Argentine Debt Restructuring

The Argentine debt restructuring is a process of debt restructuring by Argentina that began on January 14, 2005, and allowed it to resume payment on 76% of the US$82 billion in sovereign bonds that defaulted in 2001 at the depth of the worst economic crisis in the nation's history. A second debt restructuring in 2010 brought the percentage of bonds under some form of repayment to 93%, though ongoing disputes with holdouts remained. Bondholders who participated in the restructuring settled for repayments of around 30% of face value and deferred payment terms, and began to be paid punctually; the value of their nearly worthless bonds also began to rise. The remaining 7% of bondholders were later repaid in full, after centre-right and US-aligned leader Mauricio Macri came to power in 2015.

As part of the restructuring process, Argentina drafted agreements in which repayments would be handled through a New York corporation and governed by United States law. The holdout bondholders found themselves unable to seize Argentine sovereign assets in settlement, but realized that Argentina had omitted to provide for holdout situations and had instead deemed all bonds repayable on (equal) terms that prevented preferential treatment among bondholders. The holdout bondholders therefore sought, and won, an injunction in 2012 that prohibited Argentina from repaying the 93% of bonds that had been renegotiated, unless they simultaneously paid the 7% holdouts their full amount due as well. Together with the agreement's rights upon future offers ("RUFO") clause, this created a deadlock in which the 93% of renegotiated bondholders could not be paid without paying the 7% holdouts, but any payment to the holdouts would potentially (according to Argentina) trigger the 93% being due repayment at full value too; a sum of around $100 billion that Argentina could not afford.Argentina accuses US of judicial malpractice for triggering needless default
''The Telegraph'', 31 July 2014. The courts ruled that as Argentina had itself drafted the agreement, and chosen the terms it wished to propose, it could not now claim the terms were unreasonable or unfair, and that this could not be worked around by asserting sovereign status since the injunction did not affect sovereign assets, but simply ruled that Argentina must not give preferential treatment of any group of bondholders over any other group when making repayments.

Subsequently, though Argentina wanted to repay some creditors, the judgment prevented Argentina from doing so, because being forced to repay all creditors, including the holdouts, would have totaled around $100 billion. The country was therefore categorized as being in selective default by Standard & Poor's and in restricted default by Fitch. The ruling affected New York law Argentine bonds; Argentine bonds issued under Buenos Aires and European law were not affected.

Proposed solutions include seeking waivers of the RUFO clause from bondholders, or waiting for the RUFO clause to expire at the end of 2014. The dilemma raised concerns internationally about the ability of a small minority to forestall an otherwise-agreed debt restructuring of an insolvent country, and the ruling that led to it was criticized.

Although the media widely reported that the default ended with payments to the principal bondholders in early 2016, during the presidency of Mauricio Macri, several hundred million dollars in outstanding defaulted bonds remained unpaid, which resulted in continuation of litigation. In November 2016 Argentina announced that it had settled with additional creditors for US$475 million.

Argentina defaulted again on May 22, 2020 by failing to pay $500 million on its due date to its creditors. Negotiations for the restructuring of $66 billion of its debt continue.

Overview

Argentine financial crisis

Around 1998 to 2002, Argentina's economy went into severe recession. On December 26, 2001, Argentina defaulted on a total of US$93 billion of its external debt; of around $81.8 billion in bonds that were defaulted, 51% were issued during this three-year period. Foreign investment fled the country, and capital flow toward Argentina ceased almost completely from 2001 to 2003 (though it later recovered). 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 to nearly 4-to-1, producing a sudden rise in inflation to over 40% and a fall in real GDP of 11% in 2002.

Large-scale debt restructuring was needed urgently, since the high-interest bonds had become unpayable. The Argentine government met severe challenges trying to refinance its debt, however. Creditors (many of them private citizens in Spain, Italy, Germany, Japan, the United States, and other countries, who had invested their savings and retirement pensions in debt bonds) denounced the default; this included bondholders from Argentina itself, estimated to compose about a fourth of affected bondholders.

Economic recovery eventually allowed Argentina to offer large-scale debt swaps in 2005 and 2010; the first brought 76% of bonds out of default and the second, 91.3%. The terms of the debt exchanges were not accepted by all private bondholders; the holders of around 7% of the defaulted bonds—known as "holdouts"—continued to seek full repayment. The IMF initially lobbied for the holdouts until Argentina's lump-sum repayment to the IMF in January 2006. Individual creditors worldwide, who represented about one third of this group, mobilized to seek repayment following the default. Among the most prominent were Task Force Argentina, an Italian retail bondholder association; and Mark Botsford, a private U.S. retail bondholder; and Kenneth Dart, who unsuccessfully sued in 2003 to be paid $724 million for bonds purchased in 2001 for $120 million. Dart renounced his U.S. citizenship in 1994 for tax avoidance purposes, and his interests in Argentina became the focus of tax evasion charges in 2013. Italian nationals had become the largest group of foreign retail investors in Argentine bonds when during the 1990s, banks in their country purchased $14 billion in bonds and then resold them to nearly half a million investors; the vast majority rejected the first swap but accepted the second.

Background and holdout problem

Upon default, Argentina's bondholders sued to be repaid 100% of their bonds' face value. Among the bondholders were vulture funds, who had speculatively acquired US$1.3 billion of the bonds' total value on the secondary market for cents on the dollar after the 2001 default. Vulture funds also owned a large quantity of credit default swaps (CDS) against Argentine bonds. This created a further incentive to not only trigger a default against Argentina; but also to undermine the value of the bonds themselves, as the CDS would pay out at a higher rate if the defaulted bonds decline to extremely low values.

The vulture funds held out for payment in full via litigation (hence their common description as "holdout" bondholders, or "holdouts"). Their legal tactics included seeking injunctions to attach future payments to other bondholders by way of forcing Argentina to settle. A similar strategy had been successfully pursued previously by vulture funds against