Nouriel Roubini has an interesting paper out on how New York Judge Thomas Griesa’s ruling on Argentina’s sovereign debt payments could impact the entire world, especially Greece.If you’re just tuning in, Argentina has all but lost a lawsuit against it spearheaded by hedge fund billionaire Paul Singer. Singer bought Argentine bonds in 2001 when the country’s economy collapsed and he wants all his money for them.
Argentina refuses to pay him, though, saying that he didn’t take the opportunity to restructure that debt in 2005 and 2010 like most other bondholders did.
Last week, Judge Griesa sided with Singer. Argentina is appealing, but it’s not looking good.
Business Insider has already touched on what this means for the sovereign bond market. In a nutshell, what’s the point of restructuring if you (a creditor) can hold out and get more money? In Argentina’s case, as in any case, it pits creditor against creditor.
Argentina made this argument, but Judge Griesa essentially replied that this is an argument that has never been settled before, so they just need to deal with his interpretation of the law.
And he’s right, there’s no hard and fast rule about this issue. Most bond agreements now, though, have collective action clauses (CACs) that stipulate if a majority of bondholders accept the terms of a restructuring, those terms into effect (meaning one Paul Singer couldn’t object to restructure and ruin things for the whole lot).
Now there are some problems with this. For one, a lot of sovereign debt agreements made over the last several years don’t have CACs, so any conflict has been decided by the market and/or the Courts (which we’re seeing can obviously get ugly).
Nouriel Roubini makes another point, though, that applies to Greece. The CACs don’t go far enough, he says, because they need aggregation clauses — clauses that would apply terms accepted by a majority of creditors across an entire series of debt (think: Argentine bond 1 and then the new reissued bonds).
This is where Greece comes in. In Roubini’s view, it needs a super-aggregation clause because its bonds have been issued in different legal jurisdictions. The first issue was in a Greek jurisdiction (obviously more favourable for the country), and the reissued bonds are in the UK legal jurisdiction (potentially more beneficial for the creditors).
The super-aggregation clause would bring every bond issue under the same legal jurisdiction. Greece’s new agreement, however, does not have such a clause.
So, in the almost certain event that Greece needs more official sector or public sector help to make its debt manageable, Roubini points out that the country and its official sector creditors may need to engage in an expensive debt buyback program (from private creditors).
Naturally, the country will want the best deal it can get, and normally it would use a CAC to do that. However, since its bonds have been issued in two different legal jurisdictions, and the U.K. is going to be tougher than Greece, if a U.K. judge interprets the law like Judge Griesa, Greece could be in expensive trouble.
In short, it could be a hot mess.