In a clear and tough decision, the U.S. Second Circuit Court of Appeals has ruled against Argentina in its legal battle against holdout creditors. A good analysis is here.
A few initial takeaways:
1. End-game for Argentina. While the decision is stayed pending an ongoing Supreme Court appeal, the message seems clear: If Argentina wants to pay other bondholders, it must pay the holdouts in full (ratable payments). The contracts are clear and Argentina’s behavior has been unacceptable to the courts. As Argentina has publicly committed to not paying the holdouts, it’s hard to see how they maintain payments on other debt. A broad default would have potentially profound consequences for the Argentine economy. Argentina’s debt prices were broadly stable after the ruling, presumably reflecting that payments can still be made pending the Supreme Court review. I’m surprised, as the longer term outlook for the debt isn’t good.
2. Legal risk for counterparties. If a third party assists Argentina in evading this ruling, they are subject to legal action. While they can explain themselves, it is hard to see why a bank would want to be a financial counterparty (e.g., a fiscal agent) and take on this kind of legal risk. This has a chilling effect on Argentina’s ability to deal with international financial markets.
3. A big deal for the broader market? Much of the interest in this case has revolved around the ruling’s implications for future restructurings elsewhere. Does this remedy, and this interpretation of the pari passu clause, encourage holdouts globally? In this regard, the ruling goes to some length to stress the special circumstances at play here, including Argentina’s non-compliance with past court rulings, as well as the specific (and unusual) formulation of Argentina’s pari passu clause. At the same time, the arguments here are already spilling over to other cases, as noted here. Redrafting clauses going forward also doesn’t deal with the legacy of old debt, and in this regard collective action clauses on specific bonds aren’t a solution. We will have to wait to hear from the lawyers, but at this point my bottom line is that the global implications appear modest. Countries that are acting in good faith, and have better contracts, will still have holdouts (maybe more now) but can still get their restructurings done and achieve the needed financial relief.