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For Whom The Bond Tolls: Argentina’s New(er) Debt Crisis

Once again Argentina finds itself in dire capital straits as it is embroiled in a debt holdout battle with a group of American banks and hedge funds.1  Debt defaults aren’t new for Argentina – the country has defaulted eight times since 1828 – with its most recent default stemming from a previous default in 2001.2 After defaulting in 2001, various creditors purchased Argentina’s outstanding debt at below-market prices, taking a gamble with hopes that Argentina could repay them.3 It couldn’t.

In 2005, Argentina offered an ultimatum: creditors could accept a new deal, paying thirty cents on the dollar. If they refused, they would receive nothing. Seventy-five percent of Argentina’s new creditors agreed to take this cut and, in 2010, another 17% of its creditors made a similar agreement.  A minority held out – American banks and hedge funds led by NML Capital – and instead filed suit in New York’s Southern District against Argentina, demanding full payment on their bonds.

The basis of the suit is based on a pari passu (equal treatment) clause in the bonds originally brought by the banks and hedge funds. 4  The pari passu clause states that Argentina must treat all bondholders equally, thereby barring them from paying one set of creditors (here, the 92% of creditors that accepted the new deal in 2005) and not another set (the remaining 8% of creditors, who have filed suit), particularly when Argentina is fiscally capable of paying all parties. 5  Argentina attempted to pay the majority of its creditors at the expense of not paying its minority holders.  Judge Thomas Greisa of the Southern District of New York issued an injunction against these payments, declaring that Argentina must first make the outstanding bond payments, including interest, to the bank and hedge fund creditors. 6  The 2nd Circuit Court upheld the injunction, dismissing Argentina’s arguments of injury and inequity as a result of the injunction while also dismissing Argentina’s claim that the injunction violated the Foreign Sovereign Immunities Act. 7  The Supreme Court denied certiorari by Argentina.

Argentina responded to Judge Greisa’s injunction, the Second Circuit’s affirmation, and the Supreme Court’s denial of certiorari by paying neither its majority nor minority shareholders, putting the country into its eighth default. 8  Argentina recently refused to repay the banks and hedge funds, pushing Judge Greisa to declare the country in contempt of court. 9  In response, Argentina began depositing interest payments in state controlled banks for its majority creditors, a move which does not avoid Judge Greisa’s ruling. 10  Argentina recently petitioned the International Court of Justice to countersue the United States for violating Argentina’s sovereignty. 11 The application is still pending. 12

There is little that the United States courts can do to force Argentina to comply.  Prior to the most recent set of rulings, the Argentine economy already suffered shrinking output, particularly due to domestic industry sluggishness, while continuously assuring domestic depositors as to the soundness of the country’s deposit insurance in the wake of currency devaluation and shrinking dollar reserves. 13  Access to foreign capital markets would benefit Argentina’s domestic economy as it would lower the cost of new debt issuances, but Argentina has managed to survive the past fourteen years without access to such markets. 14

The international community has recognized the woes of Argentina and the power of holdout creditors; the International Capital Market Association (ICMA) issued a set of proposals limiting the scope of pari passu clauses and eliminating the holdout positions of groups of creditors smaller than 25%. 15  The ICMA proposals have been echoed by the IMF but remain mere proposals.  They have no binding power and countries issuing debt must adopt them. 16  Only Kazakhstan has issued bonds with ICMA’s proposals which, although a step in the right direction, is relatively insignificant when compared to the scope of capital markets. 17  It remains to be seen whether larger countries with more impact in capital markets will begin to abide by the ICMA proposals and how much of an influence international creditors, such as banks and hedge funds, have in keeping these proposals at bay.

  1. See NML Capital, LTD. v. Republic of Arg., 727 F. 3d 230 (2013). 

  2. Dan Rosenchek, Argentina’s Rational Default, The New Yorker (Aug. 7,2014), argentinas -rational-default. 

  3. Argentina Found to Be in Contempt of Court by U.S. Judge, BBC (Sept. 30, 2014), 

  4. NML Capital, LTD. v. Republic of Arg., No. 08 Civ. 6978 (TPG), 2012 U.S. Dist. LEXIS 167272, at *5 (S.D. N.Y. Nov. 21, 2012). 

  5. Id. 

  6. NML Capital, LTD. v. Republic of Arg., No. 08 Civ. 2541 (TPG), 2009 U.S. Dist. LEXIS 19046, at *6 (S.D. N.Y. Mar. 4, 2012). 

  7. NML Capital, LTD. v. Republic of Arg., 727 F. 3d 230, 248 (2013). 

  8. Rosenchek, supra note 2. 

  9. Argentina Found to Be in Contempt of Court by U.S. Judge, supra note 3. 

  10. Argentina Deposits Debt Payment in Defiance of U.S. Ruling, BBC (Sept. 30, 2014), 

  11. Cara Salvatore, Argentina Fights $539 M Payment Blockade in 2nd Circ., Law 360 (Oct. 7, 2014) 

  12. Id. 

  13. Argentina Deposits Debt Payment in Defiance of U.S. Ruling, supra note 10; Ken Parks, Argentina Seeks To Assure Savers, Depositors, Market Watch (Oct. 7, 2014) argentina-seeks-to-assure-savers-depositors-2014-10-07. 

  14. Rosenchek, supra note 2. 

  15. Huw Jones, UPDATE 2-Market Body Revises Rules for Sovereign Defaults After Argentina Row, Reuters (Aug. 29, 2014) 

  16. IMF Suggests Sovereign Bond Alterations in the Wake of Argentina Case, The China Post (Oct. 8, 2014) 

  17. Kabir Chibber, Want to Avoid Argentine-style Debt Stand-offs?  Buy Kazakhstan’s New Bonds, Quartz (Oct. 6, 2014) 

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Nick Marcus