LatinFinance - November/December 2014 - 60

PARTING
SHOT
The decision on Argentina's restructured debt exposes a
large gap in the international financial architecture, says
economist José Antonio Ocampo

Think again
The implications of US Judge Thomas Griesa's rulings on the
holdouts of Argentina's 2005 and 2010 debt restructurings continue
to reverberate. The case passed from the New York appeals court,
to the decision of the US Supreme Court not to review the case, to
Judge Griesa's recent declaration of Argentina in contempt of court.
The original decision was absurd in many ways. First, it does not
make any economic sense. Bonds that carry high risk premiums do
so because buyers are subject to the risk of default. It therefore goes
against the logic of how markets operate to force the payment of the
original terms when that risk has materialized.
Second, the interpretation of the pari passu clause that was
the subject of the ruling was unreasonable according to most
analysts. This clause is supposed to guarantee equitable treatment
of creditors. But Judge Griesa's interpretation generated a massive
inequity against the 92.4% of bondholders who had restructured
their bonds, by making payment to them conditional on Argentina
accepting the original terms for 1% of bondholders.
Third, payments of restructured bonds were blocked until
payments are made to the holdouts. This was applied to bond
contracts that were made not only under US but also under UK and
Argentine laws. This aspiration to extraterritoriality is unacceptable
in a well-ordered international system, in which rulings should only
apply under national borders, unless they are based on international
law, which is not true in this case.
The ruling has costs for Argentina, which could have used access
to international capital markets under favorable conditions, given
its low external debt ratios. Negotiating with the holdouts was
made more difficult by giving excessive leverage to them. More
importantly, as Argentina has correctly argued, an agreement with
1% of bondholders would have implications for the whole debt, and
could destroy the advantage that the restructuring generated in
terms of reducing the debt burden.
In this regard, Argentina is an example of what a good debt
restructuring should do: create favorable conditions for the country
to grow and for creditors to share in that growth. Despite its recent
difficulties, Argentina grew at close to 6% annually between 2003
and 2013, and restructured bondholders shared in those benefits, as
part of the interest payments were linked to GDP growth.
But beyond the effects on Argentina, the ruling has systemic
implications, as the IMF argued in 2013. The reason is simple: it
destroys the incentive of any bondholder to participate in the future

60 L ATINFINA NCE.COM - November/December 2014

in debt restructuring or even
in what the IMF now calls
debt re-profiling - essentially
a maturity extension.
The systemic implications
are why the International
Capital Markets Association
(ICMA) and the IMF have
responded by suggesting
that the pari passu clause
should be redrafted in
a manner that does not
allow for Judge Griesa's
absurd interpretation of
it, and by including even
better collective action
clauses that would allow
the accumulation of debt
contracts and stop a
minority of bondholders
from blocking a debt
restructuring agreed with
the majority of them.
However, the new
contractual solution may not
be enough because Judge
Griesa's ruling eliminates the
incentive for bondholders
to renegotiate. So, it is
time to go back to the table
and attempt to create a
multilateral sovereign debt restructuring mechanism. This is what
the IMF attempted in 2001 to 2003. The UN General Assembly has
taken the lead now, by approving on September 9 a resolution that
calls for such negotiations. This is the opportunity to fill an immense
gap in the international financial architecture. LF

"THE RULING
DESTROYS THE
INCENTIVE OF ANY
BONDHOLDER TO
PARTICIPATE IN
THE FUTURE
IN DEBT
RESTRUCTURING"

José Antonio Ocampo is professor of professional practice in
international and public affairs at Columbia University, former UN
under-secretary general for economic and social affairs, and a former
finance minister of Colombia
http://www.LATINFINANCE.COM
LatinFinance - November/December 2014

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