Question

Explain the debt crisis in Argentine with particular reference to the pricing of bonds.

Answer 1

Argentina is quite special in that exports are a relatively small part of the economy (about 10 percent). Furthermore, the FX responsive industries, manufactured products, are a small part of this already small number. The economy does not generate much foreign exchange, and it does not benefit from currency weakness to the extent that other economies could there is no natural re-equilibrium effect for the economy.

The government then opted for a middle ground course by retaining government spending to prevent a serious recession. To achieve this, the government has both printed money and borrowed to balance fiscal accounts from the capital markets. At the time, debt / GDP was moderate and credit markets, like Argentina, were amenable to risky credits. This macro-political path had the advantage of being politically palatable in a historically populist society that would likely reject both austere and then-President Macri policies.

Macri had hoped his plan could stimulate growth led domestically, improve government revenues and slowly reduce the deficit. He promised measures to minimize inflation that would trigger a real appreciation of the peso, combined with the growth of GDP. The policy was gambling that higher growth in GDP and a stronger peso would offset the short-term increase in external debt / GDP in future. Continued access to capital markets has been the core idea for the plan, allowing Argentina to borrow money to stimulate domestic GDP. Consequently, both in terms of Argentina's Nuevo Peso (ARS) and US Dollar (USD), the money borrowed from capital markets,

Argentina's debt restructuring is a debt restructuring process that began on January 14, 2005 and allowed Argentina to restart payment on 76 per cent of the US$ 82 billion in sovereign bonds that collapsed in 2001 at the peak of the nation's worst economic crisis in history. A second debt settlement in 2010 took the percentage of bonds under some sort of redemption to 93 percent, while unresolved holdout conflicts continued. Bondholders involved in the settlement negotiated for repayments of about 30 percent of the face value and deferred payment terms and started to be paid on time; the value of their nearly worthless bonds also began to increase.

Suggested solutions include seeking waivers of the RUFO clause from bondholders or waiting for the RUFO clause to expire by the end of 2014. The dilemma raised international concerns about a small minority's ability to forestall an insolvent country's otherwise agreed debt restructuring and the ruling that led to it was criticized. While the media widely announced that the default ended with payments to the key bondholders in early 2016, several hundred million dollars in outstanding defaulted bonds remained unpaid during Mauricio Macri's presidency, resulting in litigation continuing.