Argentina’s 2001 default was followed by a complex debt restructuring that included a long legal dispute with so-called vulture funds and other holdout creditors. The resolution of the sovereign default took almost 15 years—and the case continues to have ramifications that are resulting in new disputes. This paper examines the whole restructuring process. It describes the strategies followed by the debtor and the bondholders, their implications, and the characteristics of the legal disputes. It also analyzes the implications of the default resolution for the functioning of sovereign lending markets.
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Besides the effects that spending adjustments have on economic activity and thus on fiscal revenues and debt service capacity, there is always some ambiguity in the definition of the level of spending adjustments that a society can tolerate. In the case of Argentina’s 2001 default, a large segment of the society made evident that it would not tolerate further adjustments. Amidst social protests and clashes between demonstrators and the police, the elected president resigned just a few days before the debt default was formally declared.
There is a large literature that has analyzed the implications for the functioning of sovereign debt markets that this case brings. Part of that literature is analyzed in this paper, and it includes, among many others, Gelpern (2016), Park and Samples (2015), Samples (2014), Schumacher (2015), Thomas (2016), Weidemaier and Gelpern (2014), as well as in various chapters of Bantekas and Lumina (2018).
There is no consensus on the appropriateness of the term “vulture funds.” Those who advocate for the use of the term focus on the disruptive behavior that these funds create in sovereign lending markets, as their operations may make the finalization of a sovereign debt restructuring impossible, which in turn leads to an inefficient outcome when the reason for a default was the lack of capacity rather than lack of willingness for debt service. Those who are against its use point out that the presence of these funds increases the liquidity in the markets for distressed debt and that it discourages the debtor’s incentives to avoid full debt service. These trade-offs are discussed in “The Legal Disputes” section in the analysis of the implications of the victory of NML Capital.
For instance, NML Capital paid 10 cents on the dollar for its purchases of the series “Global Bonds, U.S. dollar 11.375% due 2017” made on December 5, 2008; 11 cents on the dollar for the purchases of the same series made on January 2, 2009; 10.5 cents on the dollar for purchases of the series “Global Bonds, U.S. dollar 12.25% due 2018” made on December 10, 2008; 17.5 cents on the dollar for purchases of the same series made on November 5 and 11 of the same year; 35.5 cents on the dollar for purchases of the FRAN (floating rate accrual note) series on October 16, 2008 (series that was due in 2005, and for which they got paid an interest rate that included country risk—risk that, according to the purchase date, NML never had to bear). There are many examples like these. The “Appendix” provides an analysis of the collection of these figures and the implications for the returns that those investments brought.
Analyzing the implications of the largely profitable holdout behavior requires a careful balancing of the trade-offs between the increase in liquidity in secondary markets for distressed debt versus the costs in terms of the disruption of a sovereign debt restructuring process that the behavior of the subset of distressed debt investors (vulture funds) entails. These trade-offs are discussed in “The Legal Disputes” section.
UN GA Resolution 69/319.
See https://www.project-syndicate.org/columnist/martin-guzman. For an analysis of the evolution of the Argentine macroeconomy during the years in which the case was ongoing, see Damill et al. (2015).
On the other hand, the euro medium-term notes issued under English law included CACs.
See Miller and Thomas (2007) for a more extensive discussion of the offer.
See Cooper and Momani (2005) for further details.
By October 2003, Argentina’s debt to the IMF was $16 billion, about 15% of the IMF total credit (Wolf 2004, cited in Heillener 2005). Eric Helleiner (2005) offers a detailed analysis of the characteristics of the negotiations between Argentina and the IMF with an emphasis on the role played by the Bush administration. Andrew F. Cooper and Bessma Momani (2005) also analyze the details of the patterns that featured in these negotiations, describing Argentina’s tactics for exploiting the dual role that the IMF had to play, both as a creditor that intended to maintain its super-senior status and as an implicit coordinator of the relationship between the country and its creditors.
Base case GDP established the scenario that would determine whether GDP and GDP growth were high enough as to activate the payments on the GDP-linked warrants.
Base case GDP growth was set to 4.26%for 2005, 3.55% for 2006, 3.42% for 2007, 3.3% for 2008, 3.29% for 2009, 3.26% from 2010 to 2012, 3.22% for 2013, 3.03 for 2014 and 3% from 2015 to 2034.
Cruces and Samples (2016) report that the average haircut for all sovereign debt restructurings from 1978 to 2010 was 37%.
Guzman and Lombardi (2018) show that, since 1980, 55% of those sovereign debt restructurings with private bondholders were followed by another restructuring or default within 5 years.
Anna Gelpern explains: “The court did not anchor its interpretation of the pari passu clause in Argentina's Lock Law, which bars the government from paying the holdouts, though the law got plenty of play. This was both risky and smart. It was risky because the court's reasoning might be construed to suggest that securities disclosure telling prospective holdouts that they would not be paid was tantamount to payment subordination. It was smart because a decision based solely on the Lock Law could be made moot by its repeal.” Available at https://www.creditslips.org/creditslips/2012/10/argentina-lost-elliott-won-pari-passu-rules-or-why-i-love-being-a-law-professor-.html.
Article 2 of Law No. 26,017 (the article known as the lock law) was suspended on September 23, 2013 by Law No. 26,886, article 7.
Members of the Argentine government that took part in the restructuring negotiations confirmed in private interviews that the inception of the Lock Low was the response to the article from the Financial Times quoted in the section.
The FRAN was a ridiculous bond, a form of anti-insurance, such that Argentina would pay more in bad times and less in good times.
If the market price of the defaulted bond was already reflecting an expectation that full payment was highly unlikely, then the action of purchasing the defaulted bond with the expectation of being repaid would have had to be based on a probability distribution for the bond returns that was markedly different than the one conveyed in market prices. The investor that expected to be repaid in full could believe that, given her own model for assessing the probability of full repayment and her own information, her expectation was reasonable. The ex post lack of full payment would reveal that the probability density function that governed her expectation was wrong—an expectation that from the “market consensus” viewpoint would have been deemed ex ante as unreasonable. Alternatively, the distressed debt investor could be signaling to the judge that her expectation was to get paid in full when in fact her probability distribution did contemplate the existence of states in which full repayment would not occur and that in that case she would litigate. But if the latter holds, then the true conditional expectation was not to being paid in full.
There were documented connections between Paul Singer, head of Elliott, and John Marchi—on March 25, 2004, Paul Singer made a direct donation to “John Marchi and friends” (Source: http://nyopengovernment.com/NYOG/search_summary.jsp%3Fpage=camcon%26page=camcon%26var=paul%2Bsinger%26d-49681-p%20=%207).
This interpretation is subject to debate. If everything that is included in a debt contract is priced, then giving more rights to holders of debt contracts that had been issued under a different legislative framework constitutes a change in the legal environment that the debtor would face in times of distress with respect to what it expected to face in such circumstances at the moment of the issuance—except if such a legislative change had been anticipated with probability one. An alternative view is that the softening of Champerty was not a change in property rights but a stronger preservation of the rule of law.
See EM Ltd. v. Republic of Argentina, 131 F. App’x 745, 747 (2d Cir. 2005).
As the bonds under litigation did not include collective actions clauses, a formal supermajority could be not defined.
Despite these evolutions, the New York’s statutory pre-judgment interest rate has not changed, distorting incentives against the likelihood of quick settlements in sovereign debt disputes.
There are competing interpretations of the sense in which the pari passu clause was interpreted. The actual interpretation of the clause brings different implications for the functioning of sovereign lending markets. The two main competing interpretations of pari passu clauses are the narrow and the broad interpretation. The narrow interpretation holds that there is a breach of the pari passu clause only if the debtor subordinates the protected debt by some legal or mandatory measure which changes the legal ranking. The broad interpretation holds that once a debtor is insolvent or in payment default, it cannot actually pay any of its debts without a ratable payment of other debts within the scope of the pari passu clause (cf. Allen and Overy 2012).
On the one side, a number of analysts consider that in Argentina's case the pari passu clause was interpreted in its narrow sense. For instance, Zamour (2013) explains that the notion of ratable payments did not appear until Judge Griesa's order on remedy for the breach of the pari passu clause and that the Second Circuit did not rely on that notion either when it held that Argentina had breached the pari passu clause. In his view, most commentators have failed to distinguish between the issue of the breach and the issue of the remedy (relatedly, Olivares-Caminal (2011) had also argued prior to the 2012 ruling that the enactment of Argentina's Lock Law could put the narrow interpretation of the pari passu clause at the center of NML Capital's attack). In this view is correct, it would not be Judge Griesa's interpretation of pari passu but the remedy what brings worrisome implications for the functioning of sovereign lending markets.
On the other side, Weidemaier (2013) argues that only a broad interpretation of pari passu could have justified Judge Griesa's injunction, because if pari passu only forbade formal subordination there would be no reason for the Lack Low to result in a court order of ratable payments, as the practical effect of such an order would be to enforce promises that the debtor never made. Ultimately, as analyzed earlier, neither the district nor the circuit courts specifically refused to limit their definition of breach to the Lock Law.
The September 29 order of contempt by Judge Griesa is available at www.shearman.com/~/media/Files/Services/Argentine-Sovereign-Debt/2014/Arg182-093014-086978-Doc-687.pdf.
The country issued $1415.9 million of the bond Bonar 2024 at that interest rate.
The case was so atypical that it received different names to distinguish it from ordinary defaults, such as “technical default” or “Griesafault” (Guzman and Stiglitz 2014).
The prospectus of the exchange bonds states that “Holders of New Securities will be paid in accordance with the procedures of the relevant clearing system and its direct participants, if applicable. Neither Argentina nor the U.S.-European trustee shall have any responsibility or liability for any aspect of the records of, or payments made by, the relevant clearing system or its nominee or direct participants, or any failure on the part of the relevant clearing system or its direct participants in making payments to holders of the New Securities from the funds they receive. Notwithstanding the foregoing, Argentina’s obligations to make payments of principal, interest or other amounts on the New Securities shall not have been satisfied until such payments are received by the common depositary (or its nominee), as registered holder of the New Securities.” (Prospectus Supplement, December 27 2004, S-67; and Prospectus Supplement, April 13 2010, S-110.).
See “Rule 62.1 Indicative Ruling” by Judge Griesa, February 19, 2016. http://www.shearman.com/~/media/Files/Services/Argentine-Sovereign-Debt/2016/Arg296-021916-11cv4908-Doc-47.pdf.
There is a large literature on the effects of fiscal multipliers that points out that the effects of contractionary spending policies in recession times are generally contractionary. For an analysis of the macroeconomic rationale for debt forgiveness, see also Geanakoplos (2014).
See page 23 of the Second Circuit Decision of August 23, 2013, www.shearman.com/~/media/Files/Services/Argentine-Sovereign-Debt/2013/Arg33_NML_Second_Circuit_Decision.pdf.
DRAW Capital Partners, LLC v. Republic of Argentina, 18-CV-00548 (LAP) (S.D.N.Y. Nov. 2, 2018). Memorandum and order available at https://casetext.com/case/draw-capital-partners-llc-v-republic-argentina.
More specifically, the court stated: “The terms of the Indenture provide that in addition to full payments on overdue principal and interest, the Republic will pay ‘to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest at the rate of overdue interest specified in such Debt Securities’.”
Casas and Guzman (2018) provide a detailed analysis of the characteristics of this complaint and the questions that it raises from a global perspective.
A transcript of the hearing is available at https://www.creditslips.org/creditslips/Argentina.Griesa%20Hearing%20July%2022.2014.pdf.
“Sitting here right now,” Judge Griesa said, “it strikes me that, being exchange bonds, they should be treated as exchange bonds and that they should be included with the other exchange bonds in the February 23 order” (cited by Norris 2014).
Adam Levitin (2014) commented on the issue of the reach of U.S. courts for the resolution of sovereign defaults, focusing on what for many was an overreach in the case of Argentina v NML.
Debtor countries are, of course, partly responsible for exposing themselves to New York law, as it is their choice to issue under such a jurisdiction. After this long and costly dispute with the vulture funds in the US courts, Argentina’s government decided in 2016 to issue debt again under New York law.
An illegitimate advantage would exist if the bondholder bought sovereign debt at a price manifestly disproportionate either with its face value or the amount that it seeks to get repaid and if any of the following special circumstances hold: The sovereign was in a state of default when the bondholder purchased the claims; the bondholder is incorporated in a blacklisted tax heaven jurisdiction; the bondholder systematically initiates court proceedings to obtain payment; the sovereign restructured its debt but the bondholder held out; the bondholder abused the weakness of the sovereign state; or full repayment would have an adverse impact on the state’s budget that would compromise the socio-economic development of its population. For an analysis of the Belgian anti-vultures law, see Sourbron and Vereeck (2017).
UN GA Resolution 68/304.
UN GA Resolution 69/319.
Guzman and Stiglitz (2016c) presented a proposal for creating a soft law approach based on the UN principles.
For the days for which there is no available information in Bloomberg Generic Price Database, we use the average of the prices for the closest days for which there is information before and after.
Collective action clauses
Consumer price index
Floating rate accrual note
International Capital Market Association
International Monetary Fund
International Swaps and Derivatives Association
Rights upon future offers
Sovereign credit default swaps
United Nations Conference on Trade and Development
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This paper has greatly benefited from discussions with, and/or comments and suggestions from, Juan Pablo Bohoslavsky, Skylar Brooks, Sergio Chodos, Diego Herrero, Daniel Heymann, Christina Laskaridis, Pablo López, Pablo Mira, Alvaro Pereira, Germán Reyes, Joseph Stiglitz, and participants of the Economics Seminar of the IIEP-BAIRES (UBA-CONICET) at the University of Buenos Aires and of the Political Sociology of Economics Seminar of Paris Dauphine University, and two anonymous reviewers. I’m grateful to all of them, to Juan José Cruces, with whom I shared four panel discussions on the topic under analysis, which undoubtedly improved my understanding of the case, and to Jennifer Goyder and Luis Morano for their excellent editorial and research assistance, respectively. I am also grateful to the Centre for International Governance Innovation for supporting this research project and to the Institute for New Economic Thinking for the support to the research agenda on sovereign debt crises resolution that Professor Joseph Stiglitz and I lead at Columbia Business School. Usual caveats apply.
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
1991: Beginning of Washington Consensus policies experiment and adoption of convertibility system.
1998: A recession in Argentina starts.
2001, December: A full-fledged macroeconomic, social and financial crisis implodes, including a default on sovereign debt.
2002: Litigation in NY courts starts.
2003: Presidential elections: Néstor Kirchner is elected. First exchange offer is made but it is rejected by Argentina’s creditors.
2005: Road show for restructuring offer starts on January 13. On January 14, the Financial Times publishes an article accusing the government of trying to leave open the possibility for a better treatment for holdout bondholders. First exchange swap is made in June.
2006: Plaintiffs try to attach Argentina’s central bank funds. Argentina got a favorable ruling in January 2007.
2007: Presidential elections: Cristina Fernández is elected.
2008–2009: NML purchases large amount of Argentine defaulted bonds.
2010: Second exchange swap.
2011: Presidential elections: Cristina Fernández is re-elected.
2012: NML persuades a judge to allow the seizure of an Argentine ship (Libertad) docked in a port in Ghana.
The International Tribunal for the Law of the Sea in Hamburg orders Ghana to release the ship.
2012, February 23: Judge Griesa’s pari passu ruling with injunction.Footnote 52
2012, October 26: Second Circuit decision that Argentina cannot pay its restructured debt unless it also pays the holdouts.Footnote 53
2013, October 7: The Supreme Court rejects Argentina’s June 2013Footnote 54 request to review the Second Circuit’s October 2012 decision that it violated the pari passu clause in its defaulted bonds. The court gave no reason.
2014: Argentina’s appeal did not go through. On July 31, Argentina misses interest payments. On September 11, Argentina’s Congress passes the Sovereign Payment Law.
2015: Presidential elections: Mauricio Macri is elected.
2016: Settlement with vulture funds and other holdouts is reached. Argentina’s Congress repealed the Lock Law and the Sovereign Payment Law, Judge Griesa lifted the injunctionFootnote 55 and Argentina paid the holdout bondholders according to the terms of the deal.
From court records of NML v. Republic of Argentina, we know the purchasing dates for $394,102,549 in face value, over nine different series of bonds.
By matching that information with data on bond prices in secondary markets from Bloomberg Generic Price, we estimate a purchasing cost of $113,596,396.51 over the face value of $394,102,549, which implies an average price of 28.82 cents on the dollar. For purchases since 2008, the average price is 23.83 cents on the dollar (over a declared face value of $221,949,549 million).Footnote 56
The total face value of NML purchases was $617 million. NML received $2.426 billion on that face value. If the average price of 28.82 cents that we obtain with the purchases for which we have available information was representative of the average price over the whole purchases, then the total purchasing cost would be $177 million. Therefore, NML’s return would be 1270%.
Payment to Vulture Funds and Other Holdout Creditors
Table 3 shows the payments to the vulture funds and other holdout creditors that benefited from Judge Griesa’s ruling.
Including compensatory interest and legal fees, the country paid $6.25 billion for the “Pari Passu offer.”
Every bondholder that benefitted from Judge Griesa’s ruling could also choose the “Base Offer” that recognized a claim equal of 150% of the defaulted bonds’ principal value. If all the non-Pari Passu bondholders accepted this offer, the total payments on this offer would be approximately equal to $4.62 billion (corresponding to $1.35 billion for the bondholders that sued the country under the ICSID, $1.17 billion for litigants under other US courts, $300 millions for litigants under European courts, and $1.8 billion for bondholders that did not litigate). Besides, for some funds that benefitted from the Pari Passu ruling, the payments under the Base Offer are larger, as is the case of Dart Management, that received a judgment for $725 million in 2003, that including interest liabilities would add up to $847 million in 2015 (less than the payment of $891 million that received under the Base Offer; see Levine 2016). Adding payments on the Pari Passu Offer and on the Base Offer both to the bondholders that were not included in the Pari Passu ruling and the ones that did but that would receive larger payments under the Base Offer, the approximate total payments under the deal of 2016 would be about $12 billion if every bondholder accepted it.
Argentina’s Exchange Bond Prospectus
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Guzman, M. An Analysis of Argentina’s 2001 Default Resolution. Comp Econ Stud (2020). https://doi.org/10.1057/s41294-020-00124-1
- Sovereign debt restructuring
- International financial system