Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”

J. F. Hornbeck
Specialist in International Trade and Finance

In December 2001, following an extended period of economic and political instability, Argentina suffered a severe financial crisis, leading to the largest default on sovereign debt in history. It was widely recognized that Argentina faced an untenable debt situation that was in need of restructuring. In 2005, after prolonged, contentious, and unsuccessful attempts to find a mutually acceptable solution with its creditors, Argentina abandoned the negotiation process and made a one-time unilateral offer on terms highly unfavorable to the creditors. Although 76% of creditors accepted the offer, a diverse group of "holdouts" opted instead for litigation in hopes of achieving a better settlement in the future. Although Argentina succeeded in reducing much of its sovereign debt, its unorthodox methods left it ostracized from international credit markets for nearly a decade and triggered legislative action and sanctions in the United States. 

Argentina still owes private creditors $20 billion in defaulted debt and $10 billion in past-due interest, as well as $6.2 billion to Paris Club countries. Of the disputed privately held debt, U.S. investors hold approximately $3 billion. The more activist investor groups have lobbied Congress to pressure Argentina to reopen debt negotiations. Some Members of Congress have introduced punitive legislation in both the 110th and 111th Congress, but to date it has not received any legislative action. Nearly five years after the original debt workout, however, a confluence of circumstances has persuaded Argentina to restructure the holdout debt, particularly the need to secure long-term public financing. 

On April 15, 2010, Argentina announced the key features of the proposed bond deal, which will be made formal in a final prospectus to be released after approval is given from the European authorities, presumably around April 26, 2010. Argentina expects to complete the process by early June 2010. Two offers are proposed, one for retail (small) investors, the other for institutional (large) investors. Retail investors will receive replacement bonds for the full face value of the defaulted bonds they currently hold. Past due interest will be paid in cash. Institutional investors will receive a discount bond equal to a 66.3% reduction in the face value of the defaulted debt they currently hold (the so-called "haircut"). Past due interest will be covered by a separate seven-year "Global" bond. Interest rates vary depending on the bond. Both groups of investors will receive a GDP-linked security called a warrant that provides for additional payments should the Argentine economy grow at rates higher that anticipated and stipulated in the final prospectus. Analysts value the deal at between 48 and 51 cents on the dollar, compared to 60 cents for the 2005 exchange. 

For Argentina, a successful restructuring requires a sufficiently large participation rate that will eliminate most of the existing judgments and attachment orders. Argentina expects, with no guarantee, that such an outcome will lead to renewed access to the international credit markets. Historically, sovereign debt workouts with at least a 90% participation rate have achieved this goal. Since holdouts compose 24% of the original bondholders, a 60% participation rate of this group would allow for the total participation rate to reach the 90% threshold, including the 2005 exchange. If the exchange succeeds, Argentina will have completed a sovereign debt restructuring with the deepest write-off of principal in history. Many original bondholders were severely hurt by this deal, as was Argentina by the crisis. Secondary market participants may see a sizable profit. If there is a legacy to the Argentine case, it may be in the changes to bond contracts that seek to improve outcomes for creditors. One option is the use of collective action clauses (CACs), now standard for sovereign debt, which require all creditors to bargain collectively, with a compulsory majority decision applicable to all bondholders.


Date of Report: April 23, 2010
Number of Pages: 17
Order Number: R41029
Price: $29.95

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Brazil’s WTO Case Against the U.S. Cotton Program

Randy Schnepf
Specialist in Agricultural Policy

On April 5, 2010, Brazil's Foreign Trade Council (CAMEX) approved a resolution that would postpone until April 22 the implementation of WTO-approved countermeasures by Brazil against U.S. imports in relation to a long-running dispute over U.S. cotton subsidies. Earlier, on March 10, 2010, Brazil had released a list of 102 goods of U.S. origin valued at $561 million that would be subject to import tariffs of up to 100% within 30 days unless a last-minute agreement was reached. Five days later, on March 15, Brazil released a preliminary list of U.S. patents and intellectual property rights it could restrict, barring a joint settlement. In light of the temporary suspension of countermeasures, negotiations between the United States and Brazil on a proposed settlement continue. If preliminary objectives (discussed in the report) are achieved, it may result in the permanent suspension of any countermeasures related to this case. 

This trade dispute had its origins in 2002, when Brazil—a major cotton export competitor— expressed its growing concerns about U.S. cotton subsidies by initiating a World Trade Organization (WTO) dispute settlement case (DS267) against specific provisions of the U.S. cotton program. On September 8, 2004, a WTO dispute settlement panel ruled against the United States on several key issues. It found both (1) prohibited U.S. export subsidies (related to Step 2 program payments and export credit guarantees under the GSM-102 program) and (2) actionable U.S. domestic support measures (i.e., marketing loan benefits and counter-cyclical program payments) that resulted in adverse effects against Brazil's commercial interests. 

The United States appealed the ruling, but on March 3, 2005, a WTO Appellate Body upheld the panel's ruling and provided specific deadlines for removal or modification of the offending U.S. subsidies. Shortly after the March 2005 ruling, the United States made several changes to its cotton programs in an attempt to bring them into compliance with the WTO recommendations. However, Brazil argued that the U.S. response was inadequate, and requested the establishment of a WTO compliance panel in August 2006 to review whether the United States had fully complied with the previous rulings. The compliance panel ruled against the United States in December 2007, and the ruling was upheld on appeal in June 2008. 

On August 31, 2009, a WTO arbitration panel (reviewing Brazil's retaliation proposal of nearly $3 billion) released its decision, generally finding in favor of Brazil's retaliation requests but at levels substantially reduced from those requested by Brazil. However, in a key decision, the panel ruled that Brazil would be entitled to cross-retaliation if the overall retaliation amount exceeded a formula-based variable annual threshold. Cross-retaliation involves countermeasures in sectors outside of the trade in goods, most notably in the area of U.S. copyrights and patents. 

On December 21, 2009, Brazil announced that it was authorized by the WTO to impose trade retaliation against up to $829.3 million in U.S. goods in 2010 (based on 2008 data). The countermeasure included a fixed annual amount of $147.3 million, reflecting the adverse effects from U.S. price-contingent subsidies, and a balance related to the volume of U.S. export credit guarantees, which may vary annually. The WTO also established a threshold value (related to the value of Brazil's consumer goods imports from the United States) for determining the extent of permissible cross-retaliatory countermeasures. The threshold varies annually based on changes in Brazil's total imports from the United States, but is currently estimated at $561 million, yielding a remaining value of $268.3 million ($829.3 million - $561 million) in eligible cross-retaliatory countermeasures.


Date of Report: April 6, 2010
Number of Pages: 41
Order Number: RL32571
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U.S.-Mexico Economic Relations: Trends, Issues, and Implications

M. Angeles Villarreal
Specialist in International Trade and Finance

Mexico has a population of about 111 million people, making it the most populous Spanish speaking country in the world and the third-most populous country in the Western Hemisphere. Based on a gross domestic product (GDP) of $875 billion in 2009 (about 6% of U.S. GDP), Mexico has a free market economy with a strong export sector. Economic conditions in Mexico are important to the United States because of the proximity of Mexico to the United States, the close trade and investment interactions, and other social and political issues that are affected by the economic relationship between the two countries. 

The United States and Mexico have strong economic ties through the North American Free Trade Agreement (NAFTA), which has been in effect since 1994. In terms of total trade, Mexico is the United States' third-largest trading partner, while the United States ranks first among Mexico's trading partners. In U.S. imports, Mexico ranks third among U.S. trading partners, after China and Canada, while in exports Mexico ranks second, after Canada. The United States is the largest source of foreign direct investment (FDI) in Mexico. These links are critical to many U.S. industries and border communities. 

In 2009, 12% of total U.S. merchandise exports were destined for Mexico and 11% of U.S. merchandise imports came from Mexico. After increasing 10% in 2008, U.S. exports to Mexico decreased 19.6% in 2009 as a result of the global financial crisis and the effect on the U.S. economy. Imports from Mexico decreased 18.5% in 2009, after a 3% increase in 2008. For Mexico, the United States is a much more significant trading partner. Over 80% of Mexico's exports go to the United States and 48% of Mexico's imports come from the United States. The stock of U.S. FDI in Mexico totaled $95.6 billion in 2008. The overall effect of NAFTA on the U.S. economy has been relatively small, primarily because two-way trade with Mexico amounts to less than 3% of U.S. GDP. Major trade issues between Mexico and the United States since NAFTA have involved the access of Mexican trucks to the United States; the access of Mexican sugar and tuna to the U.S. market; and the access of U.S. sweeteners to the Mexican market. 

Over the last decade, the economic relationship between the United States and Mexico has strengthened significantly. The two countries continue to cooperate on issues of mutual concern. President Barack Obama met with Mexican President Calderón and Canadian Prime Minister Harper at the North American Leaders' Summit in Guadalajara, Mexico, in August 2009 to discuss key issues that affect the three countries. They agreed to continue cooperation in North American competitiveness and security.


Date of Report: March 31, 2010
Number of Pages: 29
Order Number: RL32934
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Latin America and the Caribbean: Fact Sheet on Leaders and Elections

Julissa Gomez-Granger
Information Research Specialist

Mark P. Sullivan
Specialist in Latin American Affairs

This fact sheet tracks the current heads of government in Central and South America, Mexico, and the Caribbean. It provides the dates of the last and next elections for the head of government and the national independence date for each country.

For Further Information: http://pennyhill.net/?p=125

Date of Report: April 2, 2010
Number of Pages: 5
Order Number: 98-684
Price: $7.95

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Cuba: Issues for the 111th Congress

Mark P. Sullivan
Specialist in Latin American Affairs

Cuba remains a hard-line communist state with a poor record on human rights. The country's political succession from the long-ruling Fidel Castro to his brother Raúl was characterized by a remarkable degree of stability. Fidel stepped down from power in July 2006 because of health reasons, and Raúl assumed provisional control of the government until February 2008 when he officially became President. His government has implemented limited economic policy changes, but there has been disappointment that further reforms have not been forthcoming. The economy was hard hit by storms in 2008 and the global financial crisis has caused further strains. Few observers expect the government to ease its tight control over the political system. 

Since the early 1960s, U.S. policy has consisted largely of isolating Cuba through economic sanctions. A second policy component has consisted of support measures for the Cuban people, including private humanitarian donations, U.S.-sponsored broadcasting to Cuba, and support for human rights activists. In light of Fidel Castro's departure as head of government, many observers have called for a re-examination of sanctions policy. In this new context, two broad approaches have been advanced: an approach that would maintain the dual-track policy of isolating the Cuban government while providing support to the Cuban people; and an approach aimed at changing attitudes in the Cuban government and society through increased engagement. The Obama Administration has lifted restrictions on family travel and remittances; eased restrictions on telecommunications links with Cuba; restarted semi-annual migration talks; and initiated talks on resuming direct mail services. The Administration has also strongly criticized Cuba's human rights situation, including the death of hunger striker Orlando Zapata Tamayo in February 2010 and the repression of peaceful protests and dissent. Cuba's imprisonment of a U.S. government contactor since December 2009 could affect the future of bilateral relations. 

In March 2009, the 111th Congress approved three provisions in the FY2009 omnibus appropriations measure (P.L. 111-8) that eased sanctions on family travel, travel for the marketing of agricultural and medical goods, and payment terms for U.S. agricultural exports. In December 2009, Congress included a provision in the FY2010 omnibus appropriations legislation (P.L. 111- 117) that eased payments terms for U.S. agricultural exports to Cuba during FY2010 by defining the term "payment of cash in advance," and also continued funding for Cuba democracy programs and Radio and TV Martí broadcasting. In May 2009, the Senate approved S.Res. 149, related to freedom of the press, while in March 2010 it approved S.Con.Res. 54, as amended by S.Amdt. 3552, in the aftermath of the death of imprisoned Cuban dissident from a hunger strike (two similar House resolutions have been introduced: H.Con.Res. 251 and H.Con.Res. 252). 

Numerous initiatives have been introduced that would ease sanctions: H.R. 188, H.R. 1530, and H.R. 2272 (overall sanctions); H.R. 874/S. 428 and H.R. 1528 (travel); H.R. 332 (educational travel); H.R. 1531/S. 1089 and H.R. 4645/S. 3112 (agricultural exports and travel); H.R. 1737 (agricultural exports); and S. 774, H.R. 1918, and S. 1517 (hydrocarbon resources). H.R. 1103/S. 1234 would modify a trademark sanctions, while several bills cited above would repeal the sanction. S. 1808 would eliminated Radio and TV Martí. Measures that would increase sanctions are H.R. 2005 (related to fugitives) and H.R. 2687 (OAS participation), while H.Con.Res. 132 calls for the fulfillment of certain democratic conditions before the United States increases trade and tourism to Cuba. Also see CRS Report RL31139, Cuba: U.S. Restrictions on Travel and Remittances
and CRS Report R40566, Cuban Migration to the United States: Policy and Trends.

Date of Report: March 25, 2010
Number of Pages: 75
Order Number: R40193
Price:$29.95
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