Argentina's Debt Default

Background:

Although it was once the darling of investment banks and the International Monetary Fund, in 2001 the country suffered a lengthy recession that culminated in the government halting debt repayments to its private creditors—a default on some US$95 billion in government debt, the largest sovereign default in history. A highly overvalued, fixed 1-to-1 exchange rate from 1991 and an excessive amount of foreign debt were the two primary causes of the Argentine crisis. The negative trade imbalance caused by an expensive local currency made it impossible for the country to earn the foreign reserves needed to pay the interest on its foreign debt. Argentina had to keep borrowing to pay interests, causing the debt to grow ever larger, eventually reaching 50% of GDP by late 2001. As became evident, Argentina could no longer borrow to meet its obligations and the government was forced to default and to devalue the peso, abandoning its former parity with the U.S. dollar in January 2002. The move essentially shut Argentina out of international markets and slowed the flow of investment into the country, with many creditors filing lawsuits against the government in courts. Eventually, the government struck a deal in 2005 to pay back approximately 75% of debt-holders at a deeply discounted rate of 30%. In June 2010, Argentina tried to restructure what remained of the debt with similar conditions to the one in 2005. This debt swap had a participation rate of approximately 70%, which, added to the previous restructuring, led to a total level of 90%. In order to gain total access to international capital markets, Argentina needs to settle its outstanding debt with the Paris Club nations—approximately US$7.5billion. On November 15, President Fernandez announced that the Argentine government and the Paris Club reached an agreement to start the renegotiation of the debt, on the condition—proposed by Argentina and accepted by the Paris Club—that there would be no intermediation by or presence of the IMF in the process.