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Mohamed A. El-Erian

What to Do When Governments Default

Argentina's battle with creditors illustrates the coordination problems that arise when governments default on their debts.
Has Argentina's debt wrangling worsened a coordination problem?
Has Argentina's debt wrangling worsened a coordination problem?

Argentina's long battle with a small group of creditors, in which the latter won an important court decision this week, highlights a crucial issue in the management of financial and economic crises: What to do when a country is either unable or unwilling to pay its debts.

The Argentine case dates back to 2001, when a severe economic depression rendered the government unable to make payments on some $95 billion in bonds. Holders of more than 90 percent of the debt accepted new bonds worth roughly 30 cents on the dollar, but a group of creditors ended up betting that they could get the government to pay more on the rest. This week, the U.S. Supreme Court effectively supported the holdouts: If the government wants to keep making payments on the restructured debt, it must pay them, too.