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| Argentina has re-written the rule book on sovereign debt by refusing to pay back its bondholders. |
Argentina has changed the rules of the debt workout game by refusing to make good-faith efforts to pay its bondholders. And it is easy to understand the logic behind this move. A country that defaults on its external debt pays a huge price both politically and economically. Once that price is paid, however, it starts to recover. The cost of curing the default is large; the benefits are vague, and far in the future ? certainly at least one election cycle away.
One veteran observer of sovereign behaviour puts it this way: "For 22 years, we've all assumed that a sovereign debtor in trouble wishes to preserve its market reputation, and wants to impose as small a haircut as possible on its creditors. But after a certain amount of time in default, the psychology completely shifts. Indeed, maybe the quickest way to resume market access is to bring devastation to the existing creditor group."
Most sovereign debt restructurings work on the principle that the creditors minimize their haircut, start getting coupon payments again, and usher the debtor back to the international capital markets.