By Arturo C. Porzecanski*
The administration of Cristina Fernández de Kirchner has shown a willingness to bury the proverbial hatchet and bring to a definitive end what was once the largest sovereign default in recorded history – nearly $100 billion in obligations to domestic and foreign bondholders and official foreign-aid and export-credit agencies, including the United States Export-Import Bank. In late May, Argentina reached an agreement with its official creditors (gathered as the so-called Paris Club), committing to repay everything that had come due in full and in cash – nearly $10 billion in principal, past-due interest, and interest-on-interest – over the next five years, starting with a down-payment in July. In recent days, President Kirchner has also signaled that she is ready to negotiate a payment plan with bondholders who are potentially owed even more than the Paris Club creditors. The trigger for this conciliatory attitude is two U.S. Supreme Court decisions announced on June 16 which granted jilted creditors wide latitude in seeking redress from Argentina. The first ordered the government in Buenos Aires to stop discriminating among its bondholders by paying most but not all of them; and the second mandated banks operating in the United States to disclose any and all assets owned by Argentina anywhere in the world, facilitating efforts to seize them by unpaid creditors.
Argentine governments since the closing and troubled days of 2001 have taken a notoriously hard line toward creditors ever since Acting President Adolfo Rodríguez Saá announced that he would be suspending payments on the public debt and dedicating all sums budgeted for that purpose to fund an emergency jobs program and increased social spending. Cristina and her predecessor (and late husband), Néstor Kirchner, embraced a populist-cum-nationalist view of the world according to which the state must favor the interests of the majority of its population, particularly in terms of redistributing income from the “haves” to the “have nots.” Pervasive state interventionism, confiscatory taxation, disrespect for private property rights, widespread controls (on prices, interest rates, foreign trade, and capital flows), and confrontational attitudes toward investors became the hallmark of economic policy in Argentina. Despite a vigorous economic recovery starting in mid-2002, creditors never got a single payment from Argentina – and the government made only an arrogant take-it-or-leave-it proposition to private creditors by which they would turn in their bonds and receive new ones worth one third as much. By late 2010, over 92 percent of the private creditors capitulated and went into the debt exchange. According to a reputable comparative study of sovereign defaults in the Journal of International Money and Finance published in 2012, Argentina’s behavior towards its creditors displayed an exceptional degree of coerciveness. While Argentine and European creditors had no luck pursuing their claims in their respective courts, most bondholders who had legal rights under New York State law succeeded in obtaining favorable judgments – and lately, in gaining enforcement rights as well.
Argentina has set such a bad example in terms of how to restructure the public debt that no other nation has dared to follow it since. Given the recent advance in creditor rights courtesy of the U.S. Supreme Court, chances are that no other government will ever be motivated to copy Argentina’s rogue-debtor behavior – a very good outcome for the world at large. Concerns that the decade-long judicial fight in the United States will slow down or impede future sovereign debt restructurings are greatly exaggerated. Before reaching their decisions, the U.S. courts heard from many academic and non-academic experts, and from several governments (Brazil, France, Mexico and the United States), and the New York District Court of Appeals dismissed warnings of impending doom as “speculative, hyperbolic, and almost entirely of [Argentina’s] own making.” Argentina engaged in uniquely egregious misconduct, violating the well-established norms of sovereign debt restructuring, refusing to negotiate with its creditors, ignoring court orders, and failing to honor its obligations subject to U.S. law despite the country’s unquestioned ability to pay. The legal rights conferred to minority bondholders in the 1990s, which were actionable in this instance, have been superseded during the 2000s by the widespread inclusion of new “collective action” clauses, inspired by English law, preventing a small minority from blocking a debt restructuring supported by a large majority (at least 75 percent) of creditors. These clauses have worked very well in recent years, including in the cases of Greece and Belize in 2012 and 2013, respectively. Therefore, while the advancement of creditor rights brought about by the Argentina litigation will encourage governments to be more conciliatory towards their creditors, the evolution of market practices means that fewer than 8 percent of total creditors will never again be able to demand payment in full the next time that a government obtains the consent of everyone else.
*Dr. Porzecanski is Distinguished Economist in Residence at American University.