Argentina's Holdout Problem

A little background to the issue: in the end of the 1990s and early 2000s, Argentina’s economy was facing severe difficulties and the government was unable to make interest payments on sovereign debt issued in 1994. In 2005 and 2010 Argentina restructured its debt, ultimately negotiating the value of their bonds down 70%. Approximately 93% on bondholders accepted the Argentinean offer. 7% of bonds were not renegotiated, however. Most of these bonds were owned by hedge funds that purchased the debt while it was very distressed i.e. following the default but before the restructuring. These same hedge funds have been fighting Argentina for full payment since then and have gained a lot of press lately as "holdout creditors" or Vulture Funds (as Argentina prefers).

The holdout problem is one of the main critiques with Coasian solutions. The idea behind it is that if one party must negotiate with many actors in the opposite side in order to gain some right or benefit, the last actor to participate in negotiations (the holdout) gains tremendous leverage over the other party because he single handedly controls the overall success or failure of the negotiation. However, it may be difficult to understand how Argentina's holdout creditors have so much leverage, given that for well over 10 years they didn't receive any payments. The catalyst for this holdout problem was not the initial debt renegotiation, since that went on despite the holdouts' objections. Instead, holdouts gained their leverage in 2013 with a ruling over pari passu clauses on the bond offering, in which US Judge Grieza declared that Argentina could not pay its restructured bond holders unless it also paid its non-restructured (holdout) bonds as well. As a consequence, the hedge funds were able to setup a scenario where either Argentina paid them, or it would default in its restructured debt - that incredible leverage is what created a de facto holdout problem, something very different from the de jure issue that had been going on for more than a decade.

Interestingly, however, the fact that Argentina has a) defaulted, b) remained a "stable" society and c) continuously tried financial maneuvers to skirt US rulings, show the difficulty of actually using leverage as a holdout if there is no strong entity that can enforce the consequences of non-negotiation. Ultimately a holdout's leverage becomes meaningless if the costs associated with its demands are higher than the cost of non-negotiation, and when it comes to international law, those costs are rarely materialized, unfortunately.