Working Paper: CEPR ID: DP5236
Authors: Amrita Dhillon; Javier GarciaFronti; Sayantan Ghosal; Marcus Miller
Abstract: 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.
Keywords: bargaining; debt restructuring; efficiency; delay; sustainability
JEL Codes: C7; F3; F33; F34; K4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expectation of economic recovery (E32) | Delay in reaching a debt restructuring agreement (G33) |
| Expectation of economic recovery (E32) | Incentives for both parties to postpone settlement (D15) |
| First mover advantage of the Argentine government (H13) | Less favorable deal offered to creditors (G33) |
| Expected growth rate exceeding discount rate (H43) | Efficient delay in negotiations (C78) |
| Political legitimacy and interim nature of Duhalde's presidency (P37) | Complicated negotiations (F51) |