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 , sustainability , efficiency delay , debt restructuring

JEL(s): C7 , F3 , F33 , F34 , K4

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP5236.asp

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.