DP5236 Bargaining and Sustainability: The Argentine Debt Swap of 2005

Author(s): Amrita Dhillon, Javier García-Fronti, Sayantan Ghosal, Marcus Miller
Publication Date: September 2005
Keyword(s): bargaining, debt restructuring, efficiency delay, sustainability
JEL(s): C7, F3, F33, F34, K4
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5236

When Argentine sovereign default in December 2001 led to a collapse of the peso, the burden of dollar debt became demonstrably unsustainable. But it was not clear what restructuring was feasible, nor when. Eventually, in 2005 after a delay of more than three years, a supermajority of creditors accepted a swap implying a recovery rate of around 37 cents in the dollar. In this paper a bargaining approach is used to explain both the settlement and the delay. We conclude that the agreed swap broadly corresponds to a bargaining outcome where the Argentine government had 'first mover' advantage, and that a substantial delay occurred as negotiators seeking a sustainable settlement waited for economic recovery. Factors not explicit in the formal framework are also considered - heterogeneity of creditors, for example, and the role of third parties in promoting 'good faith' bargaining.