Sovereign Bankruptcy’s Code Sharing Shuffle

As US Appeals Court Judge Griesa reiterated that local law reconfiguration of the performing Argentina debt exchange would violate his holdout award pending Supreme Court consideration of the case and related sovereign immunity issues, Washington think tanks lined up to offer new workout proposals also coinciding with the IMF-World Bank annual meetings. A Brookings Institute study by academics and practitioners advocated changes for both advanced and emerging market debtors in light of the recent Greece restructuring which established a Eurozone precedent. It suggested ESM treaty amendments to cover burdens above the 60 percent of GDP Maastricht threshold, and multilateral creation of a Fund “adjustment facility” modeled on the poor country HIPC process without the sweeping powers of the SDRM outlined a decade ago and roundly rejected by the US Treasury and major developing nations. On the contractual front the paper urges common supermajority collective action clauses that can aggregate bondholder decisions with more efficiency and transparency. It investigates the spectrum of historical “pathologies” which encourage over-borrowing and delayed resolution and notes that despite high government debt-output ratios in many emerging economies they currently retain global capital markets access. Longer negotiations usually entail bigger haircuts, and defaults may cause broader reputational damage that affect the gamut of trade and investment transactions, according to the group. The Argentina fight has hinged on a fresh definition of “pari passu” payment preventing transfer to previous exchange participants before the distressed fund awardees and expanding enforcement to trustees and the clearing and payment networks. So-called exit consents which altered non-financial terms for outlier creditors have also been found to be too extreme following an Irish court judgment citing minority “oppression.” With these rulings litigation may become an appealing recourse rather than a rare strategy in the document’s view.

The euro conundrum is complicated by banking union and public and private debt overlap, and the Greek exercise with 95 percent of issuance under domestic law and retrograde approval provisions was not a template and was later contradicted with Cyprus’ collapse imposing depositor write-downs and sparing foreign obligations. Official creditors drove the outcome with large up-front cash payouts in the form of Stability Fund instruments which also were compensation for unpaid sovereign guarantees. Collective action practice differs between the UK and the continent and the regional rescue mechanism has no separate rescheduling window. Both the European and IMF context would benefit from updated intergovernmental agreements to set restructuring criteria and triggers, and “defang” holdouts by restricting asset and revenue reach. In Europe post-deal residual amounts could eventually be mutualized under a “redemption pact,” while the Fund construct could be applied immediately with troubled Caribbean islands. As to Argentina’s next chapter such overhauls may come too late before the end game, which may also be signaled by likely Presidential team defeats in upcoming legislative elections heralding a post-Kirchner era.