Debt restructuring in review if Argentina defaults: IMF

The mechanisms allowing a country to restructure its sovereign debt should be "reviewed" if Argentina defaults, IMF chief Christine Lagarde said Tuesday.

AFP| Updated: Jul 30, 2014, 01:34 AM IST

Washington: The mechanisms allowing a country to restructure its sovereign debt should be "reviewed" if Argentina defaults, IMF chief Christine Lagarde said Tuesday.

Under a US court order, Argentina faces a Wednesday midnight deadline to pay certain hedge funds demanding full payment on defaulted bonds or risk being declared in default.

If that happens, "the debt restructuring principles and the efficiency of collective-clauses actions will have to be reviewed," said Lagarde, managing director of the International Monetary Fund, at a news conference in Washington.

Lagarde added that the Fund was monitoring the situation and analyzing the potential consequences of a default.

Collective-action clauses -- including when a government issues bonds -- traditionally allow a majority of creditors to agree to a debt restructuring when the country is facing a crisis.

Argentina used the clauses to deal with its 2001 default on close to $100 billion in debt, which plunged the country into an economic crisis it is still battling to overcome.
Argentina persuaded 92 percent of its creditors to accept writeoffs of up to 70 percent.

But under the US judge`s ruling, it cannot pay its other creditors without also paying hedge funds which did not agree to the debt restructuring.

If Argentina pays the so-called "holdout" hedge funds -- which it calls "vulture" funds -- 100 percent of the $1.3 billion it owes them, it could be forced to pay all remaining creditors in full, as well, under the restructuring deal.

Some analysts say the US judge`s ruling could encourage investors to hold out in other restructurings of sovereign debt, making it more difficult for the IMF and other official lenders to help stabilize countries whose finances have collapsed.

The IMF proposed an international debt restructuring mechanism in 2003 but the plan was abandoned under pressure from the United States, the institution`s largest stakeholder, and the major emerging-market economies.