Jessica Terry ITRN 603 Spring 2014

1. Argentina Debt Litigation and Implications for Future Sovereign Defaults Jessica Terry ITRN 603 Spring 2014

2. Sovereign Immunity & Debt Enforceability • The principle of Sovereign Immunity has traditionally protected sovereign debtors, making sovereign debt contracts largely unenforceable. • Foreign Sovereign Immunities Act (1976): Allows sovereigns to be sued by private parties in the US justice system if the action is based on a commercial activity undertaken in the US by a foreign sovereign. • Sovereign immunity does not protect sovereign debtors from being sued by its creditors BUT sovereign immunity protects sovereign assets and makes collection of favorable court judgments difficult

3. Argentina Default • Argentina defaulted on $81 billion of government bonds in 2001 • Leading up to and after the default, investors specializing in distressed debt began purchasing Argentina’s exceedingly discounted bonds. Known as “vulture funds”, these experts purchased the debt for pennies on the dollar with the strategy to opt-out of any debt restructuring offers and pursue litigation that could potentially result in highly profitable returns. • PariPassuClause: requires creditors to be paid equally and without preference. The courts have ruled that if Argentina makes payments on new debt it must also pay the holdouts. • Argentina’s options: (1) pay NLM $1.4 billion or (2) default on over $50 million of new bonds

4. Implications • Argentine Ambassador: “If the U.S. courts uphold the complainant’s position, negative consequences will be felt by the U.S. and the rest of the world. Sovereign debt restructurings will be virtually impossible in the future. What rational creditors would agree to restructuring a debt if they know the flow of payments can be interrupted by holdouts through litigation?” • Argentina has asked the U.S. Supreme Court to review the case. • If Argentina loses: Possibility of another default. Federal courts become “clearing houses” for distressed debt holders. • If Argentina wins: (i) Bond payments to be protected by sovereign immunity; AND/OR (ii) interpretation of paripussuclause overruled

5. Policy Proposal • Objective: Avoid creditor holdouts from derailing sovereign debt restructurings in the future. • 1. Sovereign Bankruptcy Regime: attractive in theory but difficult to implement politically. Regime would provide a framework that strengthens incentives for a sovereign and its creditors to reach a rapid and collaborative agreement on a restructuring of unsustainable debt in a manner that preserves the economic value of assets and facilitates a return to medium-term viability. Sovereign debt would be enforceable according to international treaty provisions. • 2. Bond Contract Reform: (i) Collective Action Clauses (CACs) that prevent holdouts and (ii) PariPassuclause modification or removal.