The Argentine government obtained an overwhelming victory in the early hours of Thursday, when senators approved the proposed agreement with recalcitrant creditors who had rejected the renegotiations of the country’s debt in 2005 and 2010. With this, the legal fight between Buenos Aires and its “holdout” creditors is almost resolved.
This battle has cast a shadow over the international sovereign debt market — and its resolution creates a paradox. While the outcome is positive for Argentina, it sets a precedent and has some alarming implications for the administration of debt renegotiations.
In the absence of a multilateral framework, what is convenient for an individual country could have negative consequences for the international system as a whole.
For example, the outcome of the Argentine dispute clearly overturns the accepted view that creditors can do little to recover their full investment in a sovereign default — a view that underpins the concept of differential “country risk”. The accord reached between Argentina and the holdouts undermines that concept since it is based on the country’s agreement to pay an amount equivalent to 100 per cent of the principal.
Moreover Thomas Griesa, the US judge in the case, made an interpretation of the pari passu clause in Argentina’s debt — a traditional feature of sovereign bonds that ranks creditors equally — that favoured the holdouts. This put unusual pressure on the country. It also encouraged a perception that it is feasible for a minority of bondholders to isolate a government from broader credit markets, leaving it with no alternative but to pay claims held by a minority of litigants in full.
In this case, inequality among creditors caused maximum economic harm. It underlines the need for a sovereign debt restructuring mechanism
The reason the legal tussle between Argentina and its creditors took so long is that the assets involved did not include “collective action clauses”, which would have required minority creditors to accept a settlement if the majority agreed. But Argentina is not an isolated case in this respect: 20 per cent of the outstanding $900bn of sovereign debt has no CACs attached. For other countries in this position, the Argentine agreement sets a dangerous precedent.
The obstinate bondholders who faced Argentina down were able to convince the judge and secure an extraordinarily high return. This has raised the likelihood that a variety of “creative” holdout strategies will be developed, reducing overall efficiency and increasing the long-term transaction costs of credit.
Buenos Aires’ drawn-out battle with its creditors reflects the incompleteness of the international financial system. There is no bankruptcy procedure in place to kick in when a government cannot meet its obligations. The Argentine experience is proof that some such arrangement is needed.
Recalcitrant creditors bought Argentine paper at rock-bottom prices and their strategy was vindicated. They profited and the creditors who settled promptly did not. This is not fair and is also inefficient. Standard bankruptcy procedures treat creditors equitably, minimising economic damage by resolving things fast. In this case, inequality among creditors caused maximum economic harm. It underlines the need for a sovereign debt restructuring mechanism.
Yet, for all this, the readmission of Argentina to the international financial market must be counted as an important success. The new reformist government of Mauricio Macri deserves credit for its focus and effective negotiating tactics.
Some credit in this saga is also due, however, to Cristina Fernández, the former president. She argued vigorously for the creation of a formal mechanism governing the restructuring of sovereign debt. Recognising this could lead to a happier and more lasting outcome.
Mario Blejer is deputy chairman of Banco Hipotecario