HT PAREKH FINANCE COLUMN

october 18, 2014 vol xlix no 42 EPW Economic & Political Weekly
10
Cry for Me Argentina
T Sabri nc
T Sabri nc (sabri.oncu@gmail.com) is an
economist based in Istanbul, Turkey.
After a district court in New York
interpreted pari passu in a debt
restructuring contract to mean
all those who own Argentine
defaulted debt, irrespective of
whether they were the original
creditors or vulture capital rms,
the rules of the sovereign debt
market have been substantially
altered. A host of issues
about jurisdiction of courts in
international disputes has also
cropped up in the ongoing saga of
Argentine debt restructuring.
I
n an earlier H T Parekh column (A
Sovereign Debt Story: Republic of
Argentina vs NML Capital, EPW,
17 May 2014), I gave a brief account of
the history of the Argentine debt default
of 2001 and its aftermath up to a United
States (US) Supreme Court ruling of
21 April 2014. To recapitulate, in 2005
Argentina attempted to restructure the
debt that it had defaulted on in 2001, fol-
lowed by another restructuring in 2010.
In these restructurings, about 93% of
the old debt was swapped for new debt,
leaving 7% as holdouts. And some of
these holdouts and vulture funds such as
NML Capital, operating from Cayman
I slands, which had purchased the de-
faulted debt from other holdouts at a
deep discount, sued Argentina at the US
District Court for the Southern District
of New York deman ding full payment.
On 21 April 2014, the US Supreme
Court justices heard the arguments of
Argentina and some holdout owners of
the defaulted bonds led by NML Capital
in one of many appeals on the district
courts rulings. The rst of the expected
rulings came on 16 June 2014 when the
Supreme Court justices declined to hear
Argentinas appeal against the February
2012 decision of the district court. This
and other rulings that followed which
upheld the district courts 2012 ruling as
valid not only sent shock waves through
the global nancial system by threatening
the integrity of sovereign debt markets,
they also made Judge Thomas P Griesa
an 85-year-old US federal judge of the
district court whose rulings have been
called into question by many suddenly
world famous (Vilches 2014).
Legal Reinterpretation
Justice Griesas February 2012 ruling
was based on an unprecedented inter-
pretation of the pari passu clause in the
Argentine bond contracts. The clause, a
standard component of sovereign bond
contracts, is intended to ensure that the
issuing country treated identical bond-
holders identically, with the understand-
ing that some senior creditors such as
the International Monetary Fund (IMF)
are to be treated differently. Indeed, this
is the recommended International Capi-
tal Market Association (ICMA) interpre-
tation of the clause in its recently pro-
posed new framework for sovereign
bonds (Stiglitz and Guzman 2014).
Despite this standard interpretation,
however, Griesa ruled in February 2012
that if Argentina paid the interest that it
owed to the 93% creditors who accepted
the restructuring, it had to pay the
suing vulture funds among the remain-
ing 7% holdout bondholders most of
whom were not even among the original
creditors about $1.5 billion in principal
plus accrued interest in full. Indeed,
after Griesas verdict and before all
these appeals, an Argentinian navy ship
was detained for 10 weeks in Ghana at
the request of NML Capital because of
this dispute and nally set sail from
Ghana in December 2012 (Smith 2012).
One of the demands of NML Capital has
been to take ownership of global Argen-
tine assets, threatening the sovereignty
not only of Argentina, but also of any
debtor nation, including the US. Anoth-
er difcult-to- understand situation was
why Ghanaian authorities chose to
abide by the decision of a district court
judge somewhere in New York, since
Ghana is not bound by New York law.
What was more confusing was that not
all of the defaulted Argentine debt had
been issued originally under New York
law. Some were issued under domestic
law, others under United Kingdom (UK)
law and yet some others under Japanese
law. Whose law should the Ghanaian
authorities have obeyed? Yet, that
Argentine ship had been detained in
Ghana for many weeks, indicating
much confusion about what law to obey,
international or otherwise.
Argentinas #Griesafault
Once the US Supreme Court declined
to hear Argentinas appeal, however,
Judge Griesa started to reign supreme.
HT PAREKH FINANCE COLUMN
Economic & Political Weekly EPW october 18, 2014 vol xlix no 42
11
Griesa ruled that the Bank of New York
Mellon through which Argentina
makes its interest payments to most of
its non-holdout bondholders cannot
pay the non-holdouts even if Argentina
depo sited the interest payments in
the bank. And, despite that Argentina
deposited $539 million to meet its
interest payment obligations way be-
fore the due date. But the bank could
not transfer the funds to the bond-
holders after Griesas ruling, pushing
Argentina into a technical default on
30 July 2014. Although this was
called a default by the mainstream
media, it was more appropriately called
#griesafault on Twitter to mean that
Argentina actually griesafaulted on
30 July 2014.
It is very difcult to summarise
everything that has followed after
the end of July in a short article,
because almost every day since then has
been phenomenal for both Argentina
and the inter national community.
One important development was the
9 September 2014 United Nations (UN)
General Assembly resolution that ap-
proved the launch of negotiations on a
multilateral framework for sovereign
debt restructuring. This was a resolu-
tion initiated by Argentina and penned
by Bolivia representing the Group of 77
(G-77). Some called it a deeply divided
vote, although I nd it difcult to call
that voting deeply divided: 11 opposed,
41 abstained and 124 favoured the
resolution. And those opposed included
the usual culprits: the US, Japan, Germany
and the UK.
In a recent article, Ocampo (2014)
welcomed the non-binding UN resolution
and claimed that
a good model is the dispute settlement
mechanism of the World Trade Organiza-
tion. That model creates three consecutive
stages with clear deadlines: one of volun-
tary negotiations, a second of mediation
and a nal of arbitration if the former two
fail. The sequence is essential for an ef-
cient and speedy process. The decisions of
the appeals court is binding for all parties
involved.
Similarly, Stiglitz and Guzman (2014)
also welcomed the UN resolution as
well as the recently proposed ICMA
framework for sovereign bonds and
claimed that the international commu-
nity faced two challenges:
One is to deal with the hundreds of billions of
dollars of debt written under the old
terms, which cannot be restructured under
Griesas ruling. The second is to decide
on the terms that should be imposed in
the future.
I wholeheartedly agree with the
claims of Stiglitz and Guzman. How-
ever, given my experience observing
the Argentine and other such sagas for
more than a dozen years, I respectfully
differ from Ocampo. Although a World
Trade Organization-like dispute settle-
ment mechanism might offer a more
efcient and speedy mechanism than
the ongoing Griesa mechanism, in my
view a better proposal would be for a
restructuring of the defaulted debt of
the debtor country, under its own
domestic law, whether the debt was
originally issued under some foreign
law or not.
In 2012, Gulati and Zettelmeyer pro-
posed the reverse of such a proposal,
for heavily indebted Eurozone countries
mainly to Greece after the Greek
bankruptcy in May 2010. Their proposal
was for the sovereign to voluntarily
exchange domestic law debt for foreign
law debt so that, in effect, the creditors
got more contractual protection in
exchange for more reduction in the
debt burden of the sovereign. Only 3%
of the Greek debt was foreign law debt
at the time, which made their proposal
quite interesting.
The proposal being made here is
the opposite: the creditors could volun-
tarily exchange foreign law(s) debt for
domestic law debt so that, in effect, the
sovereign gets less reduction in its debt
burden in exchange for less contractual
protection to the creditors. After all, as
the neoclassical nance theory goes, our
expectation is that the market correctly
prices all nancial assets inclu ding debts
even when the debt restructuring con-
tracts are incomplete, in the sense that
the claims of the debtors are neither
directly observable nor veriable by
the creditors.
As Miranda Xafa (2014) argued, and
as the ongoing Republic of Argentina vs
NML Capital case demonstrates, holdout
cre ditors can have considerable lever-
age to frustrate debt restructuring
agreements after they have been con-
cluded if the restructuring is done
under the law of one particular foreign
country, especially so in the Argentine
case when a signicant portion of
the restructured countrys debt was
issued originally under laws of various
other countries.
Assuming that we all agree with
neoclassical nance theory, the ques-
tion then boils down to deciding whose
proposal is better for both the majo-
rity of creditors and the debtor: Gulati
and Zettelmeyers or the one I have
made here.
Until an answer is found to the ques-
tion, that is, default or griesafault, we
can only say to rephrase that well-
known song, Cry for Me Argentina.
References
Gulati, Mitu and Jeromin Zettelmeyer (2012):
Making a Voluntary Greek Debt Exchange
Work, CEPS Discussion Paper 8754, January.
Ocampo, Jos Antonio (2014): The UN Takes the
First Step to Debt Restructuring, Guest post to
the Financial Times Beyondbrics, blog, 10 Sep-
tember, http://blogs.ft.com/beyond-brics/2014
/09/10/guest-post-the-un-takes-the-rst-step-
to-debt-restructuring/
Smith, David (2012): Seized Argentinian Sailing
Ship Leaves Ghana, The Guardian, 20 Decem-
ber, http://www.theguardian.com/world/2012/
dec/20/argentina-sailing-ship-ghana-release
Stiglitz, Joseph and Martin Guzman (2014): De-
beaking the Vultures, Project Syndicate, 1 Oc-
tober, http://www.project-syndicate.org/com-
mentary/joseph-e--stiglitz-and-martin-guz-
man-on-the-efforts-to-remove-new-legal-ob-
stacles-to-sovereign-debt-restructur-
ing-2014-10
Vilches, Jorges (2014): Pay Up or Shut Up: Argen-
tinas Default Begs a Few Questions, Counter-
punch, 16 September, http://www. counter-
punch.Org/2014/09/16/argentinas-default-begs-
a-few-questions/
Xafa, Miranda (2014): Lessons from the 2012
Greek Debt Restructuring, VoxEu, 24 June.
Style Sheet for Authors
While preparing their articles for submission,
contributors are requested to follow EPWs
style sheet.
The style sheet is posted on EPWs web site at
http://www.epw.in/terms-policy/style-sheet.html
It will help immensely for faster processing and
error-free editing if writers follow the guidelines
in the style sheet, especially with regard to
citation and preparation of references.