This is the opinion that we expressed recently in an op ed in the FT:
A framework for sovereign debt restructuring is required.
Late last month the Argentine government filed a writ at the US Supreme Court to have claims in its continuing legal battle with Elliott Management, a hedge fund, and other
creditors heard by that higher tribunal.
Some commentators quickly dismissed the move as a simple strategy to buy time and delay an inevitable defeat for Buenos Aires, which already suffered a setback in New York courts that ruled in favour of Elliot Management. Far from
this, the pertinent question to ask is why it has taken so long for this case to arrive to the highest tribunal.
The case brought by those of Argentina’s creditors who did not participate in the two original debt restructurings was originally a civil litigation brought under New York state laws. A Supreme Court ruling is warranted because the case has far wider implications – for US foreign policy and the international financial system.
Every day the lack of a predictable set of rules for timely, orderly, fair and economically efficient resolutions of sovereign debt problems becomes harder to hide. Think of it as the absence of the bankruptcy procedures that exist at national level. Without them there is no speedy restitution to
disputes, funding dries up and crisis costs rise.
When several years ago the International Monetary Fund tried to provide a statutory framework for sovereign debt restructuring, the US argued that there was no need for such a framework since contractual solutions were available.
The challenge by holdout creditors to the Argentine bond restructuring deal, if successful, would throw into question the feasibility of such contractual restructurings. It would also undermine the attractiveness of New York as a market for sovereign debt issues where investors can expect flexibility in the legal system to manage complex cases.
The holdouts have demanded their claims be paid in full, plus interest. But the one factor that sovereign debtors have in their favour for nudging creditors towards a voluntary debt restructuring is that bondholders may fear that, should they not join on it, they may be left out of any deal altogether. If creditors had reason to believe that litigation will allow them to recover the whole amount of their claims, why would they settle for less?
The presence of collective action clauses – an essential mechanism for negotiating a settlement – is considered essential to limit the ability of holdouts to block a restructuring offer. This has been the dominant view over the past decade and the reason why CACs have spread since the Asian crisis, not only for emerging countries but more recently for European debt issues. A ruling in favour of the holdouts would also make this palliative ineffective.
The IMF recently recognised as much, noting: “The Argentine decisions – if upheld – could exacerbate collective action problems and risk undermining the sovereign debt restructuring process.” This is why, the IMF added, a decision against Argentina would have systemic implications.
Indeed, we do not know whether a ruling in favour of Argentina will necessarily stop holdouts from continuing to take their chances in litigation. But we do know that a ruling in favour of the holdouts will make voluntary debt
restructurings almost impossible in the future, thus putting further pressure to establish a statutory framework for sovereign debt restructuring mechanisms, and making the position of those who are against it, such as the US, harder to justify.
We believe that a formal international framework for debt restructuring is needed. A decision against Argentina will make the negotiation of such a mechanism inevitable. If only for these reasons, this should have been a case for the US Supreme Court all along.
Aldo Caliari and Jose Antonio Ocampo
The writers are respectively director of the Rethinking Bretton Woods Project at Center of Concern and professor at Columbia University, former UN Under-Secretary General of Economic Affairs and a former finance minister of Colombia.
Professor José Antonio Ocampo
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