Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”

Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”

J. F. Hornbeck
Specialist in International Trade and Finance
February 6, 20

In December 2001, Argentina suffered a severe financial crisis, leading to the largest sovereign
debt default in history. In 2005, after prolonged, contentious, and unsuccessful attempts to
restructure the debt, Argentina abandoned the negotiation process and made a unilateral offer. The
terms were highly unfavorable to creditors, but $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 and some have opted to litigate instead. These actions resulted in attachments orders
against Argentine assets, leaving the country unable to access the international credit markets and
mired in litigation. Holdout creditors also lobbied against Argentina’s debt policy, which has
triggered actions by the U.S. government and legislation in Congress (H.R. 1798 and S. 912 in
the 112th Congress).
The lingering effects of the debt default became a legacy problem for Argentina. The government
decided to open another bond exchange in 2010 to deal with remaining holdouts, on slightly less
favorable terms than before. Argentina reduced its outstanding defaulted debt by another $12.4
billion. As of December 31, 2010, Argentina reported that it owed private investors $11.2 billion
($6.8 billion in principal and $4.4 billion in past due interest). Holdout creditors estimate that
with additional interest, this number could be as high as $15 billion by 2013, with $1.3 billion
under litigation in federal court. 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 remaining private holdout debt in its official financial
statements and is legislatively barred from making another offer to bondholders. Nonetheless, in
the eyes of holdout creditors, the bond exchanges have set a precedent that cannot be condoned,
even though 91.3% of total bondholders have accepted terms. Although Argentina continues to
argue that the restructurings were negotiated solutions, they were not mutually agreed ones.
Bondholders had to accept or reject the offers with the alternative being the promise of no
restitution at all. Holdout bondholders remain unpaid while Argentina is current on its obligations
to bondholders who participated in the two bond exchanges, an outcome that is currently being
challenged in court under the equal treatment provision of the bonds. 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 Argentine government filed its final papers before the appellate court on February 1, 2013,
arguing that it would not be able to fulfill a court order requiring full payment to litigant holdouts.
It did, however, suggest that to meet the concern over equal treatment it could arrange to reopen
the previous bond exchange to allow those who did not participate in it to reconsider their
position. Some holdouts have suggested that this may be an acceptable option. The issue remains
unresolved pending outcome from the February 27, 2013, court proceedings. 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. These include lessons on
the effectiveness and cost of Argentina’s default strategy, the ability to force sovereigns to meet
debt their obligations, and options for avoiding future defaults like Argentina’s.

Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”

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