IFI governance


After recent court decisions: how can sovereign debt workouts become fair, comprehensive and account

18 April 2013 | Minutes



Eva Hanfstaengl, Bread for the World Germany
Eric LeCompte, Jubilee USA
Adrian Cosentino, vice minister for under secretariat of economy and secretary of finance, Government of Argentina

Eva Hanfstaengl: The current case regarding Argentina’s hold-out creditors may become a precedent for similar cases of holdouts by vulture funds and is a very important situation.

Eric LeCompte: This court proceeding could have a long-lasting impact on poverty, and the Argentina  vulture fund case is at its possibly last stop before the supreme court, and if the vulture funds win it will signal the chance to exploit poorer countries, imperil financial stability and target assets that are needed for development. The Obama administration filed a friend of the court brief that sought to point out the negative impact of vulture funds – buyers of deeply discounted debt in order to make 400% profits by making cases in London or New York cases.

These are aggressive, selfish and greedy and most investors disassociate themselves from them. In 1999 Donegal international bought a defaulted/cancelled Zambian debt for pennies of its original value, and after Zambia received debt relief Donegal sued Zambia and own an award that was equivalent 65% of its development budget.

This is the international version of an individual case in the US, when you lose your job and cannot pay your debts, and hospitals or others refuse to resolve it, and instead sell the right to collect repayment to collection agents. If you receive support, say to take your daughter to the dentist, they sue you for that money.

This is what is at stake here.

We have with partners put pressure on NY legislative bodies, but this past November the vultures took their case to the US district court, and won, with a payment deadline for Argentina of December 15th, until Argentina appealed in order to hear new arguments in February. On the same day, they were ordered to pay $1.5 bn. On Feb 27th, the Federal appeals court, later ruling on March 31st, Argentina had to supply a payment plan, but it laid out a plan that was essentially the same as all other creditor have accepted.

Since the Libertad was returned to Argentine waters, and we hope to see a similar result.

EH: Introducing also in the room, Yuefen Li  (YL) from UNCTAD to discuss their current work.

YL: I would just like to say that because of the Argentina case, there has been a shift in the attitude towards the debt workout mechanism, having had a high level meeting at the start of the crisis, by when a third of the experts in the room, argued that debt restructuring had gone smoothly and asked ‘what’s the point’ of having restructuring mechanisms.

Now concerns have shifted. Firstly people are worried about the fragmentation of legal forums, e.g. local level institutions could make decisions on debt restructuring – showing that one vulture fund can stop the entire group, punishing debtors and other investors. This is a push in the right direction, and we are seeing discussing at a higher level in the general assembly and at ECOSOC, and at UNCTAD we have a multimillion dollar project, with Norway. We have sent out invitation letters at the beginning of March to join our working group, that is an invitation extended to world renounced experts, development banks and the Paris club, within a week we got most of the replies. This is a signal of the willingness to discuss the problem of the debt restructuring mechanism.

Adrian Cosentino: Economist of Buenos Aires university and vice minister for under secretariat of economy and secretary of finance.

As some of you may recall, in Tokyo at our session with you, I discussed how this process will generate many spillover effects, including the fact that this case is now known by many people, such as what Eric discussed regarding what it means to be a victim of the negative consequences of loopholes of the financial and legal system. The conclusion is that there is a lot of work to do.

I will focus on pointing out some main issues that help to understand the strategy of Argentina, including the scenarios that we are considering, and how we are preparing in each case. The way that this issue of equal treatment is understood by different parties; this is basically what Argentina has been supporting in the different documents.

For us equal treatment means to treat all bondholders in the same way.

If you start from this equitable idea regarding how to treat bondholders, then many issues around this issue can be better understood.

The conduct of Argentina, since 2002, we understood from the beginning that the financial package that we had to offer to investors should generate incentives on both sides in the possibility of sharing in the benefits of our subsequent economic growth, this was the CDP unit which was an excellent business for the bondholders. This has to be understood as a process, it’s not a transaction – when you talk about debt restructuring, you are discussing a long term process with the prospect of closure, which relates to the legal framework encompassing the different technicalities surrounding a debt normalisation step. After the second swap, 92% of original bondholders accepted the proposal. Two per cent of the original bonds had holdouts then generated a huge problem for the borrower. It is very difficult to manage public finance when you spend so much effort to identify vulnerabilities of all assets, be it a ship or account.

Over the last two years, our strategy to mitigate this really very difficult risk, was very effective, allowing us to continue in our position that was basically to say ok – ‘we gave opportunities, we received 93% acceptance. We were able to learn and explain to the financial community what it means to deal with a situation like that.

But then, a new idea emerged in the litigators’ strategy – leading to today’s process, and the principle of equal treatment, or pari passu, and this supposed right to be repaid the full nominal value of a security bought for 10 to 15% of that nominal value, while a court ruling upheld that.

Argentina is now in a situation where we have to convince the appeals court of a simple position. We did everything, and it was not free to do so, to support creditors via each debt restructuring. Many local resources are transferred to creditors each time, taken away from social or other policy priorities, and we understand that need to serve a debt, and if you cannot serve it all, then you negotiate with creditors in an equitable way.

Hence after doing all this great effort, how can it make sense that 1 or 2 per cent affect the rights of the majority, this I s a sign that something is not working, hence collective action clauses may appear to be a good solution. However, we understand them as an imperfect solution.

What happens to the stock of debt that is untaxed, what about the complexity of CAC triggers – hence it is not easy, though it is something very positive which will help many debtors in many situations

QUESTION – Yuefen Li – Trying to get the data for the vulture fund payments of original value can you elaborate.

AC: Yes, we included the costs of payment in our last filing. The return accumulated that the vultures seek is over 1,380%.

When we designed that security to work with creditors, we did it with the objective of making our creditors our partners, and if we grow, we pay more – which is what happened. Argentina over the last ten years we consolidated an average growth rate of 9% annually, and investors received their earnings. This idea of getting a repayment that reflects in no way the original outlay of investors and the risk that they took.

Josh Goodman, Bloomberg news.

The creditors last night filed with the court reflecting the latest proposal of payment ahead of the court ruling. Do you have any expectation of when the court will rule – and do you have a plan B??

Well this is perhaps not the right venue for discussing such specificities, rather to discuss how one gets into such situations.

Regarding your question regarding the uncertain framework, we have no idea what would happen formally speaking, the procedures that the court of appeal will take, are not specified. What I mean by this is they can take more time, asking for more information, asking the republic about additional information – we just don’t know.

The message for the financial community and bondholders is that our priority is to continue paying, as it is the best way to show our willingness to pay, and to show that these kinds of situations have to be handled in a different way, when 2 % can impede the rights of 98%.

EH: The two issues we see are both fairness, and of course social cost which is pertinent to many countries.

In civil society, there have long been demands for a different approach to mechanisms for workouts.

In some ways, we see a positive out of this situation which is the push to a more structured and legally clearer procedure. On the 23rd at ECOSOC there will be a whole day debate regarding this mechanism. This issue which has been discussed for many years is now gaining more prominence.

ELC: Though Ana has not joined us she is one of our foremost experts and we hope she may join us still later on.

The reality is that when a country faces a significant economic crisis, or stresses, through that process when a country can resolve most if not all of their debts we see problems down the line.

What many of us believe is that currently a fair and transparent workout mechanism. This would lead to an international bankruptcy process, allowing lender and borrower to negotiate workouts in the best interest of each party, and the following points are important to explore, and we know that low income countries now face renewed risk of debt crisis, while middle income and other states are facing them now.

Restructuring debt has become much more complicated, and the spectrum of debt crises has broadened, and now even developing and middle income states have themselves become lenders. There is a new wave of aggressive marketing by export credit agencies, while there have been expanded modes of post crisis lending. Specifically the vultures, the holdouts are attempting to get a free ride from official lenders and creditors. To deal with debt fully, we need to be able to acknowledge this debt issue, including a new framework for sovereign debt relief that addresses the realities of requiring:

  1. One single insolvency process, involving all creditors
  2. Impartiality in decision making
  3. An automatic stay on loan enforcement once a case has been filed.
  4. An impartial assessment of the legitimacy of debts and indeed lending