SouthViews No. 126, 5 March 2016

Implications of Argentina’s Deal with “Super holdouts”: Need for an Urgent Revision to Bond Contracts and a Debt Workout Mechanism

By Yuefen Li

Argentina signed an agreement in principle on 29 February 2016 with four “super holdout” hedge funds including NML Capital Ltd, Aurelius Capital, Davidson Kempner and Bracebridge Capital. Buenos Aires would pay them a total of about $4.65 billion, amounting to 75 percent of the principal and interest of all their claims of Argentina’s bonds that were defaulted on during the 2001 debt crisis. The payment is to be made in cash before 14 April 2016, provided that Argentina’s Congress approves the repeal of Argentina’s domestic laws, namely the Lock Law and the Sovereign Payment Law, which prohibit the country from proposing terms to the holdouts that are better than those Argentina offered to its creditors in earlier restructurings. This deal would allow the return of Argentina to the international capital market after more than 15 years of exclusion, something that is imperative for the government to try to put the economy on a more sustainable path even though this would mean having to use a substantial part of its foreign currency reserves to pay off the holdout bond holders. Nevertheless, there are systemic implications of this deal to future sovereign debt restructurings which deserve careful examination and remedial actions. (more…)