Argentina: A critical review of recent sovereign debt restructurings (2003-2020) Andrea Molinari and M. Emilia Val

Sovereign indebtedness has been a dominant theme in Argentine economics and politics, particularly since the beginning of the 21st century. As a result, the country figures prominently in international debate on the issue. Recent rounds of sovereign debt restructuring negotiations with private creditors —in particular, the negotiations that followed the unprecedentedly massive 2001 default and the 2020 swap in the context of the COVID-19 pandemic— allow us insight into the complexity of these processes and the relationships between debtor States, bondholders, and other international financial and political stakeholders.

The 2005 bond swap (which was followed by a new round in 2010) was the first stage in a long and complex process of normalising Argentina’s sovereign debt, a process which only ended in 2016. The debt management strategy implemented by the centre-left Kirchner administration (2003-2015) was based on a confrontational, “game changer” approach. This strategy sought to sustain a sovereign position that would allow for greater degrees of (relative) autonomy in Argentina’s economic policy. The exchange proposal was intended to ensure the debt sustainability of the new payment scheme (with a considerable haircut), while also allowing for domestic economic consolidation and social recovery. The restructuring conditions offered included a nominal reduction, a longer maturity period and a lower interest rate, in addition to GDP-linked warrants. All of this reflected a general guiding premise of “crecer para pagar (growing to be able to pay)” and attempted to encourage creditor buy-in. Argentina’s internal and external political support and fiscal strength, a heterogeneous and atomised group of private creditors (mostly retail investors) and the neutralisation of the IMF’s intervention in their favour contributed to this strategy. This restructuring attained a 92.7% acceptance level (after the 2010 debt swap) and a historic 75% present value haircut.

In the aftermath of this restructuring, legal disputes with so-called “vulture funds” escalated in United States courts. Without any chances of enforcing judgements obtained from lawsuits initiated in 2001, NML Capital presented its case before the Federal Court of the New York Southern District in 2010, arguing that Argentina had (since 2005) failed to comply with the principle of equal and equitable treatment. In an unprecedented decision by Judge Thomas, Argentina was found to be in violation of the “pari passu” clause of its debt agreements. He then issued an injunction ordering Argentina to issue 100% pro-rata payment to the litigants along with the payment of the restructured debt. To ensure compliance, Judge Griesa also halted payments of the other Argentine exchange bonds under NY law. After the US Supreme Court rejected the country’s appeal, Argentina was again declared to be in selective default, and the government redoubled diplomatic efforts aimed at obtaining international support. The most notable of these initiatives culminated with the adoption of nine (9) basic principles to guide sovereign debt restructurings by the United Nations General Assembly.

In 2016, the centre-right administration of President Mauricio Macri (2015-2019) brought a swift end to the dispute, adopting a cooperative strategy which recognised the litigants’ as holding “legitimate” rights to payments stipulated in the court order. The “trial of the century” ended with onerous settlement terms (in some cases, representing almost 2000% in profit for creditors) and set a negative precedent which has created incentives for holdout behaviour by creditors.

Over the two years that followed (2016-2018), Argentina became one of the world’s leading issuers of public debt on international markets. By mid-2018, macroeconomic imbalances had worsened, and external private financing diminished, leading to a massive capital outflow, run on foreign exchange, loss of reserves and exchange rate depreciation, all of which increased inflation rates. This crisis led the Macri government to enter into a record agreement with the IMF (for some US$45 billion), relaunching another new cycle of private and public debt arrangements similar to those of the 1990s and compromising the Argentine sovereign debt and political sustainability. Again, these decisions can be linked to the overall financial approach (under IMF supervision) of paying creditors even if that meant damaging domestic economic and social stability.

Argentina’s economic fragility and implicit inability to meet its financial obligations (even in terms of debt issued in domestic currency) led the country to a new comprehensive sovereign debt restructuring in 2020, under the centre-left administration of Alberto Fernandez (2019-2023). The new government’s strategy involved a pre-emptive debt restructuring which included elements that, while inspired by the experience of 2005, also took the new global scenario into account. Its major similarity to the former (2005-2010) restructuring was an attempt to restore a sustainable debt path that provided debt servicing relief without jeopardising the country’s growth and assistance to the population. The Fernandez government focused on obtaining interest rate reductions, extended maturity periods, and further grace periods. Although parallels were inevitably drawn with the 2005 restructuring, there were also several major differences. On one hand, unlike the 2005-2010 restructuring, the government faced a context of domestic economic and financial crisis (exacerbated by the COVID-19 crisis) and had a clear mandate to avoid a new default and prevent the possibility of creditors who might take inspiration from the vulture funds in initiating judicial proceedings against Argentina. On the other, the creditors in the latter case were much more homogeneous, specialised and concentrated among North American institutional investors, with the attendant economic weight and negotiations capacity. The results from the two restructurings were also quite dissimilar: high creditor participation by activation of collective action clauses (CAC), postponement of payments for almost a year, limited relief (lower interest rates, but little principal reduction) in line with the historical middle-income countries’ average real haircut. Although these outcomes, the result of an evident power asymmetry between the parties, provided fiscal policy space during the COVID-19 crisis, the new debt profile also generated concerns about Argentina’s medium- and long-term debt sustainability.

Focusing on both the strategies employed and the results of these negotiations, our analysis suggests that sovereign debt management policies implemented during the 2003-2020 period in Argentina showed great variability based on the government’s policy space and orientation (centre-left versus centre-right). One of the most important lessons that this case can provide to the Global South is the trade-off between a large haircut and the risk of needing to implement another debt restructuring shortly afterwards. Furthermore, the conditions under which the negotiations take place, together with the negotiators’ skills and the government’s (economic and foreign) policy orientation guiding its restructuring strategy, are essential to plan alternative strategies aligned with the debtor country’s interests. Finally, it shows the need for continuity in sovereign debt management strategies, both regarding maintaining long-term sustainable sovereign debt (including the country’s access to international markets) and following consistent strategic guidelines to face debt crises, when aiming at defending national interests and sovereignty. For that reason, dealing with a country’s sovereign debt must be considered as a continuation of state economic policy and not as a temporary measure of a particular government.

** This article builds on the analysis and research produced for the IDEAs Conference on the African Debt Crisis and the International Financial Architecture