Sovereign Debt Restructuring: Evaluating the Impact of the Argentina Ruling
Harvard Business School & NBER
Study By: Laura Alfaro
Recent rulings in the ongoing litigation over the pari passu clause in Argentinian sovereign debt instruments have generated considerable controversy. Some official-sector participants and academic articles have suggested that the rulings will disrupt or impede future sovereign debt restructurings by encouraging holdout creditors to litigate for full payment instead of participating in negotiated exchange offers. This paper critically examines this claim and argues that the incentives for holdout litigation are limited because of (1) significant constraints on creditor litigation, (2) substantial economic and reputational costs associated with such litigation, and (3) the availability of contractual provisions and negotiating strategies that mitigate the debtor’s collective action problems. It also argues that the fact-specific equitable remedy in the Argentina case was narrowly tailored to Argentina’s unprecedented disregard for court opinions and for international norms of negotiating sovereign debt restructurings and is therefore unlikely to be used in future debt restructurings.
On August 23, 2013, the Federal Court of Appeals for the Second Circuit affirmed a District Court award of equitable relief that barred Argentina from paying creditors who had exchanged their debt as part of a sovereign debt restructuring while it refused to pay other plaintiff-creditors that had declined the exchange offer. In reaching this ruling, the court interpreted the bondholder-friendly pari passu clause that Argentina had offered in its nowdefaulted debt documentation. Argentina immediately rejected the court’s ruling and vowed to appeal to the United States Supreme Court. The Argentinian government also made it clear that it planned to ignore any adverse ruling. In fact, the Argentinian president stated that she would try to circumvent the ruling by changing the payment mechanism on Argentina’s international bonds to avoid the reach of US courts. This pronouncement is just the latest of Argentina’s attempts to ignore adverse court rulings.
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