Stalled Argentina debt negotiations ensnared by Pac-Man fears and legal wrangles

LONDON/BUENOS AIRES (Reuters) - Argentina’s debt talks have gone cold with the country at loggerheads with its creditors over the legal terms of a $65 billion bond restructuring after coming tantalisingly close to a financial agreement.

FILE PHOTO: Demonstrators hold a banner that reads "no to foreign debt payment, IMF out" as they march towards Casa Rosada Presidential Palace during a protest against the visit of an IMF technical team to Buenos Aires, in Buenos Aires, Argentina February 12, 2020. The National Congress building, where Economic Minister Martin Guzman is having a presentation to explain the way Argentina is going to repay the debt, is seen at rear. REUTERS/Agustin Marcarian/File Photo

Argentina’s government extended a deadline for talks earlier this month to July 24, the biggest delay yet, to allow time to defuse tensions.

With the two sides only a whisker apart in terms of valuation of their proposals, the wrangling has shifted to the collective action clauses (CACs) which determine the requirements for any future changes made to the bond agreements.

“The next phase may focus more on legal as opposed to financial terms,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities.

As analysts and creditors game out various scenarios, some fear Argentina could adopt what has been dubbed the “Pac-Man” strategy and attempt to get creditors on board one at a time - in much the same way as the 1980s video-game character gobbled up ghosts. This would make it harder and harder for remaining creditors to block any deal, but could also aggravate relations with them.

Morden considers this a high-risk strategy and worst case scenario, while a protracted standstill remains most likely.

CACs make it easier for countries to push through an orderly debt restructuring by requiring only a majority of creditors to agree to change payment terms or otherwise restructure debt.

The widespread adoption of “enhanced” CACs by the international community from 2014 went a step further by allowing borrowers to bundle together multiple bonds, making it even harder for minority hold-outs pushing for a better deal to disrupt the process.

Argentine Economy Minister Martin Guzman admitted that differences over CACs with the major Ad Hoc Bondholder Group including the likes of BlackRock, AllianceBernstein and Fidelity had caused the recent snag.

“Part of what created a lack of understanding is the legal terms that were suggested by the Ad Hoc Group for a restructuring deal,” he said during a recent Council of the Americas event. “And that’s not something that Argentina can commit to.”


Legal wrangles over enhanced CACs - broadly untested to date - could have ramifications well beyond Argentina at a time when economic strife threatens to push more developing economies into debt overhauls, say restructuring experts.

In its latest proposal, the Ad Hoc Bondholder group here said it wanted new bonds to be issued using the same legal terms as existing 2005 bonds.

That would mean a restructuring vote would need to clear an 85% threshold on an aggregate vote of the relevant debt as well as a 66% bar for individual bond-by-bond votes, giving more protection to creditors.

Meanwhile nine-time defaulter Argentina is pushing for the enhanced CACs, under which there is only a single threshold generally set at 75%.

“They have been endorsed by the G20, the IMF and ICMA and now we are being asked to go back in time and remove those enhanced collective action clauses,” Guzman said.

Bondholders say Argentina is trying to bend the system, requesting the right to decide here which bonds would be included in a restructuring deal - even once a vote on such a deal had passed.

“What is so frustrating to creditors is this is not what the CACs are for,” said one bondholder source with knowledge of the talks. “They have turned this on its head.”

Mark Sobel, chairman of economic policy and central bank think tank OMFIF said almost all emerging market foreign law sovereign bond issuers have adopted the enhanced CAC standard, and a shift backwards could stoke more risky litigation.

“Any undermining of the new global standard could hurt other emerging markets using enhanced CACs in their quest for more orderly and predictable contractually based sovereign debt restructurings,” he said.

The Argentina talks, meanwhile, have largely ground to a halt, the bondholder source added.

“Nothing is happening,” the source said. “There are no discussions happening, and that is not a good sign.”

Reporting by Karin Strohecker in London and Cassandra Garrison in Buenos Aires; Editing by Kirsten Donovan