Debt restructuring in review if Argentina defaults: IMF

The mechanisms allowing a country to restructure its sovereign debt should be "reviewed" if Argentina defaults, IMF chief Christine Lagarde has said.

Under a US court order, Argentina has to pay certain hedge funds demanding full payment on defaulted bonds till this midnight or risk being declared in default.

If that happens, "the debt restructuring principles and the efficiency" of collective-action clauses "will have to be reviewed," said Lagarde, managing director of the International Monetary Fund, at a news conference in Washington yesterday.

Collective-action clauses - including when a government issues bonds - traditionally allow a majority of creditors to agree to a debt restructuring when the country is facing a crisis.

Lagarde added that the Fund was monitoring the situation and analysing the potential consequences of a default.

Argentina used collective-action clauses to deal with its 2001 default on close to $100 billion in debt, which plunged the country into an economic crisis it is still battling to overcome.

Argentina persuaded 92% of its creditors to accept writeoffs of up to 70%.

But under the US judge's ruling, it cannot pay its other creditors without also paying hedge funds which did not agree to the debt restructuring.

Argentina is due to make a $539 million payment on the restructured bonds today.

If Argentina pays the so-called "holdout" hedge funds 100% of the $1.3 billion it owes them, it could be forced to pay all remaining creditors in full, as well, under the restructuring deal.

Some analysts say the US judge's ruling could encourage investors to hold out in other restructurings of sovereign debt, making it more difficult for the IMF and other official lenders to help stabilize countries whose finances have collapsed.

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.