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Sovereign Debt Restructuring After Argentina

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Abstract

Sovereign debt restructurings may experience marginal changes as a result of recent modifications in contractual terms being incorporated into new bond issues, but for the most part they will likely resemble what has generally worked so well in recent decades to the satisfaction of most governments and private creditors. The statutory reforms that have been proposed to date are highly unlikely to gain traction for a variety of reasons, including the prospect that they would have been stymied when confronted with a rogue sovereign debtor such as Argentina.

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Notes

  1. ‘The current non-system does not achieve the described objectives of restructuring. Instead, it creates a host of inequities as well as inefficiencies. It overpenalizes debtors in distress, causing delays in the recognition of the problems. It leads to the ‘too little, too late’ syndrome. In some cases, there is too much lending—and too much suffering later on; in other cases, there may be too little lending. Moreover, the legal frameworks permit a situation in which a few specialized agents (the vulture funds) can block the finalization of a restructuring, imposing large costs on the debtor and on other creditors’ (Guzman and Stiglitz 2016a: 10).

  2. ‘The commission would not rule over different alternatives. Instead, the sovereign would finalize the process with a final proposal and the commission would produce statements about the reasonability of the process and the final proposal. This approach would serve to legitimate the restructuring or, alternatively, to legitimate positions that speak of illegitimate restructurings.’ (Guzman and Stiglitz 2016a: 22).

  3. In the mid-1990s, Barry Eichengreen and Richard Portes had called for the establishment of an independent agency that ‘could provide mediation and conciliation services in negotiations between the debtor and creditors and, if desired by the parties themselves, binding arbitration’ (Eichengreen and Portes 1995: 43), but the earliest proposal for an ad-hoc debt arbitration process was put forth by the Austrian economist Kunibert Raffer in the late 1980s (Raffer 1990). With some of its features further developed, this concept was later on adopted by NGOs campaigning for debt relief as part of the Jubilee 2000 Campaign, and is nowadays referred to as the Fair and Transparent Arbitration Process (Fritz and Hersel 2002).

  4. Bonds issued by euro-area sovereigns are required to include a CAC that allows for either a series-by-series or a two-limb aggregated voting procedure. The latter enables differential treatment among creditors. For additional background and details, see Hofmann (2014).

  5. In order to accommodate stylistic differences between legal markets, ICMA published in May 2015 two different versions of the model clauses, one for English-law bonds and another for New York-law bonds, see www.icmagroup.org/assets/documents/Resources/ICMA-Standard-CACs-Pari-Passu-and-Creditor-Engagement-Provisions—May-2015.pdf, accessed 23 March 2017.

  6. ICMA (2014); see also the prior note and citation for the May 2015 version of the provision as tailored for sovereign bonds governed by New York law.

  7. This average would be considerably shorter if the sample were to exclude the longest delays, which had to do with unique restructuring strategies and the parallel restructuring of official sector and commercial loan debt simultaneously with the restructuring of the bond instruments (Duggar 2013).

  8. The pari passu clause in the old Argentine bonds reads as follows: ‘[t]he Securities will constitute… direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all time rank pari passu without any preference among themselves. The payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness…’ (Duggar 2014: 2). The U.S. federal courts interpreted it as requiring equal ranking of payment obligations under the relevant debts, and they prevented Argentina from making payments to the restructured bondholders without first making a ‘ratable payment’ to the holdout creditors (IMF 2014: 37–44).

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  1. American University, Washington, DC, USA

    Arturo C. Porzecanski

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  1. Arturo C. Porzecanski
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Correspondence to Arturo C. Porzecanski.

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Porzecanski, A.C. Sovereign Debt Restructuring After Argentina. Development 59, 100–106 (2016). https://doi.org/10.1057/s41301-017-0067-z

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