Holdout problem
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When a government offers an exchange offer, in an effort to restructure its sovereign debt, some bond holders may reject it. Bondholders are so widely diversified that the coordination of bondholders has become very difficult. In what some call "selfish" behavior, some bondholders then reject the exchange offer and seek the full payment of original bonds, as is their entitlement, but in so doing disrupt the restructuring process. This is normally referred to as the holdout problem.
This creates an unequal situation between holders of new bonds and those of existing bonds. In addition it may delay the restructuring process and ultimately reduce the resource and capacity of the country to avoid repaying its debt or to raise new loans.
There have been recent holdout problems in Peru (1996) and Argentina (2001). In the case of Peru, "buying out" holdouts has had a cost. The holdout problem may become more prevalent in future, as successful litigation by some creditors in one case may increase the incentives for others to try it. In addition, the possibility that holdout creditors can attach future payments on restructured debt and receive better treatment than cooperating creditors distorts incentives and can derail efforts for a cooperative restructuring. It is likely to be of particular importance in cases in which the creditors are being asked to accept substantial debt and debt service reduction.
External links:
- The problem of sovereign debt restructuring (http://www.law.harvard.edu/programs/pifs/pdfs/kentaro_tamura.pdf) (PDF) by Kentaro Tamura.
- Proposals for a Sovereign Debt Restructuring Mechanism (SDRM) (http://www.imf.org/external/np/exr/facts/sdrm.htm#a4) International Monetary Fund