Sovereign Debt Litigation in Argentina: Implications of the Pari Passu Default

Abstract

On 31 July 2014, Argentina defaulted on its sovereign bonds for the second time in the 21st century. It was also its eighth default since independence1; at such frequency, this was perhaps not an especially noteworthy event. What made it so extraordinary was not that another domestic financial crisis triggered the payment default, but rather an injunction handed down by a federal district court in New York. However, despite public outrage, the wider impact of this decision is likely to be limited. That is even more so if reforms that have already started continue to be implemented. The case dates back to Christmas Eve 2001, when the interim Saa administration declared a payment suspension on foreign debt.2 The first scheduled payments affected by this decision were due in January 2002. Only weeks later, in March, the first lawsuits by American investors against the Argentine government were filed in US courts (see Figure 1). But a real rush to the courthouse took place from September 2003 onwards, when the first details of the intended debt restructuring were published. With a present value loss (‘haircut’) for investors of approximately 90 per cent, they were considerably harsher than most bond exchange offers since the 1990s, which saw average haircuts of 35 per cent.3 A debt exchange finally took place in June 2005 with a haircut of approximately 77 per cent. About 76 per cent of creditors accepted the offer, later increased to slightly more than 90 per cent after a reopening at identical terms in 2010. Afterwards, Argentina resumed payments to participating investors on the new ‘exchange’ bonds, but refused to make any payments to the ‘holdout’ creditors who kept the original bonds. Figure 1. Lawsuits filed since 2002. Cumulative nominal claims in litigation against the Republic of Argentina, Provinces of …