In 2002, Argentina faced a financial crisis and had no choice but to devalue its currency and default on its debt. Before this the Argentine peso was tied to the dollar at 1:1 and after devaluation it settled to 4:1.
Solution : Debt Structuring. Argentina exchanged old debt with the new debt at 30 cents to the dollar and returns were linked in terms of GDP indexed bonds.
What are GDP indexed bonds ?
Suppose a country has been growing in the last few years at an average rate of 3% and is expected to do so in the coming years. Suppose also that this country can issue debt using a fixed-income bond with a coupon of 7%. This country can issue a GDP-linked bond that pays 7% when output growth at the end of the year is exactly 3% and will pay more or less accordingly to its economic performance. That is, for example, if the country grows 1% instead of 3%, then the GDP-linked bond will pay a coupon of 5% instead of 7%. Conversely, if there is an unusually better economic performance and the country grows 5% instead of 3%, then the GDP-linked bond will pay a coupon of 9%. <Source Wikipidea>
Why GDP indexed bonds worked ?
The incentives of the creditors and the debtors were both aligned as both of them wanted to come out of recession.
How is American Corporate Debt restructured ?
Bond is swapped for equity, with bondholders becomeing equity holders. Chapter 11 of bankruptcy filing.
What are vulture funds ?
They took advantage of a clause that all claimants are treated equal. That is if Argentina would pay the claimants who accepted debt structuring, they would also have to pay what they owed to other claimants.
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