Photo Source: Allthingsd.com
Argentina awaits a decision that could deal a severe blow to countries around the world facing a debt crisis. This all began back in 2012 when a District Court Judge in New York named Judge Thomas Griesa ordered Argentina to pay $1.33 billion to creditors because the country had violated the equal treatment clause in its bonds. This story has been developing for years now so for a quick general background this is essentially what happened. In 2001 Argentina was an economic mess and came up with a plan to restructure its external debt owed to creditors that owned bonds. In 2005 and 2010 Argentina’s restructuring plan was accepted by 92% of the creditors. To be clear, restructuring debt in this case basically means Argentina would reduce and renegotiate the amount of debt it owed. The other group of creditors however did not agree to the debt restructuring and wanted the full amount owed, this group is led by Elliott Capital Management. Elliott is affectionately called a vulture fund. As you can imagine, Argentina basically ignored this small group of creditors and began to pay off the rest of the creditors that had agreed to debt restructuring. Elliott and his group brought Argentina to court and Judge Griesa not only ordered Argentina to pay the original face value of the bonds to the Plaintiffs, but placed an injunction that prohibited 3rd parties from helping Argentina from disobeying this order. This means that the financial institutions in the U.S. that had Argentina’s money and were being used by Argentina to pay the 92% of creditors could not longer pay out those funds. The Court of Appeals has ordered Argentina to present another debt restructuring plan to the Plaintiffs and if rejected, then the Court will decide on the case. The offer by Argentina will surely be rejected because it can’t be better than the previous two offers in 2005 and 2010 that the Plaintiffs rejected because the other 92% of creditors accepted them.
The problem that could be faced by all countries that are in a debt crisis as result of this case is that if this sets a precedent that a minority of creditors cannot be forced to accept a debt restructuring plan with regard to a sovereign state, then there is nothing to stop creditors in the future from refusing all proposed debt restructuring plans. The global bond market will face an unprecedented situation where bonds will be sold on a one way bet, pay everything or be in complete default. On a more local level, if Argentina refuses to pay Elliott then the country needs to find a way to still pay the other 92% of creditors or Argentina will be in default again and may sink back into another economic crisis.
The points that are most interesting for debate are the fact that Argentina made a promise to pay a certain value for bonds, the country wants to reduce the amount owed and wants to force creditors to accept that diminished value. For the minority that chooses to not agree, Argentina simply chooses to not pay. On the one hand, debt restructuring is essential in helping a nation that is facing a debt crisis and on the other hand, the Plaintiffs want what was contractually agreed upon. At this point we have two parties that don’t want to negotiate further so a reasonable settlement by the parties is not in play. The question then is who should we side on? What legal justification would you use to support your view?