The

Argentine
Default
WHO, WHAT, AND WHY IT MAT TERS
C A I T LY N M C B R I D E
N OV E M B ER 2 0 1 4

Content
Sovereign debt
Introduction
Politicization

Vulture funds
Argentinas default
Timeline
Explanation
Reaction to court decision

Global implications

Takeaways

Sovereign Debt
Debt issued by a sovereign nation denominated in a foreign currency
Syndicated bank loans
Sovereign bonds

Access to wide array of investors

Popular instrument for developing nations, enabling:
Industry development
Economic investment
Support of government activities

Bond contracts written similarly to private bonds

Main exception: no clear recourse for restructuring negotiations

The Politics of Default

Default is a natural occurrence in financial markets

Nations are also susceptible to failed investments

Markets are not currently able to handle sovereign defaults
No formal restructuring mechanism for debt
Prolonged negotiations
Assets of a country cannot be liquidated or handled like in traditional
bankruptcy proceedings
Sovereign
Collective action problems
Issuer
Bond

Addition of a third actor

Jurisdiction
Investors
Vulture Fund

Emergence of Vulture Funds

Refuse restructuring agreements

Enter litigation with the sovereign in the

bonds jurisdiction
Rarely successful
Court typically lacks jurisdiction
Unable to compel the sovereign to act

Type of holdout
Hedge funds that purchase the bonds near
default at huge discount
Singular purpose
Speculation not investing

The Argentine Saga

Par Pass
Latin translation: with equal step

Common feature of all bond contracts

Designed to ensure equal treatment in a bankruptcy
Applying to Argentina
NY court ruled that Argentina violated this clause by paying
restructured bondholders while withholding full payment to holdouts
Argentina argued in appeals that paying both would violate its Lock Law

Debate as to interpretation of the meaning of the clause

Questions as to whether this is an appropriate feature for a sovereign

debt contract

Appealing to
Investors
Full page ad in the Wall Street Journal and
other publications internationally
Part of an attempt to reach wide base of
investors and bondholders
Pleads for support against the vulture funds

Looks to explain the technical default

Implicates and vilifies vulture funds

Evidence of political maneuvers

Beyond Argentina
Simultaneous growth in debt and litigation highlights system failure

Dangerous status quo

Credit: Financial Times

Outlook for Change

Collective Action Clauses
Currently implemented
Power with majority bondholders
Untested in court

Restructuring Mechanism
Comprehensive solution
Provide structure and arbitration
space for investors and countries
Discussion began in 2002

Private and public backlash

Complicated implementation

Takeaways
ARGENTINA
Possible actions

THE BIGGER PICTURE

Defaults will continue

Pay or settle with the vulture funds

Courts issuing binding decisions
Seek international adjudication
Sovereign nations affected by
Ignore decision and change trustee
foreign courts
Rewarding vulture funds
Economic instability
Default status
Lack of liquidity for borrowing
Slowing economic growth

Domestic unrest

Result:
Dangerous divorcing of the purpose
of investment from the intentions
of prospective creditors.