonds, some are indexed based on the future economic growth of Argentina.

The terms of the debt exchange were not accepted by some of the private debt holders (amounting to a quarter of the debt). The IMF used to lobby for these holdouts, but its position has been greatly weakened by the anticipated payment made in January 2006.

In 2010, the debt exchange was re-opened to holders of the debt. By 2012 holders of 6% of the debt continued to hold out; the hold-outs continue to put pressure on the government, most recently having an Argentine Navy ship seized in Ghana. Argentina has still not been able to raise finance on the international debt markets for fear that any money raised would be impounded; their borrowing costs over 10%, much higher than comparable countries. Instead they have been paying debt from central bank reserves, and have banned most purchases of dollars, limited imports and ordered companies to repatriate money held abroad.