Sovereign debt restructuring: Implications of funds litigation against Argentina

Rethinking Bretton Woods | Fri, Jul 19, 2013

On Monday July 22, RBW Project Director Aldo Caliari spoke at a Congressional Briefing “Sovereign Debt Restructurings: The Case of Argentina and Latest Developments.”

What are the most recent developments in the Argentine debt case? Why are experts and institutions like the IMF claiming that ongoing litigation against Argentina could have pervasive implications for future sovereign debt restructurings? What are the systemic implications of this case?

Other panelists at the briefing were Jeremiah S. Pam, Visiting Scholar at Columbia University Law School and Sergio Chodos, Alternate Executive Director for Argentina at the International Monetary Fund. The event was moderated by the Ambassador of the Republic of Argentina to the United States, H.E. Cecilia Nahon.

Remarks delivered at Congressional Briefing “Sovereign Debt Restructurings: The Case of Argentina and Latest Developments” (July 22, 2013, US Congress)

By Aldo Caliari, Center of Concern (and on behalf of Jubilee USA Network)

We are bringing to this discussion the perspective of groups and citizens that have historically advocated for debt cancellation for the poorest countries, but our mission is about much more than that. The cancellation of unpayable debts is the tip of the iceberg, dealing with a symptom, if you will. Our mission is about justice, good governance and accountability in the whole process of acquiring and repaying sovereign debt obligations.

From that perspective we appreciate the opportunity to express --once again-- our concern about the recent ruling on NML Capital v Argentina. We believe this ruling, if allowed to stay, will have negative consequences in at least three respects: 1) for the poorest and vulnerable in countries going through debt crises in the future, 2) for the international financial system (not a minor point when the short- and medium-term prospects for the global economy are very uncertain) and 3) for US foreign policy.

For many years our organizations have been promoting orderly debt resolution processes that provide incentives for responsible lending and fair burden-sharing among all players. We believe this can only be achieved in a rules-based framework for orderly, timely and efficient resolution of sovereign debt problems.

When we say “Responsible lending“ we mean both on the side of the debtor and the creditor. Debt contracts have two sides, so when debt becomes unpayable, both sides should share the responsibility. This shared responsibility goes to the heart of preventing excessive debt in the future. If the creditors are allowed to believe that they will bear no responsibility when debts become unpayable, what’s their incentive to perform due diligence at the time of entering into debt contracts?

When we say “fair burden-sharing” we mean not just the debtor and the creditor, but we mean between the public and the private sector. We shouldn’t have a situation in which only official creditors, taxpayer –funded institutions, end up shouldering the burden for solving a debt crisis. And we mean among the private creditors, too. We cannot tolerate that some private creditors that contribute their part to get a borrower back on its feet—and are capable of fulfilling its obligations again—are taken for a ride by other creditors that did not make such contribution.

You might remember that at the International Conference on Financing for Development, held in Monterrey in 2002, Heads of State agreed to establish a “set of clear principles for the management and resolution of financial crises that provide for fair burden-sharing between public and private sectors and between debtors, creditors and investors.” Jubilee was among the many groups calling for such framework and we continue to hold governments accountable for an implementation that has, unfortunately, not yet come. We were also involved in the United Nations Conference on Trade and Development efforts to issue Principles on Responsible Lending and Borrowing. Jubilee has, in fact, issued its own Principles for Responsible Lending and Borrowing, and we have been working with colleagues in debt networks across the world to develop similar guidelines.

So it is only consistent with our history on this issue, that we have been speaking out against the broad scope ascribed to the rights of minority bondholders in the recent ruling by the Second Circuit Court. Our worry is that, if it stands, such ruling would have consequences that go far beyond the particular case of Argentina. 

A ruling that upholds that in a sovereign debt restructuring debt-holders that chose to not participate in the deal have a right to recover the full amount plus interest of the debt would make it very hard for debtors going through similar problems in the future to restructure their sovereign debt in successful, timely and orderly fashion.

It is extraordinarily difficult for any country facing a debt crisis to achieve a restructuring of the debt in conditions that allow the country to normalize the economy and restart growth. It falls upon the debtor to reach out to each and every creditor and negotiate a restructuring deal that will be acceptable to all, or to at least a large majority, of them. And here is where the incentives creditors face are crucial and if the US Court’s ruling is allowed to go ahead, would make a significant difference.

If the ruling by US courts reinforces among creditors the notion that not participating in debt restructurings and suing for the full amount, is an appropriate avenue to recover their claim in full, the chances that any debtor country can in the future succeed in achieving a debt restructuring solution with its creditors will diminish significantly.

You don’t need to take my (or Jubilee’s) word for it. Look at a recent paper where the International Monetary Fund warned that if the Second Circuit Court decision on Argentina is upheld, it could “exacerbate collective action problems and risk undermining the sovereign debt restructuring process.”


The Fund also endorses our reading of the channels by which this would happen: the existence of such precedent in US courts would tilt the incentives so:

1--Creditors that would otherwise be inclined to participate in a restructuring would be less willing to do so, more willing to stay out of it.


2--Participating creditors would also fear that the flow of payments towards them can be interrupted by the holdouts.


I want to focus on the impacts this will have on three areas I’ve mentioned at the beginning of my presentation:

Impacts on poverty and the most vulnerable

As countries going through crises face more difficulties in restructuring debts, the length and depth of crises is expected to grow, too.

Organizations like ours that have vast experience in monitoring the impacts of debt are very familiar with the human toll taken by sovereign debt crises. The poorest and most vulnerable are the ones that suffer the most. Inequality increases, jobs are lost, services such as health, education and water are cut or become more precarious for those who cannot afford them. This is a story repeated far too many times. The way impacts are distributed, is never fair. The only thing that is changing is that we used to see these impacts in developing countries. But the debt crisis now spreading from the South to the North we are seeing that they can take place pretty much anywhere.

Impacts on global economic growth, international financial system

But we also worry about the negative consequences for the fluid functioning of the international financial system and sovereign debt markets that this decision would have.

This is something we cannot risk at a moment when the global economy is still so shaky.  

With debt levels in advanced countries at their highest peak in peacetime, and several emerging markets also showing worrying signs of growing debt levels, we cannot rule out more countries finding themselves in a situation of debt distress.

Given the lack of incentives for creditors to support debt restructuring that would come as a result of a Court decision in favor of the holdouts, the situation of chaos, uncertainty and contagion that typically accompanies a sovereign debt crisis will risk being far more prolonged, and potentially bring the global economy to a sudden stop. I know this sounds perhaps too dramatic, but just think of Greece, a relatively small economy, and what its debt difficulties did to the whole European Union, and how that affected the rest of the world. Imagine that an economy just a bit larger than Greece (and I don’t want to name any in particular) was to find itself facing severe liquidity or solvency issues, and unable to achieve a needed restructuring in timely and efficient fashion.

We surely cannot risk such turmoil in this fragile moment.

Impacts on US foreign policy

Finally, the decision will have negative consequences for US foreign policy that are also worth considering.

Firstly, US foreign policy on sovereign debt restructuring was made clear at the time when the IMF proposed a statutory framework for sovereign debt restructuring. US doctrine on the matter was that a statutory framework was not necessary because contractually-based solutions were available and would take care of the problem.

Now, these contractual approaches involve inserting Collective Action Clauses in bonds. There are reasons why we maintain that this is not sufficient. We can discuss those arguments if there is time.

But for the moment I only want to underscore that if the Second Circuit Court’s decision is allowed to stand, contractually –based debt restructuring solutions, such as relying on Collective Action Clauses, will become so impractical that current US doctrine on the matter will become no longer tenable.

Secondly, prominent economists have warned that if the Second Circuit Court’s interpretation of pari passu stays, this will significantly discourage the use of New York as a jurisdiction of choice for sovereign debt issuance or even the denomination of debt in US dollars (in order to avoid payments having to go through the US banking system at all). I doubt it will be consistent with current US foreign economic policy to scare investors away from relying on US jurisdictions as financial centers, or reduce the use of the US dollar in sovereign debt transactions.

Finally, US foreign policy has traditionally put a lot of emphasis on ensuring that public funding the US contributes to multilateral and regional official lenders is subject to careful stewardship. This is a laudable goal that in Jubilee we support: taxpayer funding should not go to waste or to support questionable causes.

However, another consequence that has been identified – I refer to the IMF again – is that when sovereign debt restructurings are too little and /or too late, official creditors end up shouldering a disproportionate share of the burden of helping countries in crisis. The example of Greece is very graphic: before the crisis, exposure by private creditors in total Greek debt was a little above 0 %, now it’s more than 80 %; correlatively, exposure by the private sector went from almost 100 % to less than 20 %.

In other words, private creditors, and especially private creditors that refuse to participate in any restructuring agreement, are benefitting at the expense of the taxpayer, placing taxpayer-supported institutions in harm’s way. At a moment when many people are suffering the effects of the budget cuts (including in this country), can we really accept a judgment that will signal to funds like NML that free-riding on public support, courtesy of the US taxpayer, is ok?

I should add that these are not the only cases where holdouts free-ride on taxpayers’ subsidies. The situation is the same when holdouts get in their cross-hairs countries that benefitted from debt relief provided by the international community. I am talking about the debt relief for 40 of the poorest countries in the world, that Jubilee worked so hard to achieve. Let us remember those initiatives were supported with taxpayer funding. The US has been a leader in those initiatives – by the way, under two different Administrations of different political signs. 

I, again, doubt that it is consistent with US foreign policy, and with the wishes of the citizens that supported that generosity, that the debt relief so provided goes to fill up the coffers of private funds such as NML Capital.

But this is exactly what a Second Circuit Court’s ruling in favor of the holdouts’ claims would effectively mean.

Thank you very much for your attention.

[i] IMF 2013. Sovereign Debt Restructuring: Recent Developments and Implications for the Fund’s Legal and Policy Framework. April 26, p. 31.

[ii] Ib.

[iii] Ib.