SECURITY COUNCIL: Topic 3 – Issue Briefing Pack

Topic 3 – The Question of Argentina’s Debt Default: What Should the UN do?

The Argentinian debt default crisis places a serious economic burden on both Argentina and its partnering countries. The approach to solving this issue depends on how much legal intervention will be required.

Current Economic Situation

Currently, Argentina holds over $100 billion of debt. This, along with its unsustainable deficits and monetary policies, has forced the country to declare its ninth default. The Macri government has already taken desperate measures in an attempt to restructure Argentina’s debt. Buenos Aires announced a delayed repayment of $7 billion on its short-term local bonds, as well as $44 billion of loan from the International Monetary Fund, in order to prioritise debt reprofiling of $50 billion to its foreign investors.

Criticism of the Argentinian Economy

In this century alone, Argentina has declared more sovereign debt crises than any other country. This has raised large concerns regarding the country’s credibility, which has led potential foreign investors to divert their interest towards other, less economically volatile, countries. A very similar event occurred after a severe recession between 1998 and 2002, when Argentina defaulted on $93 billion of external debt. This immediately led foreign investors to peel out of any further capital flow towards the Argentinian economy. The currency exchange rate was floated, resulting in the swift devaluation of the peso. This was followed by a rise in inflation to over 40%, impelling the government to declare large-scale debt restructuring. However, both international and domestic creditors denounced the default. Argentina later faced numerous legal issues, including being sued by domestic bondholders to be repaid their full bond’s face values.

During the 2005 Argentina debt default, however, the country fully paid out its debt to the IMF, which it regards as a privileged creditor. This not only prompted the IMF to declare Argentina as a model country in its compliance to debt repayment policy proposals, but also increased the country’s credibility.

Potential Solutions

One of the more conventional approaches to default crises is debt restructuring, which allows a sovereign entity to renegotiate debts so that it can restore liquidity and thus resume operations. Therefore, a potential solution to Argentina’s economic crisis could be to renegotiate debt settlements with its international and domestic creditors. There are two possible approaches to sovereign debt restructuring that could help Argentina regain liquidity. The first is debt rescheduling, which would lengthen the maturity of any old debt (potentially accompanied by lowered interest rates), therefore shifting any contractual payments into the future. The second approach intends to reduce the nominal value of any old debt, allowing the borrower to repay any debt to its creditors more easily. The advantage of debt restructuring is that there is no serious legal intervention, which attracts foreign investors to smooth out the volatile market.

A more extreme approach would be to punish the debtor to see the return of any investment. This would involve legal actions on Argentina and would unsurprisingly reduce the country’s liquidity. The approach may come in response to Argentina’s lack of compliance with the policies set for the repayment of debt, which would force creditors to seek legal intervention. Additionally, Argentina’s ‘knack’ for sovereign default is, and will continue to incentivise foreign investors to invest elsewhere, or instead, request legal repercussions for the debtor.

Questions to ask when writing a resolution

  • Should Argentina face legal repercussions?
  • Is it reasonable for Argentina to request debt restructuring?
  • To what extent should debt restructuring occur?
  • How likely is it that after Argentina has been offered a restructuring of debt, that it will regain economic
  • Is it fair that Argentina receives so much support from creditors such as the IMF, when it has experienced sovereign default more than any other country during this century?