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The holdout bondholders found themselves unable to seize Argentine sovereign assets in settlement,  but realized that Argentina had omitted to provide for holdout situations and had instead deemed all bonds repayable on pari passu equal terms that prevented preferential treatment among bondholders. Although the media widely reported that the default ended with payments to the principal bondholders in early , during the presidency of Mauricio Macri , several hundred million dollars in outstanding defaulted bonds remained unpaid, which resulted in continuation of litigation.
Around to , Argentina's economy went into severe recession. Large-scale debt restructuring was needed urgently, since the high-interest bonds had become unpayable. The Argentine government met severe challenges trying to refinance its debt, however. Creditors many of them private citizens in Spain, Italy, Germany, Japan, the United States, and other countries, who had invested their savings and retirement pensions in debt bonds denounced the default; this included bondholders from Argentina itself, estimated to compose about a fourth of affected bondholders.
Individual creditors worldwide, who represented about one third of this group, mobilized to seek repayment following the default. This created a further incentive to not only trigger a default against Argentina; but also to undermine the value of the bonds themselves, as the CDS would pay out at a higher rate if the defaulted bonds decline to extremely low values. The vulture funds held out for payment in full via litigation hence their common description as "holdout" bondholders, or "holdouts". Their legal tactics included seeking injunctions to attach future payments to other bondholders by way of forcing Argentina to settle.
DTIC ADA Argentina's Defaulted Sovereign Debt: Dealing with the Holdouts
In August , the Government of Argentina lost a U. Consequently, Argentina has been paying debt from central bank reserves, has banned most retail purchases of dollars, limited imports, and ordered companies to repatriate money held abroad. In , Argentina defaulted on its foreign debt. The majority of the Argentine bond market thereafter became based on GDP-linked bonds , and investors, both foreign and domestic, netted record yields amid renewed growth. During the restructuring process, the International Monetary Fund was considered a "privileged creditor", that is, all debt was recognized and paid in full.
Crs Report for Congress: Argentina's Defaulted Sovereign Debt: Dealing with the Holdouts
During Argentina shifted from a policy of constant negotiation and refinancing with the IMF to payment in full, taking advantage of a large and growing fiscal surplus due to rising commodity prices and economic output, with the acknowledged intention of gaining financial independence from the IMF. The debt was in fact denominated in special drawing rights SDR; a unit employed by the IMF and calculated over a basket of currencies.
The Argentine Central Bank called on the Bank for International Settlements in Basel, Switzerland , where a part of its currency reserves were deposited, to act as its agent. The BIS bought 3. This disbursement represented 8. The initial announcement was made in a surprise press conference. President Kirchner said that, with this payment, "we bury an ignominious past of eternal, infinite indebtment. Snow said that this move "shows good faith" on the part of the Argentine government.
Local criticism of the IMF debt paydown centered around the cost, which made funds unavailable for productive purposes within Argentina or to come to terms with outstanding creditors; and second, that the government traded cheap IMF credits for new emissions of public debt at much higher interest rates. The Central Bank's reserves surpassed their pre-payment levels on September 27, The final settlement of the debt exchange took place on August 11, for bondholders that didn't participate in the early tranche that closed on May 14 and settled on May During the s NML Capital's lawyers initially obtained several large judgments against Argentina, all of which were affirmed on appeal.
These rulings found that the holdout bondholders in the case were entitled to be repaid the full face value of the bonds they held, rather than alternative amounts such as the reduced settlements negotiated in and , or the amounts they had purchased the bonds for.
After defaulting, Argentina continued to pay its renegotiated bondholders, but not the holdout bondholders who had rejected settlement. The holdout bondholders soon discovered that due to a number of sovereign immunity laws, it was impossible to actually enforce their judgments by seizing the handful of Argentine assets still within the reach of U. Before , Elliott successfully appealed the case to the UK Supreme Court , which ruled that Elliott had the right to attempt to seize Argentine property in the United Kingdom. The basis of the holdout bondholders' next approach arose from oversights on Argentina's part, due to both its economic history and partly from the legal wording chosen by the Argentina's government.
Because Argentina had been historically so unstable, it would have been difficult for it to solicit investors to buy bonds in Buenos Aires under Argentine jurisdiction, as few external investors trusted Argentina courts to enforce bonds against their own government. This consideration led Argentina to transfer the issue of bonds to New York, under United States law, on April 20, , as were most subsequent bond issues.
In the Fiscal Agency Agreement, Argentina's attorneys included a boilerplate pari passu clause, but neglected to include a collective action clause. Pari passu is a term generally used to signify equal priority or treatment, and a collective action clause would have obligated any holdouts to accept the generally offered terms if enough other bondholders agreed to accept them. As a result, the holdouts realized that while Argentina could not force the holdouts to accept the terms in the or restructurings, NML could use the pari passu clause to force Argentina to choose between paying all its bondholders including NML or none of them.
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Federal district judge Thomas P. Griesa was assigned to hear the case. The crucial expression pari passu had not previously been interpreted in any published decision by the courts of the state of New York , but there is no way in U. By way of contrast, if NML Capital had sued Argentina in a New York state court, Argentina would have had the option to " remove " the case to federal court. Instead, the district court was required by Erie Railroad Co. Tompkins to make an " Erie guess " as to how a New York state trial court would interpret that clause by applying general principles of contract law in the state of New York as articulated in the published decisions of the New York Court of Appeals and the New York Supreme Court, Appellate Division.
The district court ruled in NML Capital's favor and issued broad permanent injunctions against Argentina and the bond trustee. Court of Appeals for the Second Circuit the federal appellate court with jurisdiction over New York in turn affirmed the district court's interpretation, but did not exercise its optional right to certify that specific issue to the New York Court of Appeals for a ruling on New York state law.
The Second Circuit interpreted this clause under New York law and concluded "that in pairing the two sentences of its Pari Passu Clause, the FAA manifested an intention to protect bondholders from more than just formal subordination Thus in affirmed on appeal , the courts ruled that paying the settled bondholders but not the holdouts was a breach of Argentina's agreement and discriminated against the holdout bondholders. Furthermore, the Second Circuit held that the trial court's injunctions did not violate Argentina's sovereign immunity because they merely enforced the prohibition against both formal and informal subordination of any part of the debt to any other debt: In other words, the Injunctions do not transfer any dominion or control over sovereign property to the court.
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As of February , after further decisions by the district court, the case came again before the Second Circuit. On August 23, , the Second Circuit in another opinion also signed by Judge Parker affirmed the lower court's latest ruling clarifying the scope of the permanent injunctions. After refuting all of Argentina's arguments on the merits, the Second Circuit concluded: We believe that the interest — one widely shared in the financial community — in maintaining New York's status as one of the foremost commercial centers is advanced by requiring debtors, including foreign debtors, to pay their debts.
Notably, when it came to looking at big-picture public policy issues, both Second Circuit opinions examined them only through the lens of federal procedural law i. Although New York recognizes several defenses to the enforceability of a contract like unconscionability , those defenses are usually available only to the weaker party at the time of contract formation, the party who did not write the contract i.
If those defenses are unavailable for example, because the party resisting enforcement was the one who wrote the contract , New York courts will mechanically enforce the plain language of a contract regardless of its harshness because "a court is not free to alter the contract to reflect its personal notions of fairness and equity. The United States Supreme Court repeatedly denied Argentina's petitions for certiorari, on October 7, and June 16, ,  meaning that it was effectively refusing to hear Argentina's appeals from the Second Circuit's decisions.
On the same day it denied to review the injunction, the U. Citigroup, which has operations in both New York and in Argentina, was caught in the middle, being required to conform to both New York and Argentine law, an international conflict of law. The trial court has granted temporary relief to the bank, allow payment of a few of the interest payments due to holdout bondholders,  but the obligation to repay all holdouts as the cost of continuing to service Argentine bonds had resulted in a decision to terminate its Argentine debt servicing operation absent legal relief.
The Pari passu ruling had a grave impact on Argentina's route out of economic difficulty.
Argentine debt restructuring
The issue perceived by Argentina was that the agreement also included a " rights upon future offers " "RUFO" clause. The effect of such a clause was that, if a later settlement paid more, or on better terms, all existing settlements would be repaid on the improved terms.
This was intended to reassure bondholders that it was safe to settle early, and reduce the incentive to hold out for a better later offer.