A new book considers the history of what author Gregory Makoff calls “the country’s repeated boom, bust and default cycles of the previous hundred years.” His main focus is a case study of Argentina’s debt default and subsequent restructuring that began in 2001 and finally wound down by 2016. Makoff is a senior fellow at the Center for Business and Government at the Harvard Kennedy School and a former global head of sovereign liability management at Citi. This is his first book.

The process and players / In the United States, if a person or firm is saddled with too much debt, nearly the entire process for restructuring that debt is court-driven. There are individualized chapters of the law for a variety of entities under the bankruptcy code. Commercial banks have their own separate process, an administrative procedure whereby the Federal Deposit Insurance Corporation is appointed as a receiver and oversees a resolution of the bank.

As Makoff explains, some elements of a sovereign debt restructuring involve the courts, but the procedure also involves other essential elements, a “multitude of factors [that] are deeply interconnected: legal aspects, political events and alignments, and economic developments.” Makoff provides an example of a Peruvian debt restructuring that lasted from 1996 to 2000 as what he calls a “backstory” on the topic, and he draws on contemporary case studies for Pakistan, Ukraine, Ecuador, and Uruguay.

Beyond the complexities of the restructuring process, the reader is presented with many major players to keep track of over the course of the Argentine saga. The book’s Appendix A provides a helpful scorecard of the key participants. The government of Argentina, through its Ministry of Economy, was obviously involved in debt negotiations to minimize the resources that the Argentine people had to commit to the restructuring. This was done either by fighting efforts of creditors to “attach” sovereign assets, by codifying new laws favorable to the government, or by invoking the Foreign Sovereign Immunities Act (FSIA), a US law protecting sovereigns.

The International Monetary Fund (IMF) was a major participant because a country undergoing restructuring usually does so under a formal, multi-year IMF program. These programs include a “carrot” in the form of a package of financial assistance through a lending facility (in this case, $10 billion), accompanied by a “stick” in the form of economic and legal reforms structured as conditions for the assistance. IMF economists run a debt simulation model “to determine how much debt a country could safely incur.”

Although it is a leading member of the IMF along with the EU members, the US also is generally a major standalone player in the restructuring process. The book chronicles the involvement of the US presidents during the Argentine debt restructuring (George W. Bush and Barack Obama), US treasury secretaries (Paul O’Neill, John Snow, Jacob Lew) and other senior Treasury officials (John Taylor, Randal Quarles, Mark Sobel). Finally, debtors whose claims are restructured play an outsized role, the most prominent of which in this case was Elliott Associates, frequently called a “vulture fund” throughout the book, as well as their lawyers (including Ted Olson, Supreme Court litigator extraordinaire) and the judges overseeing the restructuring cases (predominantly federal district court judge Thomas Griesa).

The trigger / Makoff begins the first chapter with a visual presentation of Argentina’s economic slide based on real quarterly gross domestic product growth data. Lofty growth levels in the 5–10 percent range from early 1996 to 1998 invert, first to a negative growth rate of 0–5 percent beginning in late 1998 and then negative growth of 10–20 percent by late 2001 and early 2002. The debt restructuring saga began with the trigger for the default in December 2001, when an IMF review of Argentina’s finances revealed a lack of sustainability and the “IMF pulled the plug [on assistance], announcing it was refusing to disburse a pending $1.24 billion loan installment to Argentina.” The IMF concluded that “lending more to Argentina would only make matters worse.” This led to several dramatic events, including government interventions to stabilize the banking system, which led to public demonstrations; the resignation of the minister of the economy; and the spectacle of President Fernando de la Rua fleeing the country via helicopter. An interim president announced a moratorium on payment of Argentine debt, a measure that is common for a country in default.

The initial steps / Fast forward to January 2003, when the IMF

approved a new program[,] … one without new cash but also light on conditions … and it had a term of only eight months…. [A] normal IMF program for a deeply distressed country would have a term of three years and would entail comprehensive reforms…. [T]he program’s eight-month term was chosen to give the country just enough time to elect a new president and come back to the IMF.

Néstor Kirchner would emerge as Argentina’s new president, with a promise to “accelerate growth, increase upward mobility and distribute revenues more fairly … [and] promised a tough negotiation with international creditors.” Meanwhile, US Undersecretary of the Treasury John Taylor worked to decentralize debt restructurings with less IMF and US involvement, a restructuring “in which the sovereign government and its creditors would work out the terms on their own.”

Economy Minister Roberto Lavagna and Finance Secretary Guillermo Nielsen released initial guidelines for such a decentralized negotiation of terms at the World Bank–IMF annual meetings in Dubai in September 2003. The terms contained a proposed face-value “haircut” of 75 percent for creditors, lower coupon rates, longer maturities, and forgiveness of $20 billion in missed interest payments. One securities analyst summarized the Argentine government’s opening salvo: “This is the first move in what is going to be a prolonged chess game.” Makoff adds, “Bondholders were appalled.” The litigation leg was off and running, small and large investors alike, with Griesa hearing the cases, which were consolidated in the US District Court for the Southern District of New York. Both sides litigated the case in part by offering juicy quotes to major business publications such as the Financial Times.

Evolution of a restructuring template / The IMF board held a tense meeting where members expressed sympathy for creditor calls for committed “good faith negotiation” and doubts about the Argentine reform process. Ultimately, there was a vote for no formal support for the original restructuring proposal, in keeping with Taylor’s decentralized focus on negotiations between the sovereign and its creditors.

Ultimately, a revised proposal, the “Buenos Aires Offer,” was drafted and presented in June 2004 after meetings with creditor groups. The offering document was published in January 2005. The creditor haircut was reduced to 66 percent. To further encourage approval of the plan, Argentina passed the Lock Law in February 2005. According to Makoff, “a new law to scare potential holdouts … [who] would never be paid even if they held court judgments … [was] a big stick to add” in the effort to get approval for the offer.

The consensus within the debt market began to coalesce around a benchmark that indicated success based on the level of acceptance for the offer. “Commentators decided to draw the victory line at 70%,” writes Makoff. If the deal reached this participation rate, Argentina would be deemed the victor.” When the votes were counted, the offer won with 76 percent of bondholders. “There was no denying the magnitude of the victory.”

Cash cow for the lawyers / As the subtitle’s reference to “Landmark Court Battle” makes clear, much of Makoff’s narrative involves an “in the weeds” review of legal issues. The extent of the legal detail may bore many readers.

The legal struggle did not end with the positive vote by any means. Even though 76 percent of bondholders accepted the offer, the remaining bondholders (so-called holdouts) continued to pursue their claims in court: “Hundreds of cases were filed on behalf of tens of thousands of plaintiffs, and the litigation was about dozens of different matters.”

One example of this was Makoff’s telling of a long saga that started in late 2005, focusing on the tactics of the creditors to “raid … the Argentine central bank … because that’s where the [government’s] money is.” The challenge for creditors was that central banks are protected by the FSIA, which Makoff describes as “nearly bulletproof immunity.” But the Argentine central bank managed to expose a small segment of investments: $9.9 billion in central bank assets earmarked for payment to the IMF were not an asset for the central bank’s own account, but rather for the benefit of the Argentine government.

In early 2007, the US Second Circuit Court of Appeals determined, “The funds were immune to attachment,” and it sent the case back to Griesa at the district court level. The court case lingered, alternating back and forth with hearings between the district court and the appeals court. In 2010, Griesa made a final determination: “What is going on between the Republic of Argentina and the federal court system is an exercise of sheer willful defiance of the obligations of the Republic to honor the judgments of a federal court.” The attachment was allowed to stand.

A related Griesa ruling on the obscure and technical legal doctrine of pari passu, which involves the payment of creditors based on their level of priority, took a similar path and was finally resolved in 2016. No doubt these legal rabbit trails were a major reason why the restructuring process dragged on for 15 years.

Conclusion / Default is a well-researched book that answers the question of what happens when a sovereign nation cannot pay its debts. So, what lessons did the parties learn from the lengthy bout of restructuring negotiation?

In the book’s epilogue, Makoff informs readers of a fresh Argentine default after the 2016 settlements. The country’s economy faltered in late 2017, leading to $50 billion in financing as part of a new IMF program that quickly “went off track.” In the wake of COVID-19, Argentina was again in default by May 2020. The restructuring process this time took a mere three months with the help of collective action clauses (CAC), an innovation that prevents holdouts like Elliott Associates from “gaming future sovereign debt restructurings.” As a result, Makoff concludes that CACs and similar contract provisions should proliferate to make sure that “holdout creditors will [not] thrive.”