IMF warns about 'default' costs for Argentina; calls for debt restructuring mechanisms
The IMF's chief economist warned that a default by Argentina in its battle with holders of its defaulted debt may hurt its economy and the global financial system. Argentina continues to face the fallout of its 2001 debt default, which plunged the country into an economic crisis it is still battling to overcome.
“If it goes into default and doesn't pay the holdouts, there might be substantial costs, being basically unable to access markets for some time,” said Olivier Blanchard, head of the IMF's team of economists.
Blanchard, speaking at a news conference on the latest IMF growth forecasts for the global economy, also emphasized that “there's a cost to the world in the sense that we need resolution systems which work well when countries are in trouble.”
Under a US court order, Argentina has until next Wednesday to either pay certain hedge funds demanding full payment on defaulted bonds or risk being declared in default.
Blanchard said the Argentina case means “there's much more uncertainty as to how we'll be able to restructure debt for others countries in the future.
”So this really tells us that we need to work on improving resolution mechanisms.“
The IMF proposed an international debt restructuring mechanism in 2003 but the plan was abandoned under pressure from the United States, the institution's largest stakeholder, and the major emerging-market economies.
Argentina persuaded 92% of its creditors to accept write-offs of up to 70%, but is now facing a Catch-22: under the US judge's ruling, it cannot pay its other creditors without also paying the hedge funds; and under the restructuring deal, it is supposed to pay all its creditors the same.
If Argentina pays the so-called ”holdout“ hedge funds -- which it calls ”vulture” funds -- 100% of the 1.3 billion it owes them, it could be forced to pay all remaining creditors in full, as well.
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