In December 2001, Argentina suffered a severe financial crisis, leading to the largest sovereign debt default in history, except for Greece. In 2005, Argentina abandoned negotiations to restructure the debt and made a unilateral offer on terms highly unfavorable to creditors. Still, $62.3 billion of the $81.8 billion in principal was exchanged. A diverse group of "holdouts" representing $18.6 billion did not tender their bonds. Argentina completed a second bond exchange in 2010, capturing another $12.4 billion of defaulted bonds (for a total of 91.3% of the original defaulted debt). At the close of 2010, Argentina reported that it owed private investors $11.2 billion ($6.5 billion in principal, $4.7 billion in past due interest). With additional interest, holdout creditors argue that they may now be owed as much as $15 billion. Argentina does not recognize the private holdout debt in its budget, and legislation bars the government from making further offers to the holdouts. U.S. responses have been varied. Some of the "holdout creditors" have brought claims against Argentina in the U.S. federal courts totaling $1.3 billion, resulting in judgments and attachment orders. Recent court decisions have left Argentine central bank assets in the United States immune from attachment, but require Argentina to treat both holdout and exchange bondholders equally. In this case, the district court ordered Argentina to pay litigant holdouts the full $1.3 billion of their claim. The appeals court stayed the order pending conclusion of the appeals process. A final payments offer was rejected by the holdouts, who urged the appeals court to enforce the lower court ruling against Argentina. Should this occur, it could prohibit banks from allowing Argentina to make payments to exchange bondholders unless it also paid the holdouts, creating a conundrum for Argentina: either pay all parties per the court order, or for lack of an ability to pay only the exchange bondholders, find itself in technical default. Argentina may try to continue the appeals process, but could eventually have to decide whether to find a way to settle with the holdouts, or find itself in technical default of the exchanged bonds. The U.S. government has also taken action, and punitive legislation against Argentina has been introduced in the last three Congresses. This report reviews Argentina's financial crisis, the bond exchanges of 2005 and 2010, ongoing litigation, prospects for a final solution, related U.S. legislation, and broader policy issues. Argentina's 2001 debt crisis resulted from many factors. For the most part, Argentina over borrowed and fell victim to its own economic policies, but this was compounded by questionable lending and policy advice by the International Monetary Fund (IMF), a global recession, and international credit markets determined to chase high-yielding debt with inadequate regard to risk. Together, these factors propelled Argentina toward a position of unsustainable debt that ended in financial crisis, unprecedented default, and a controversial restructuring scheme. Argentina's 2001 financial crisis had its roots in a history of periodic macroeconomic policy problems, the Achilles' heel of Argentine economic strategy for much of the 20 th century. Argentina has long relied on fiscal largesse as a basic policy tool, often covering its shortfalls by expanding the money supply. These policies led to recurring bouts of high inflation and indebtedness, typically followed by temporary efforts to stabilize prices. Toward the end of the 20 th century, Argentina experienced hyperinflation that eventually toppled the Alfonsín government in 1989, bringing Carlos Menem to the presidency, along with his well-known Minister of Economy, Domingo Cavallo. The Menem-Cavallo cure for chronic inflation was the now infamous "convertibility plan." Enacted on April 1, 1991, it set the stage for the crisis that would emerge a decade later. The plan legally guaranteed the convertibility of pesos to dollars at a one-to-one fixed rate and limited the printing of additional currency only to amounts supported by its reserve position (which could fluctuate with the amount of dollars entering or leaving the country). Upholding this promise, however, required that monetary and fiscal policies also be constrained—the money supply could not be expanded to cover deficits (as it is now). Therefore, to preserve this system, deficits either had to be eliminated or financed through debt. At first convertibility worked well; it forced fiscal and monetary discipline on the government, which combined with strong economic growth, reduced inflation and debt service. Cracks in Argentina's economic policy, however, soon began to appear. The main problem was fiscal deficits, which were not restrained at either the provincial or national levels to thresholds required to support the convertibility plan. By 1993, debt began to grow, compounded by the practice of rolling it over. From 1995 to the end of 2001, the debt service ratio grew from 30% to 66%. The Argentine peso soon became significantly overvalued, reducing Argentina's competitiveness and ability to export, with predictable declines in public revenue needed to service debt. Fiscal balances further deteriorated with a strengthening dollar (to which the peso was linked), competitive devaluations by its major regional trading partners (most importantly Brazil), and falling commodity prices. Argentina was already entering a four-year recession when the global downturn arrived in 1999, causing public revenue to fall further. The weaknesses of the convertibility plan's strict policy constraints were now exposed. It has been likened to a straitjacket precisely because the Argentine government had no policy room to address the recession. The convertibility plan, by definition, prohibited devaluing the peso to increase exports, and excessive debt eliminated the option for a fiscal stimulus to counter the economic downturn. The third option, reducing government spending, only guaranteed a deeper recession. By this point, there was already little chance of Argentina avoiding financial disaster. In retrospect, it is also clear that in addition to Argentina's policy choices and an increasingly hostile global economy, actions by the international community were complicit in deepening the severity of Argentina's financial crisis. Global credit markets lent generously to Argentina, compounding the problem by chasing high yield even after risk factors began to rise to worrisome levels. Investment bank and credit agency reports overstated Argentina's strengths. Also, the IMF agreed to numerous lending arrangements made between 1991 and 2001 based on promised changes in Argentine policies, and economic assumptions and projections that ranged from being overly optimistic to wildly unrealistic. U.S. policies for much of the time could not be divorced from those of the IMF. Without the IMF, the convertibility plan would have collapsed much sooner. By its own admission, the IMF made repeated mistakes in surveillance, conditionality, and economic analysis that resulted in lending too much for too long into an untenable situation. Many economists would later argue that Argentina would have been better off had the IMF ended its support and pushed for debt restructuring much earlier. Faced with the unsustainable situation described above, and falling international credibility, Argentina was unable to roll over its debt. Financial panic and political unrest ensued. On December 20, 2001, President de la Rua resigned, and six days later, an interim government defaulted on Argentina's sovereign debt. Soon thereafter the government abandoned the convertibility plan and devalued the peso. Total public debt mushroomed from 45.7% of GDP in 2000 to 166.3% in 2002 (see Appendix A for data) and the default left the Argentine government in arrears with a number of international creditors. At the time, Argentina owed private investors bonds with a face value of $81.8 billion, the Paris Club countries $6.3 billion, and the IMF $9.5 billion, among other domestic and multilateral obligations. Addressing the large private-sector debt was Argentina's most pressing problem, which was undertaken in a highly unusual manner. A sovereign debt restructuring is a complicated matter and in Argentina's case the government faced three interrelated issues. It needed to formulate a strategy to (1) negotiate a solution with private creditors, (2) repay or reschedule Paris Club debt, and (3) reengage the IMF. In 2002, it was widely believed that a successful conclusion for Argentina was unlikely without meeting all three goals to some degree, in part because they are interrelated. For example, the Paris Club generally does not entertain a sovereign debt restructuring proposal without the debtor country undergoing an Article IV review of its economy (standard practice for all IMF country members), and having an IMF lending program in place. Among other goals, the Article IV review provides one presumably unbiased assessment of Argentina's economic health and ability to repay its debt, although Argentina has been particularly distrustful of the institution since the 2001 crisis. In addition, the IMF usually does not consider a formal program until the creditors have been offered a proposal. There was, however, little hope for a clean IMF review for Argentina at that time, and prospects for that changing have worsened considerably. These concerns raised two important questions: was Argentina willing to accede in whole or in part to these requirements, and if so, what was the sequence that would make the most sense to ensure that all three conditions were met? As it turned out, Argentina skirted the issue entirely, and moved ahead with the bond exchange without an IMF review, promising to deal with the Paris Club at some future date. As the value of Argentina's bonds plummeted, hedge funds specializing in distressed debt began to purchase the highly discounted debt and prepare for litigation. In so doing, these so-called "vulture funds" became, in effect, the closest thing to a coordinating group for private bondholders, but "average creditors" who sold their bonds took an enormous loss. The financial crisis hit Argentina hard. Between capital flight and the large peso devaluation, much of the country's wealth evaporated nearly overnight.