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Argentina debt restructuring deal – 15 years too late!

By Kanad Bagchi

Argentine-flag-diveOn 28th February 2016, Argentina finally reached a settlement with the rest of its holdout creditors lead by Elliot Management in what is being hailed as ‘historic’ signalling the return of Argentina to international bond markets. While the pesky details of the settlement agreement are yet to be hammered out (at the time of writing), it is however known that in substance, Argentina has agreed to shell out a total of around $4.4 billion to the holdouts including Elliott Management, Aurelius Capital Management, Davidson Kempner and Bracebridge Capital. In sum, that represents a 25% write down of the original debt amount previously owed to the funds. While indeed, the present agreement unlocks Argentina’s financial leg room in the international capital market, thus providing a fillip to its already distressed economy, the agreement is also a manifestation of almost 15 years of desolate and futile negotiations, characterized by opportunity costs, derailed investments, scarce liquidity and immense deadweight losses leading to a general reduction in economic welfare. That apart, one wonders whether it is ethical or moral for a few set of private funds to arm-twist a sovereign into a contractual enforcement claim, that causes at best a deflection of governmental resources towards defending such claims and at worst, obstruction and hindrance in performing essential governmental functions. Moreover, in the present instance, there was every possibility that the deadlock would have continued unabated, lest for Judge Griesa’s unflinching stance towards a resolution. By indicating his disapproval for continuing with the ‘no pay-out’ injunction against Argentina, which had hitherto allowed a leverage to the holdouts in the negotiations, Judge Griesa tilted the balance in favour of Argentina, finally leading to the settlement.

Flashback to 2012 and readers will remember that Greece, during its debt restructuring phase, had similarly experienced a holdout situation characterized by a minority group of bondholders demanding for a full pay-out. It was indeed to avoid a long drawn court ligation, that Greece readily agreed to pay the holdouts in full (around €6billion), inviting criticism from various quarters for its compromising stance and for setting an undesirable precedent.

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The Ultimate Sovereign Debt Showdown: Russia & Ukraine likely to battle it out in court!

By Kanad Bagchi

Against the backdrop of acute political instability, civil war, the loss of Crimea, and a debilitating state of public finances, Ukraine remarkably secured a debt restructuring deal with its international bondholders on 27th August 2015, potentially augmenting its case for a $40bn bailout from the International Monetary Fund. The restructuring package envisaged a principal reduction of around 20% of the total $18bn debt outstanding along with a debt rescheduling arrangement until 2019. The deal has been vociferously hailed as a ‘significant milestone’ and one, which is likely to restore the ‘debt sustainability’ of the Ukrainian government. Amidst a cohort of international financial institutions, including Franklin Templeton, BTG Pactual, Rowe Price et al, agreeing to the haircut, Russia, which holds $3bn worth of those US dollar dominated bonds (just ‘bonds’ hereafter), refused to participate in the negotiations and insisted on being repaid in full. Both countries, having dilly-dallied for weeks since the initial restructuring deal, are now considering to resolve their dispute over the debt in a London court. In this regard, the bond agreements are governed by English law and are subjected to the jurisdiction of British Courts. Political skirmishes aside, this post considers some of the intricate questions connected with sovereign debt enforcement in general and speculates on the likely set of legal issues arising out of the present dispute in particular.

One of the main sticking points of the present controversy relates to the nature and scope of the bonds that were issued by the Ukrainian government, and in particular whether these count as official or private debt. The distinction is important for two specific reasons. First, Russia can validly insist on restructuring of official debt under the umbrella of the Paris Club, as opposed to the recently agreed private creditor-debtor arrangement. Second, legal defenses available to Ukraine in a debt enforcement action by Russia would vary substantially depending on the form and substance of the bonds and whether these are categorized as official or private debt.

Bilateral State Loan or Private Debt?

If the matter reaches the English courts, a ruling on the status of the debt becomes imperative. For starters, the Russian government acquired the entire 3 billion worth of Ukrainian government issued bonds, as a partial fulfillment of a previously agreed loan disbursement to the erstwhile government of Ukraine under President Viktor Yanukovych. Reports suggest that an artificially low interest rate of 5% was agreed on the bonds, when the market, admittedly was demanding far higher rates. In addition to that, a debt acceleration clause giving Russia the option of immediately reclaiming the entirety of the funds, in the event of Ukraine’s debt to GDP ratio exceeding 60%, posits an unusually compromising financing arrangement, further confounding the distinction between private and official debt. In the author’s opinion, the peculiarities of the transaction highlight the fact that the bond issue and its purchase was both creditor specific and materially distinct, in as much as the Russian initiative lacked a purely commercial motive and a profit rationale. Such unconventional issues of securities add a strategic, if not a completely official flavor to the transaction, thereby admitting a characterization of the bonds as official sector debt, regardless of its form. That said, the present indeterminacy has nonetheless stimulated an intensely polarized debate amongst academics and practitioners alike and one hopes that a court decision will infuse more clarity and coherence on an issue, which is both novel and unprecedented. (For a fuller exposition of the debate, see here and here).

Can Ukraine Validly Resist Debt Enforcement by Russia Assuming that Debt is ‘Official’?

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