Argentina and the Holdouts, 2001–2016Hard

A sovereign default, two exchanges accepted by most holders, and a minority that refused — and won, because one clause in a New York-law bond had no majority mechanism behind it.

3 min read · 471 words

What happened

• December 2001 — Argentina defaults on a large stock of foreign-law bonds.
• 2005 and 2010 — two exchange offers are made. Together they are accepted by holders of roughly 93% of the defaulted debt, who take new bonds worth substantially less than the old.
• A minority refuses both and litigates in New York, where the bonds were governed.
• 2012 — a US court reads the pari passu clause to require that if Argentina pays the exchange bondholders, it must also pay the holdouts rateably; injunctions follow.
• 2014 — Argentina is unable to pay the exchange bondholders without also paying the holdouts, and a payment default follows. 2016 — a settlement is reached and the country returns to the international market.

The mechanism

• A bond is a contract, and the governing law is not a formality. Domestic-law debt can be changed by domestic legislation; foreign-law debt cannot, which is the whole of the difference.
• Without a collective action clause, payment terms need every holder. That gives any single holder a veto over a restructuring the rest have accepted — the collective action problem in its purest form.
• The pari passu clause had been boilerplate for decades. A reading nobody had relied on turned an equal-ranking covenant into a payment obligation.
• The injunction worked through the payment system. It was not enforcement against a sovereign's assets, which is nearly impossible, but against the intermediaries that process the coupon.
• Compare the Greek exchange, where most bonds were domestic-law and a collective action clause was legislated in retrospectively.

What it teaches

• Read the governing law before the coupon. It decides what can be changed and by whom.
• A high acceptance rate does not finish a restructuring unless the instrument has a mechanism to bind the rest.
• Boilerplate is not inert. A clause that has never been litigated has never been tested, which is a different statement from being safe.
• The market's response was drafting. ICMA's model aggregated collective action and pari passu clauses, published in 2014, are the direct consequence.

The mechanisms behind this

Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:

• Distressed exchange — the mechanism both offers used.
• Sovereign syndication — how a state issues, and under which law.
• Greece, 2012 — the same problem, solved by legislation.
• The restructuring desk — holdouts and the court processes that bind them.