Restructuring Argentina's Debt: How Is It Going to Happen?

The recent unrest in Argentina and the fall of its government vividly illustrate some of the costs of an excessive debt burden. The Argentine government’s last ditch efforts to put in place austerity measures were emphatically rejected by its populace. Assuming that there is no official sector bail-out in the offing – and the usual suspects have given every indication that they don’t want to get into the business of funding repeated bail-outs – the only solution for Argentina is to default. Defaults are messy for many reasons, foremost among which is that they tend to displease creditors. And the problem with displeased creditors is that they are generally unwilling to loosen their purse-strings the next time the sovereign ventures out. More immediately, for the political party in power, a default can cause public embarrassment and demands by opponents that the government step down.

But assuming that the reluctance to displease creditors and to acknowledge failure is overcome – as Argentina has had to do – what next? One can imagine the sovereign turning to its creditors and saying: “Look, I’m sorry, but I can’t pay you right now. Why don’t you give me a break now, allow me a chance to get back on my feet, and then I’ll be more likely to be able to pay you back”. In most domestic corporate contexts, there is no need for this conversation to take place. Instead, the company declares bankruptcy and then a judge or similar individual oversees either an orderly restructuring or a liquidation. The sovereign context though is more complicated.