Since the Supreme Court decided that it would not hear the strange sovereign debt case between Argentina and a Paul Singer-led group of hedge funds, and academics, technocrats and the like have worried that a dangerous precedent has been set.
The country’s stock market did, after all, take a serious nose dive immediately after the ruling.
“We have said in the past, the Fund remains deeply concerned about the broad systemic implications that the lower court decision could have for the debt restructuring process in general,” said Gerry Rice, director of the International Monetary Fund’s Communications department earlier this month.
So what are these implications he and his organisation are so worried about?
To get that, you have to understand the case. Back in 2001/2002, Argentina collapsed. Its debt turned into junk — something “no one would want to buy,” as Argentina’s own president said on TV Monday night.
But many investors, especially hedge funds, did buy the debt believing that it would increase in value as Argentina put its house in order. It is, after all, a very rich country when it wants to be.
Recovering from default, however, takes time. In both 2005 and 2010 92% of Argentine bondholders restructured the debt, taking 30 cents on the dollar, in order to move the process along a bit and get money over time.
Paul Singer and his company did not. They waited to get the entire pie.
Argentina believes that isn’t fair. Paul Singer believes he needs to get his money yesterday. According to Argentina’s deal with the “exchange bondholders” (the ones who took a haircut) the country can’t negotiate with Singer unless it absolutely has to (i.e. faces default, as it does now) until 2015.
So you see the problem. Why should anyone restructure their debt if they can just play a waiting game, like Singer, and get 100 cents on the dollar. If this holds, poor countries facing default will have no mercy. Argentina, for its part, may need to print money to pay Singer back, devaluing its currency and punishing its own people.
No one wants that, especially not organisations like th IMF that have to bail poor countries out.
Now, the thing is, these days sovereign debt agreements like this one tend to have Collective Action Clauses (CACs) which state that if a certain percentage of bondholders agree to take a haircut in a given series of debt issuance, everyone has to.
But there are exceptions. Back in 2012, economist Nouriel Roubini pointed out one very important one — Greece.
In Greece’s case, Roubini pointed out, the CACs don’t go far enough. You don’t just need every investor in every series to accept, you need to make it so that every investor, in every series, in every legal jurisdiction accepts. For example, some of Greece’s debt was issued in Greece, under Greek legal jurisdiction — so potentially more favourable to the debtor, and some of the debt is issued in the United Kingdom — potentially more favourable to the creditor.
Imagine slugging that one out in court.