LONDON Nov 23 In an era where sovereign debt
distress has become commonplace, this week's ruling on
Argentina's protracted bond restructuring just made the outlook
more complicated for creditors and debtors alike.
The ruling by U.S. Federal judge Thomas Griesa has raised
the spectre of a technical default next month by Argentina,
which has been ordered to immediately make full payment to funds
that had shunned its past debt restructuring rounds.
The ramifications of the case will ripple far beyond Buenos
Aires and New York.
The ruling is of course a blow for Argentina which terms
these holdout funds "vultures" and has vowed not to pay them a
It is bad news for other bondholders who accepted a
restructuring of old Argentinian debt after the country's $100
billion smash in 2002, agreeing to write off - or take a
haircut, in bond parlance - on 70 percent of the debt.
Above all, it is fuelling unease that creditors will have
little incentive to agree to future restructurings or haircuts
if a sovereign runs into trouble.
"The wider implications of this legal ruling will send
shockwaves through all future restructurings," says Greg
Saichin, head of emerging debt at Pioneer Investments, who
considers the ruling negative for Argentina as well as for other
sovereigns that could require a debt workout in future.
"A lot of sovereign debt in emerging markets is done under
U.S. law, and from Russia to Brazil all these emerging countries
will see a precedent in this ruling for what they want to do
next," Saichin said.
That is a real issue, with debt levels deemed unsustainable
in many euro zone states and increasing numbers of poor
developing nations from Africa to central America issuing debt
on international bond markets, most of it, like Argentina's,
governed by U.S. law.
The case also reopens questions over the restructuring that
cut Greek sovereign debt by 100 billion euros ($130 billion),
handing creditors losses of around 75 percent. A minority of
investors in Greek bonds issued under foreign law held out, and
some 6 billion euros worth of those bonds are still outstanding.
Argentina's government says forcing it to treat holdout
investors pari passu - on equal terms - with holders of
restructured debt will exacerbate future sovereign debt crises
by "making voluntary debt restructuring essentially impossible".
"No one in their right minds would participate in such a
process now," Economy Minister Hernan Lorenzino told reporters.
CAN'T OR WON'T
Not everyone agrees the ramifications will necessarily be
First, most concerns revolve around older debt like
Argentina's because bonds issued before 2004 usually lack
collective action clauses (CAC) that make a restructuring
agreement binding on all creditors.
Greece, for instance, activated a collective action clause
forcing holdouts who owned bonds issued under Greek law to take
part. But others note that Greece paid out 435 million euros to
holders of a bond issued under foreign law, averting litigation
by another group of holdouts.
"Over time, all emerging market sovereign debt will contain
collective action clauses. In the meantime debtors will seek to
avoid U.S jurisdictions when considering restructurings," said
Richard Segal, emerging markets analyst at Jefferies.
That might be hard for any emerging economies that run into
trouble in servicing existing bonds, said a one fund manager who
asked not to be named.
"It will clearly have secondary and tertiary impact on
countries that have not gone through a restructuring or who do
not have collective action clauses in their documents," he said.
As to the fairness of the ruling, NML Capital and Aurelius
Capital Management, the hedge funds who brought the case against
Argentina, might say sovereigns would have less incentive to
default in the first place if they knew they would eventually be
held accountable for old debt.
Many including fund manager Sam Finkelstein at Goldman Sachs
Asset Management appear to have some sympathy with that view.
"The legal ruling empowers creditors and can thus be
interpreted as a victory for sovereign creditors," he said.
Vivienne Taberer, a portfolio manager at Investec Asset
Management, disagrees. While some sovereigns are just unwilling
to pay, others really are unable to do so and restructuring is
the only option.
"If Greece hadn't had CACs in place it wouldn't have been
able to restructure debt at all," she said. "You want to make it
difficult for sovereigns to restructure and walk off, but you
don't want to make it impossible to restructure debt into
something that's more viable for them to pay."
That was the case with Argentina in 2002 and Greece in 2012.
It is also likely that Argentina, a country of 40 million
people, will be tipped into bankruptcy if all holders of
restructured debt also demand to be paid in full.
Many also point out that Argentina's is a unique case with
few creditors willing to litigate for a decade or with as much
ferocity as NML and Aurelius did. NML also recently won a court
order to detain an Argentine ship in Ghana in lieu of debt.
Argentina, with its history of multiple defaults, may elicit
less sympathy than most.
"It's not simple for a creditor to be a holdout," said
Rodrigo Olivares, a sovereign debt expert at Queen Mary
University in London. NML "has been litigating for 10 years.
They have tried to seize everything from satellites to ships.
The message is: this is not for me or you."
($1 = 0.7717 euros)
(Additional reporting by Carolyn Cohn, Ingrid Melander and
Krista Hughes; Editing by Ruth Pitchford)