U.S Courts Hold Argentinean Debt in the Balance
by Bryce Johnson
In December 2001, Argentina defaulted on $100 billion worth of debt after a series of unsuccessful attempts to reduce the debt it had accumulated through a severe recession during the late 1990’s. In the wake of this default, Argentina was essentially cut off from the global financial market, and the bonds representing the government’s debt were reduced in value to pennies on the dollar. Speculators soon took advantage, and bought up a lot of the debt at the significantly reduced price in the hope of turning a large profit in the future.
In 2005 and 2010, the Argentinean government initiated debt exchanges in which it offered holders of the bonds payments of 30 cents on the original value, representing a large return on investment for any of the speculators who bought at the low point. Approximately 93% of the bondholders accepted one of those two offers, and Argentina has been reliably making payments ever since.
Paul Singer, who operates a fund owning a portion of the 7% of debt not exchanged in the Argentinean offer, recently prevailed as a plaintiff in a case brought in the Southern District of New York. The Honorable Thomas Griesa ordered Argentina to pay Singer’s fund $1.3 billion by December 15th, and to make payments into an escrow account while any appeal is pending. However, the Second Circuit issued a preliminary ruling overturning the escrow order, buying Argentina some time.
If the Second Circuit rules against Argentina, the remaining holders of the 7% will almost certainly also demand payment of the $11 billion cumulatively owed to them. Further complicating matters, the 93% of bonds successfully exchanged, on which Argentina has been making payments on since 2005 or 2010, each contain a clause requiring the entire amount to be due immediately if Argentina “voluntarily changes the terms of the restructurings.” This amount totals $20 billion. Therefore, an adverse ruling by the Second Circuit will force Argentina to either pay $12.3 billion to the so-called “bond vultures” or pay $20 billion to the “exchange holders,” neither of which it would be able to do, resulting in a second sovereign default within the span of a decade.
Setting aside the issue of whether or not Griesa’s order is consistent with proper foreign diplomacy–Argentinean President Christina Fernandez refers to it as “judicial colonialism,” and terms such as “Monroe Doctrine” and “Roosevelt Corollary” come to mind–such a ruling sets a concerning precedent for potential future sovereign defaults involving European countries such as Greece, Ireland, Spain, and Portugal. A single holdout in a restructuring deal would be able to ruin the entire restructuring, essentially preventing the sovereign from moving on and rejoining the international financial market until a deal could be worked out to the satisfaction of 100% of the bond holders.
Because of this, all deals with bondholders would have to be contingent on an acceptance by all other bondholders. Unlike in a real estate scenario, there would be no downside to remaining a holdout until the bitter end, so the sovereign would have to offer more money to each bondholder in order to induce a unanimous agreement. This would make it more difficult and costly to emerge form a difficult financial situation. For these reasons, it would seem beneficial for the international financial community for the Second Circuit, and potentially the Supreme Court, to decline to reward the opportunism of Singer and his fellow holdouts.
Suggested Citation: Bryce Johnson, U.S. Courts Hold Argentinean Debt in the Balance, GEO. J. INT’L L. ONLINE: THE SUMMIT (Jan. 13, 2013, 2:08P.M.), http://gjilsummit.blogspot.com/2012/10/update-argentinean-debt.html.
