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World Bank loophole leaves creditors in limbo


It's one thing for Argentina to default on its bonds. Now, though, in the wake of Argentina's collapse, the World Bank has also decided that it is happy to leave bondholders unpaid. In mid-October, the Bank essentially destroyed the structure of an innovative bond it had partly guaranteed. It thereby managed to resolve a tricky dilemma but also embarrassed itself, the ratings agencies and Goldman Sachs and JPMorgan.

Restructuring at all levels:
a Buenos Aires poster
explains the system of
exchange for assets frozen
by banks

In October 1999, Goldman and JPMorgan launched a $1.5 billion series of six zero-coupon bonds for Argentina. Each had a face value of $250 million, and the first was wholly guaranteed by the World Bank.

As each bond was paid off by Argentina, the Bank guarantee rolled over to the next in the series. The clever part was that if Argentina defaulted and the Bank was forced to pay out, Argentina would have a $250 million debt to the Bank that it would have to pay within 60 days. Since the Bank has preferred creditor status, it would probably have got repaid on time, after which the guarantee on the next bond in the series would have been reinstated.

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