Argentina to Settle with the Paris Club

It's taken almost almost seven years since Argentina defaulted on its debt at the beginning of 2001, but finally the country looks as though it's going to agree terms with the Paris Club of bilateral creditors. Argentina owes the Paris Club a relatively small $6 billion, but paying off or restructuring that debt is crucial, because so long as Argentina is in arrears to the Paris Club, club members such as Spain won't allow their export credit agencies to guarantee any business dealings with companies in Argentina. This, then, is good news for Argentina, which should see a significant uptick in international investment.

It's probably not good news for Argentina's private-sector creditors, however. Argentina still owes $20 billion or so to bondholders who didn't accept its restructuring terms back in 2005, and a Paris Club settlement now would mean one less reason for Argentina to care about them.

And it's also not particularly good news for the doctrine of "comparability of treatment," which says that if the Paris Club offeres generous restructuring terms to a country, then that country has to demand the same generous terms from its private-sector creditors. The corollary is not true: if a country's private-sector creditors end up giving very generous restructuring terms, as happened in Argentina, the Paris Club feels no obligation whatsoever to follow suit. That would be something called "reverse comparability", which has never been accepted by anybody in the official sector.

In this particular situation, however, the difference in treatment between public-sector and private-sector creditors is truly extreme. Big official-sector creditors such as the World Bank and the IMF were paid off in full by Argentina. Smaller bilateral creditors are now going to get a good deal at the Paris Club. Most bondholders, by contrast, gave up 70% of their claims on the country, and a minority of "holdout" bondholders held on to their paper and have so far received nothing at all.

The holdouts have been reduced to stunts such as paying freelance protestors to dress up in blue gowns and demonstrate outside the Waldorf hotel in New York. Which is an interesting way for multibillion-dollar hedge funds to try to make money on their investments, but I don't think it's going to prove particularly successful. Clearly Argentina's fellow sovereign nations still have more power over recalcitrant debtors than any hedge fund.