Over the latest twenty years, the average credit rating of U.S. corporations has trended down. This decrease in average credit ratings could be interpreted as indicative of a decline in the actual credit quality of U.S. corporate debt over time. Another interpretation is that the decline in average ratings reflects a tightening of credit standards by agencies, implying a decreasing default probability for a given credit rating.
The pace at which the credit derivatives market has been growing since its inception about ten years ago topped all projections1, increasingly calling for the development of more and more accurate pricing tools for these products since market reality often reveals that the assumptions underlying the prevalent models are inadequate and misleading.
The instrument this paper focuses on is a credit default swap (CDS). This is a bilateral contract aimed at transferring the credit risk of a (corporate or sovereign) borrower from one market participant (the protection buyer) to another (the protection seller). The CDS buyer pays a periodical premium for the assurance that the CDS seller will compensate him for the loss in case the borrower defaults during the term of the contract. If so, the protection seller pays the notional amount of the contract to the protection buyer as compensation for the loss incurred. The latter, in turn, must deliver obligations (usually bonds) of the defaulted borrower with total principal equal to the notional amount of the CDS contract.
To us, who have written this work, the study of the Argentinean foreign debt does not need justification. For almost three decades, the foreign debt was continuously one of the main concerns of economic policy. On the other hand, both the record amount of the defaulted debt and the novel characteristics of its restructuring may be sufficient reasons to include an analysis of Argentina in a selection of studies about sovereign debt. Therefore, the processes that led to the default of the debt and its subsequent restructuring constitute one of the focuses of this work. However, the case also presents other singular aspects that call for attention. Our analysis is also focused on some of them.
References to the country are frequently found in the recent literature. It is often used as an example of general arguments that take Argentina as a notable particular case. The rhetoric power of the example precisely comes from its supposedly well-known characteristics, that sometimes seem to exempt the quote of solid proofs. Many are second hand references and in some cases not even that but the mere mentioning of a ‘consensual image’. This is a motivation to take a close look at what happened in Argentina.
