by Reynolds Holding
Reuters
U.S. courts have made a clear mark in Argentina’s spat with holdout creditors. Judges have, unusually, tried to broker a deal between the Latin American nation and hedge funds still objecting to debt swaps last decade. Ordering Argentina to honoUr its agreements and pushing other countries to clarify theirs were also useful moves. Elliott Management affiliate NML Capital and other hedgies are winning this case, but the rule of law is coming out ahead.
The courts’ creativity has shown through since Argentina’s historic US$100 billion default on sovereign debt in 2002. Judge Thomas Griesa used his powers in a way that encouraged most creditors to agree on a bond exchange in 2005 and 2010. Later, after a standoff, he ordered Buenos Aires to cough up the US$1.3 billion still owed to the holdouts — taking more literally than many expected the nation’s standardized promise to treat all creditors equally. And last year he devised a clever ruling that makes it difficult for Argentina to pay creditors who exchanged bonds without also paying Elliott and the other holdouts.
That aspect is still on appeal, but will probably be upheld. In the meantime, appellate judges encouraged a settlement by delaying Griesa’s order to pay. They even invited Buenos Aires last month to propose a repayment plan, though Argentina merely repackaged its old exchange offer and the holdouts predictably rejected it. The appeals court’s effort at compromise, which several experts said was unprecedented in sovereign debt cases, suggests a new and useful role for jurists in resolving such disputes.
The judges broke new ground in other ways as well. They called Argentina on its contract breach, despite earlier decisions that had rendered typical equal-treatment or ‘pari passu’ provisions essentially meaningless. And their rulings have already had knock-on effects. Italy and Belize, for instance, recently changed their sovereign debt arrangements to clarify when bondholders are on anequal footing and when they aren’t.
The US government is among critics who oppose the recent rulings as rocking the boat for foreign policy, the financial payments system and sovereign debt workouts in general. But the courts have concluded that something important is at stake. When other nations co-opt the credibility of American markets and U.S. law — notably New York’s regime — to raise money, they should play by the rules. Griesa and the appellate judges are making sure that happens.
CONTEXT NEWS
- Elliott Management affiliate NML Capital and other holdout creditors on April 19 rejected Argentina’s offer to resolve litigation over US$1.33 billion in overdue sovereign debt by swapping heavily discounted bonds for the debt, on which Argentina defaulted in 2002. The creditors said the offer is less than the deal given bondholders who exchanged their debt for new bonds in 2005 and 2010. Those bondholders received 25 cents to 29 cents on the dollar. The new offer “would be worth less than 15 percent of what Argentina owes,” the holdouts wrote in a document filed with the U.S. Court of Appeals in New York.
- The court has already upheld an order for Argentina to pay the holdouts in full, but asked Argentina to propose a repayment method.