Sovereign Debt Rules’ Exasperating Exceptions
As the US Supreme Court upheld the New York holdout payment order for Argentina and Grenada continued negotiations on a reopened bond deal, and the IMF previewed a new exceptional access policy post-Greece encouraging maturity lengthening as an early alternative, sovereign workout specialists have often minimized their initial impact. A National Bureau of Economic Research paper on Argentina’s case refutes claims of disruptive litigation and asserts that the singular remedy was due to “unprecedented disregard” for restructuring norms. In the absence of a supranational bankruptcy mechanism direct legal sanctions are limited on borrowers that instead are punished through denied access and reputation damage. Consensual talks are routinely conducted to resolve difficulties under IMF and IIF guidelines respectively for lending into arrears and promoting capital flow stability. Both codes mandate a good-faith effort and full information disclosure, but Argentina’s original 2005 offer was unilateral as the Fund criticized “no constructive dialogue” and the likely understatement of growth prospects to drive greater repayment reduction. The three-quarters creditor acceptance then was skewed by the 100 percent take-up by captive domestic institutional investors, and the congressional “lock” barring better future terms and discussions with non-participants. The hard line was in contrast with the approach by Dominica at the time as it “worked constructively” with individual holders to get exchange unanimity. In 2010 the same deal was repeated to bring overall subscription to 90 percent as opponents soured on the litigation process, according to the Bureau’s analysis. As of 2012 experts worried that enforcement under foreign law was too weak as no assets had been seized despite numerous collection judgments as they were commonly protected by sovereign immunity. Judicial recourse is a rare strategy given the expense and expertise requirements, as most portfolio managers cannot hold illiquid instruments and are eager to benefit from post-swap secondary market price increases. Big commercial and investment banks prefer to maintain relationships and often come under diplomatic and regulatory pressure to preserve balance sheet and geopolitical ties. Just one-sixth of restructurings over 35 years since the mid-1970s saw private lawsuits, with Argentina and Greece the exceptions over the past decade.
From a contractual standpoint governments now have an array of provisions at hand to overcome holdout challenges, the review adds. Collective action clauses with a 75 percent supermajority threshold are the New York norm since 2005, binding dissenters, and refinements in enforcement and aggregation can further block alternatives. Pari-passu provisions dating from the 2000s on privileging a particular class were interpreted broadly in Argentina’s covenants, but Italy and others have since removed equal payment wording. Loan agreements have sharing edicts so that creditors broadly receive awards from litigation. Local law transfer was a feature of the recent dramatic Greek 75 percent haircut with the retroactive application of instrument sweeps. Jamaica in its post-2008 exchanges set high minimum participation rates to forestall judicial action, and after Ecuador’s operation exit consents have been used to alter non-financial terms. The survey concludes that Argentina represents no broad precedent as Taiwan’s export-import bank has unsuccessfully tried the same pari-passu filing with Grenada without the “uniquely recalcitrant” debtor epithet.
