Where Argentina’s debt case stands now and why it still matters
In NML v Argentina, the world continues to witness a rare and surreal spectacle: the unpredictable consequences a US judge will unleash when he disregards the law. Last June, the US Supreme Court upheld a lower court ruling that gave investment group NML Capital the right to settle 100% of its claims against the Argentine government, setting a precedent whose effects are only just beginning to be felt.
NML’s actions against Argentina show why the firm is often referred to as a “vulture fund”. After initially purchasing Argentine government bonds after the country defaulted in 2002, the investment group refused to accept the terms of the deal Argentina struck with over 92% of bondholders in 2005 and 2010. NML then sued in US courts for payment of 100% of the value of its bonds plus interest, with the goal of earning a 1600% return on its original investment.
NML’s lawsuit was part of a carefully considered script during Argentina’s long debt restructuring process, a strategy vulture funds have exploited in the past. First, buy the debt of a troubled country cheap. Second, systematically decline any offer of a deal that is worth less than the entire claim. Third, wait for the country’s circumstances to improve, backed by a mix of debt relief granted by other creditors and the normal healthy impact that such debt relief, if timely and sufficient, will have on the debtor country’s economy . Then sue for the entire claim amount plus interest.
It’s easy to see that the strategy wouldn’t work if all creditors followed this playbook — waiting for the debtor to get better without sacrificing some of their credit.
Unfortunately, internationally and for government bond issuers, there is no recourse to anything like bankruptcy, leaving them subject to judgments – including dissenting ones – from judges responsible for particular bonds.
In this particular case, US Judge Thomas Griesa decided to deviate from the traditionally accepted interpretation of the judgment equal Clause typically included in government bonds. While the default equal As the clause is usually understood to grant parity and equal treatment, Griesa extended the interpretation to prohibit Argentina from making payments on its restructured debt without also paying the holdout bondholders.
Argentina went ahead and deposited payment for its restructured bondholders with the banks, which call the instruments trustees – who are responsible for collecting payment and passing it on to bondholders. As the banks interpreted the judge’s order as preventing them from disbursing these funds, an anomaly has emerged: a country that meets its debt obligations defaults because a foreign court prevents disbursement. Amazingly, the unusual nature of the judgment was just the beginning of a sui generis scenario that continues to unfold.
Holders of bonds restructured under European or Argentine law have filed lawsuits, arguing that by blocking payment on their loans – even if they were made by US banks – Judge Griesa exceeded his jurisdiction. In fact, the judge has already granted several “one-off” exemptions to allow the fiduciary banks to make payments to certain non-US bondholders. When one of the banks, Citi, requested that the injunction on those payments be lifted so that it would not have to seek an exemption each time interest payments were due, the judge denied the request, only to later reverse his own decision. But while the judge agreed to give Citi that latitude, he expanded the original order — and the jurisdictional trespass — by ruling that future debts under Argentine law, if they are or can be paid in U.S. dollars, qualify as foreign debts. Financial institutions that help Argentina make such payments would thus be prevented from doing so by the court order.
In one of these cases, an English court ruled that payments deposited with the trustee institution in New York belong to the bondholders and no longer belong to the debtor country. Therefore, they should not fall under the jurisdiction of a US judge. Indeed, herein lies another anomaly created by the judge’s ruling: his ruling ignored the agreement Argentina had reached with 92% of its creditors, but then enacted – and arguably forced – measures affecting payments to those majority creditors under its jurisdiction.
Argentina’s Congress also passed legislation under which it will give holders of non-restructured bonds – like NML – the same deal it gave to the restructured ones, but no more. To meet this obligation, the government deposited these payments with an Argentine banking institution, which the Vulture Funds could claim at any time if they wished (so far they have not done so).
Some observers speculated that after the RUFO clause expired, the Argentine government would agree to a settlement with the Vulture funds. RUFO stands for “right upon future offer” and is inserted into the restructured bonds to promise their holders that they have the right to be offered any better future offer that other bondholders receive. If Argentina had settled before the clause expired, it should have seen immediate demands from majority bondholders for payments proportionate to the payments made to NML. But the expiration of the clause in January brought no change to Argentina’s offer to the vulture funds. The speculation by these observers failed to appreciate that a settlement in which NML gets paid the full amount it is owed – even without the “RUFO effects” – could lead to lawsuits from other holders of non-restructured bonds. In fact, following the Supreme Court ruling last June, some of these bondholders have already filed lawsuits hoping to follow in NML’s footsteps. With these investors holding about $15 billion in claims, this is hardly advisable for Argentina.
Regardless of what happens to Argentina, however, the implications of Griesa’s decision go much further. The ruling continues a trend that legal experts say has resulted in holdouts getting better treatment by courts, at the expense of the soundness of sovereign debt restructuring. What former IMF economist Anne Krueger described as a gap in the international financial architecture in 2003 is now bigger than ever. By increasing the potential rewards for cautious behavior, this latest precedent will make future debt crises more difficult to resolve, with unpredictable systemic consequences.
At the same time, creditors could opt for a jurisdiction where the traditional understanding of equal still – like England – at the expense of New York’s current dominance as the preferred jurisdiction for government bond issuance. In fact, following Griesa’s verdict, numerous prominent economists warned of this possibility.
Facing continued resistance from the United States and other countries to reach a consensus, developing countries voted last September to create a sovereign debt resolution mechanism, and negotiations to create such a legal framework at the United Nations have begun. Even in the worst-case scenario, failing to get all countries on board, these negotiations would set a UN-backed standard for resolving future sovereign debt crises. If history is any guide, we know one thing for sure: sooner or later there will be a country that will have to draw on it.
Aldo Caliari has been a staff member at the Washington DC-based Center of Concern since 2000, where he has been Director of the Rethinking Bretton Woods Project since 2002, which focuses on the links between trade and financial policy, global economic governance, debt, international financial architecture and human rights in the international economic policy.