There is no formal procedure in international law for a sovereign debt default. Argentina followed common practice by allowing the US courts to resolve how much should be repaid and when, under a bipartisan agreement between Republican and Democrat legislators.


What is the common procedure that countries tend to follow during a sovereign debt default? I am wondering what are things that could have been handled differently, and if so if it would have been considered to be a "common" procedure still since it seems there might be more than one common practice in defaulting.

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    I don't think Argentina wanted to have the US courts drive the defaulting procedure, at all. IIRC US vulture funds acquired cheap debt after the default and then lobbied themselves into getting preferential terms by getting any "haircut deals" torpedoed. That was, IIRC, contrary to precedents but it worked out well enough, for the vulture funds. Often the parties settle on something like 25cents on the dollar (name your own ratio) where the debt is discounted and settled, in order to allow the defaulting country back into the monetary system. But that's case by case, not common procedure Feb 19 at 4:14

2 Answers 2


Yes, it's common for haircuts to be agreed at some point. The catch is that countries used to force these on domestic investors at least, by passing local legislation that typically says that if X% of investors agree to Y% of haircut, then all investors get the Y% haircut. So, the international investors got wiser and at least for some countries that have a history or higher risk of defaulting they shy away from bonds unless said country agrees that the laws of some other country apply to the default disputes, which precludes domestic legislation from forcing the hands of those investors. This is what happened to Argentina and later to Greece. In the latter case mostly because of supranational rules, IIRC.

To quote the general idea from a paper:

While a smooth resolution of a crisis situation may also be in the interest of creditors, each individual investor has an incentive to free-ride, by rejecting the haircut suffered by other creditors and insist on full repayment instead. Holdout creditors could even go to court to enforce their claims in full, resulting in less debt relief and the risk of disruptive litigation. This well-known "holdout problem" has become evident in recent sovereign restructurings, most notably in Argentina 2005.

Thus far, the main policy response to solve this type of creditor coordination problem has been the introduction of Collective Action Clauses (CACs) in sovereign bond contracts. CACs can bind minority holdouts to accept the terms of a debt restructuring if a sufficiently large supermajority accepts the offer.

[...] smaller bonds, as well as bonds issued under foreign law (such as English law), bonds with high coupons, and more actively traded bonds see higher average holdouts

And in more detail from the same, of the most famous examples

Uruguay 2003, Argentina 2005 and Greece 2012 saw the largest within-deal variation, with holdouts ranging from 0 to 100%.

Uruguay 2003 involved 18 international bonds, 28 domestic bonds, and one Japanese-law bond which were offered three separate restructuring deals. Four of the five Brady bonds and both of the two EUR-denominated bonds mostly held by retail investors had holdouts exceeding 25%. The Brady New Money Notes had a holdout rate of 75%. All other bonds had less than 10% holdouts.

Argentina 2005 is probably the most well-known sovereign bond restructuring that suffered from large-scale holdouts. Of the 145 bonds for which we could obtain bond-level participation information, 17 were completely tendered, 63 had more than 25% holdouts and 9 bonds had more than 50% holdouts. Most of these high-holdout bonds were heavily litigated.

Greece 2012 involved a total of 117 eligible securities, of which 75 were local-law, 35 English-law, five Japanese-law, one Swiss-law and one Italian-law. The 53 government-issued local-law bonds were retrofitted with the single-limb CACs that increased the participation from initially 82.5% to full. The participation rate across 22 government-guaranteed local-law instruments was very high (95%) even without the retrofitted CACs. In contrast, foreign-law bonds became a magnet for holdouts. Half of all (21 of the 42) foreign-law bonds saw holdouts above 50% and 9 bonds had 100% holdouts, meaning that not a single holder of the bonds agreed to participate. In aggregate, the final (post-CACs) participation rate for Greece's foreign-law bonds was 71%.

[...] Within the same deal, the range between the maximum and minimum haircuts across bonds averages 17 percentage points, but in some cases the haircut distribution has been much more dispersed and was highest in Argentina 2005 with a difference of 56 percentage points between the bond with the lowest and highest haircuts. These numbers show that inter-creditor equity is often violated ex post.

A similar take, expressed somewhat more dramatically:

For centuries, sovereign debt was assumed to be ‘above the law’ and non-enforceable. This column shows that this is no longer the case. Building on a new dataset on sovereign debt lawsuits, it documents the erosion of sovereign immunity since the 1970s and argues that legal disputes can disrupt government access to international capital markets, as foreign courts impose a financial embargo on defaulting sovereigns. These legal developments have strengthened the hands of creditors and raised the cost of default for debtors, with far-reaching consequences for government willingness to pay and the resolution of debt crises.

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Also, ItalianPhilo's comment is rather correct that a certain kind of "vulture" funds have specialized in buying litigable sovereign debt.

Our case archive also shows that the market changed fundamentally in the early 1990s. A new type of plaintiff emerged: specialised distressed debt funds, which often buy debt at a discount and then sue for full repayment. Hedge funds now account for two-thirds of all new cases. The lawsuits they file are typically larger, less likely to be settled early on, and involve multiple attempts to attach sovereign assets abroad or interrupt the government’s capital market access.

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Argentina became a hallmark of the phenomenon in no small part because the default itself was absolutely huge, $80-$100 billion (yeah, sources don't even quite agree how much it was) so the absolute dollar value of the haircuts was something some found worth fighting for.

Also, while some claim the "vulture" practices are new, they are apparently only so with respect to the 20th century. Some research reports that in the Victorian era the practices in London were similar, and that they were an improvement over simply sending a fleet to shell the ports of the debtor(s). The somewhat modified practice of imposing a blockade or taking prizes at sea for non-payment persisted in the early 20th century, by the way, e.g. Venezuelan crisis of 1902–1903. (The fact that the franchise was rather narrow in most European countries at the time, i.e. mostly only the rich could vote, probably had something to do with the ease of lobbying the government[s] to send over a fleet to recover debt owed to private notables.)


A variety of actions are taken in the event of a sovereign debt default. For example (from the link):

very often there are international negotiations that end in a partial debt cancellation (London Agreement on German External Debts 1953) or debt restructuring (e.g. Brady Bonds in the 1980s). This kind of agreement assures the partial repayment when a renunciation / surrender of a big part of the debt is accepted by the creditor. In the case of the Argentine economic crisis (1999–2002) some creditors elected to accept the renunciation (loss, or "haircut") of up to 75% of the outstanding debts, while others ( "holdouts") elected instead to await a change of government (2015) for offers of better compensation. . . . In some cases foreign lenders may attempt to undermine the monetary sovereignty of the debtor state or even declare war. . . .

A failure of a nation to meet bond repayments has been seen on many occasions. Medieval England lived through multiple defaults on debt, Philip II of Spain defaulted on debt four times – in 1557, 1560, 1575 and 1596. This sovereign default threw the German banking houses into chaos and ended the reign of the Fuggers as Spanish financiers. Genoese bankers provided the unwieldy Habsburg system with fluid credit and a dependably regular income. In return the less dependable shipments of American silver were rapidly transferred from Seville to Genoa, to provide capital for further military ventures.

In the 1820s, several Latin American countries that had recently entered the bond market in London defaulted. These same countries frequently defaulted during the nineteenth century, but the situation was typically rapidly resolved with a renegotiation of loans, including the writing off of some debts.

A failure to meet payments became common again in the late 1920s and 1930s. As protectionism by wealthy nations rose and international trade fell, especially after the banking crisis of 1929, countries possessing debts denominated in other currencies found it increasingly difficult to meet terms agreed under more favourable economic conditions. For example, in 1932, Chile's scheduled repayments exceeded the nation's total exports; or, at least, its exports under then-current pricing. Whether reductions in prices – forced sales – would have enabled fulfilling creditors' rights is unknown.

Often, a sovereign debt default or risk of a sovereign debt default results in the creditor negotiating austerity measures to be adopted by the defaulting country to assist it in repaying some or all of the debt owed.

For example, this is essentially what happened following Greece's debt crisis which began in 2007 and continued through a June 2015 default on a $1.7 billion payment to the International Monetary Fund and beyond.

This is also what happened in the case of a number of Latin American countries at risk of defaulting on their loans in the 1980s as a result of the Latin American debt crisis.

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