Restructuring Argentina’s Sovereign Debts – Navigating the Legal Labyrinth
20 Pages Posted: 22 Nov 2019
Date Written: November 12, 2019
In November 2019, roughly four years after Argentina finally settled the lawsuits from its previous crisis, the new left-wing administration finds itself between a rock and a hard place. Argentina is in a deep economic recession and owes significant sums to different types of creditors, including more than USD200 billion to international creditors and roughly USD45 billion to the IMF. Indeed, there are serious doubts about the sustainability of Argentina's debt and a debt restructuring seems, if one was to listen to financial market chatter or indeed the government itself, almost inevitable.
This short essay provides an overview of the intricate challenges that Argentina would be facing in a potential restructuring of its sovereign debt obligations, with a focus on the legal aspects.
First, relying on Bloomberg data as well as official statistics, I show which types of debt instrument Argentina has issued, including respective volumes. Second, the essay discusses some of the key legal obstacles when it comes to the (unilateral) restructuring. While a majority of Argentina's international sovereign bonds include so-called Collective Action Clauses (CACs), which ameliorate holdout inefficiencies, there are several series that include older, less effective CACs. Moreover, as this paper argues, the requirement in Argentina's newer bonds that a restructuring offer must be "uniformly applicable" raises complex transactional and design questions. With respect to the interpretation of the pari passu clause included in Argentina's bond prospectuses, I argue that a recent decision by S.D.N.Y. significantly reduced the risks of specialized holdouts to attack a debt workout deal.
To be sure, modern sovereign bond restructurings rest on the basic premise of bondholder democracy. In other words, as long as a sufficient majority of creditors accepts a restructuring offer, most legal obstacles can be overcome. However, the entrance of specialized distressed-debt managers the market suggests that some investors will gamble for a better deal, or try to leverage their contractual rights against the country in a classic holdout manner. While Argentina certainly finds itself in a legally superior position compared to its last debt crisis, the country will soon have to sail straight into the choppy sea where all sorts of hazards lurk - some of which the country is all too familiar with.
Keywords: Sovereign Debt, Sovereign Debt Restructuring, Argentina, Financial Crisis, Holdouts, Collective Action Clauses, Pari Passu, International Monetary Fund, Vulture Funds, Litigation
JEL Classification: F34, G01
Suggested Citation: Suggested Citation