Dubbed ‘the sovereign debt trial of the century’, NML v. Argentina saw notorious ‘vulture fund’ Elliot Capital Management face off against ‘rogue debtor’ Argentina. The decades-long case concerned the restructure of more than US$82 billion of debt that fell due during Argentina’s economic crisis of 2001.The debt restructure that followed has been the most acrimonious in recent history.
There is no bankruptcy regime for sovereign nations. Thus, the natural, highly unruly order of things sees the sovereign debtor negotiate with its creditors, with most creditors accepting a swap of new debt for old. Meanwhile, a small number of specialist funds (dubbed ‘vultures’ by Argentina and notable commentators such as economics Nobel Laureate Joseph Stiglitz) adopt a ‘holdout’ strategy.These funds buy distressed bonds at bargain basement prices, hold out on restructure offers, then seek to achieve full repayment and reap windfall gains. The tactics employed include lobbying, prolonged ‘creative’ litigation, and seizing overseas assets of the distressed nation.
Indeed, in a dramatic move, Elliot seized an Argentinian trading vessel while it was docked in Ghana.
Most countries undertake the restructure of debts as a matter of urgency, to avoid being frozen out of world markets. Once the number of creditors dwindles, debtor countries tend to settle with the holdouts.
Argentina’s debt restructure was unusual in that: the size of its debt was world-record breaking (see Figure 1); the terms of the restructure on offer were particularly harsh, at around 30% of net present value; and it has staunchly refused to engage with the holdouts and even passed a national law invalidating their claims. Argentina’s President Cristina Fernández de Kirchner has made the defiance of vultures a domestic political issue and point of national pride.
Argentina’s intransigence may seem irresponsible. However the plaintiffs in this case are not particularly sympathetic. Elliot Capital Management, founded by its billionaire CEO Paul Singer, is a uniquely aggressive specialist fund that has utilised ‘vulture tactics’ to reap windfall gains from sovereign defaults in Congo and Peru.
Depending on your political stripes, Elliot and their ilk may be viewed as unscrupulous opportunists, or the bad cops we need to hold profligate nations accountable.
In any case, following the decision in New York concerning an obscure standard contract clause, on 21 November 2012, the bad cops just got badder.
In a decision upheld on appeal, Judge Griesa of the Second Circuit Court in New York, sided with NML (a subsidiary of Elliot) on the interpretation of pari passu, a standard clause which confers equal legal ranking on creditors. In a radical decision, Judge Griesa found that the clause required that, for practical purposes, no payment can be made in full to a creditor unless payment is made to all other creditors. Argentina was thus barred from continuing to pay the holders of restructured debt until it made good on US$1.3 billion to the holdouts.
An injunction on Argentina’s payment facilities, located in New York, gave teeth to the ruling.
This is a pretty big hand grenade for Elliot. Basically it enables them to say to the other creditors: ‘You don’t get paid, until we get paid’.
Paul Singer and President Kirchner
For Argentina, already in dire economic straits, defaulting on all of its 2001 debt would be economic suicide. At the current time of writing, Argentina is seeking Supreme Court review of the legal decision.
The implications of NML v. Argentina have caused ripples around the world. If the precedent is applied broadly, it moves the balance of power sharply towards the creditors.
According to Joseph Stiglitz, ‘if this principle prevails, no one would ever accept debt restructuring.’
There is little incentive for creditors to accept reduced-value restructured debt if payments can be frozen by aggressive holdouts gunning for a windfall.
Meanwhile poorer countries facing default may prematurely agree to demands from growing numbers of holdouts, rather than risk the chaos of such an injunction.
New debt issues from countries such as Mexico, Colombia and Paraguay have already flagged the risk posed by the ruling in their prospectuses: ’Recent federal court decisions in New York create uncertainty … and could potentially hinder the ability of sovereign issuers to restructure their debt.’
The implications go beyond the economic to the political. As Stiglitz has written: ‘For those in developing and emerging-market countries who harbour grievances against advanced countries, there is now one more reason for discontent with a brand of globalization that has been managed to serve rich countries’ interests (especially their financial sectors’ interests).’
Unsurprisingly, the US State Treasury, IMF and numerous anti-poverty NGOs have been very critical of the outcome of NML v. Argentina.
IMF Director Christine Lagarde has frankly stated that the ruling undermines the ability of sovereign debtors and creditors to reach an agreement and ‘poses a threat to financial stability.’
The case has thrown into sharp relief that, now more than ever, a global treaty based solution to the issue of sovereign debt restructuring is needed.
In the early 2000s, Deputy Chief of the IMF Anne Krueger championed a Sovereign Debt Restructuring Mechanism: a framework for debtor nations and creditors to negotiate a debt restructuring in an orderly and timely fashion, so as to reduce uncertainty and economic dislocation.
In this author’s opinion, a proposal well worth revisiting.
 Cotteril, J., ‘Sovereign Debt Saga,’ series of articles in Financial Times blog FT Alphaville, at http://ftalphaville.ft.com/tag/pari-passu-saga/
 Hornbeck, JF, ‘Argentina’s Defaulted Sovereign Debt: Dealing with the Holdouts’ (6 February 2013), Congressional Research Service at https://www.fas.org/sgp/crs/row/R41029.pdf
 Zamour, R., ‘NML v. Argentina and the Ratable Payment Interpretation of the Pari Passu Clause,’ (Spring 2013) The Yale Journal of International Law Online Vol. 38 at http://www.yjil.org/docs/pub/o-38-zamour-nml-v-argentina.pdf
 Stiglitz, J., ‘The Vulture’s Victory’ (4 September 2013), Project Syndicate at http://www.project-syndicate.org/commentary/argentina-s-debt-and-american-courts-by-joseph-e–stiglitz
 Gelpern, A., ‘Sovereign Damage Control,’ (May 2013) Policy Brief, Peterson Institute for International Economics at http://www.iie.com/publications/pb/pb13-12.pdf
 Stiglitz, J., above n 5.
 Goodman, J. and Chilcote, R., ‘IMF Should Ask U.S. to Review Argentina Case: Lagarde’ (21 July 2013) at http://www.bloomberg.com/news/2013-07-20/imf-should-ask-u-s-to-review-argentina-case-lagarde.html
 Krueger, A., ‘International Financial Architecture for 2002: A New Approach to Sovereign Debt Restructuring,’ (26 November 2001), Address given at the National Economists’ Club Annual Members’ Dinner, Washington DC at http://www.imf.org/external/np/speeches/2001/112601.htm
Image: ‘Argentina vulture fund protest 5’ by James Robertson/Jubilee Debt Campaign, https://flic.kr/p/dY38MK. Licence at https://creativecommons.org/licenses/by-nc/2.0/.