Last week the negotiations between Argentina and its creditors were locked within pennies of reaching an agreement. In addition to the financial differences, there are significant legal differences between the parties. In their latest counter proposal, creditors demanded that the new bonds they receive with the swap be issued with the indenture of the bonds issued in 2005, which would imply a step back in the contractual infrastructure applied by international finance since 2014.
One of the first to speak out against this setback, in addition to Argentina's Finance Minister MartÃn GuzmÃ¡n - for whom a deal under such conditions is unacceptable - was Mark Sobel, a former U.S. Treasury official who in the last decade has driven the development of the new legal architecture to minimize the risk of default and restructuring processes becoming "messy". In the past, this resulted in endless lawsuits that served as fertile ground for the emergence of vulture funds.
After significant lobbying in international organizations for a statutory solution through a supranational bankruptcy court for sovereign debt crises, it was proposed that future debt issues should already have built-in mechanisms that would emulate what a court of law might do. Thus the Enhanced Collective Action Clauses (CACs) of the International Capital Market Association (ICMA) emerged. Over the years they have been further developed. As a result, Europe has already decided that the latest contractual innovations will apply to its sovereign debts from 2022 onward.
Sobel, who represented the United States at the IMF until 2018 and is currently the country director of the Official Forum for Financial and Monetary Institutions (OMFIF), a London-based think tank, agreed to an interview with La Politica Online in which he warned that the application of the collective action clauses that were in force in 2005 could set a "damaging precedent" for the upcoming restructurings that will follow the pandemic.
What are your concerns about creditors seeking to use the 2005 indenture?
First, let me be very clear, my interest is not about Argentina. Also, I am not weighing in on the financial discussion between creditors and Argentina. My interest is in seeing that enhanced collective action clauses are used in any restructuring, thereby supporting the orderliness and predictability of the sovereign debt restructuring process for all countries.
There is no global sovereign bankruptcy mechanism currently, nor do I think - for better or worse - that one is likely anytime in the foreseeable future. Hence, from the standpoint of pragmatism and realism, the challenge is to better mimic bankruptcy in a contractual framework. The so-called International Capital Market Association (ICMA) clauses, which allow for "single limb" aggregation and thus the possibility for better binding all creditors into a restructuring, are an important advancement to that end. These enhanced collective action clauses (CACs) were developed in 2014 by an international group that I chaired.
They were endorsed by the G20, IMF, and private sector. They were launched 5 years ago. They are now included in about 50 percent of the existing stock of all foreign law sovereign bonds and almost all new issuance. This is an important achievement.
Can you elaborate on your concerns on this particular case and possible drawbacks?
Disorderly sovereign debt restructurings are in nobody's interest. For a country, disorderliness makes it harder to resume normal economic activity, secure investment and regain market access. That creates greater hardship for workers and citizens. For investors, predictability is beneficial in securing returns and restoring normal relations.
If a small minority of creditors do not participate in a restructuring and are able to secure higher returns than those who do, will creditors who did participate have as strong an incentive to join in future restructurings? If not, what will that do the orderliness and predictability of the sovereign debt restructuring process and the lives of citizens?
Could this demand be just a bluff to claim a higher interest rate on the new bonds?
Again, I have no wish to get drawn into the negotiations. My only interest is in seeing that any deal faithfully uses the G20/IMF/private sector endorsed ICMA enhanced collective action clauses. These clauses are now the clear international standard. Argentina and creditors should adhere to that standard.
When the enhanced clauses were designed, did you ever picture the current scene as plausible?
The clauses were designed to promote balance between creditors and issuers. They include very strong protections - such as a high voting threshold and uniform offers to creditors - to uphold creditor rights. The balance that was struck was and remains a good one.
Of course, one never has a crystal ball and it is not uncommon for creditors to pursue aggressive strategies. At the same time, there have been sharp criticisms of Argentina's so-called Pacman and re-designation strategies for using the 2016 indentures.
Again, I urge Argentina and creditors to use the ICMA clauses as they were intended.
(Guzman's original proposal had some modifications to the bonds' indentures that allowed the debtor, on the one hand, to reserve the right to expel a bond series from the voting pool after the votes had been cast. By this â€˜redesignation' of the pool, the â€˜rules of the game' could be changed by one of the players in their sole interest. And on the other hand, the new issuance indenture would permit the repetitive use of the single-limb procedure in order to sweep up dissenting creditors, which is known as the â€˜Pacman strategy'.)
If you had known creditors would ignore the enhanced clauses designed to support the contractual framework, would you have considered giving statutory approaches a chance to solve the debt crisis situations?
I am not wading into the question of who is ignoring the enhanced clauses. I think a statutory approach or a global sovereign debt restructuring mechanism is unrealistic, especially from America's standpoint. I much doubt there is appetite for pursuing an international agreement that could result in a supranational body having the authority to supplant core US sovereign decision making or judicial authority. Such An agreement would require Congressional approval, and I doubt you'd find any appetite there. There would also be concerns about whether the mechanism would be politicized. In contrast, as I noted, as a matter of realism, the enhancement of the contractual framework offered better prospects to mimic domestic bankruptcy proceedings and create orderliness.
That said, I have little doubt that if the enhanced clauses are not used in Argentina's restructuring, there might well be renewed calls, for example in the UN General Assembly, to create a global sovereign debt bankruptcy court. Fairly or unfairly, creditors would likely get disparaged in the process. That should be another incentive to use the enhanced ICMA clauses.
Do you foresee a return to the previous 2005 CACs?
As I mentioned, almost all emerging market issuers now use the ICMA CACs. Europe will allow for the use of single limb aggregation starting by 2022. I would be deeply concerned if the current Argentine/creditor discussions did not use the ICMA CACs and thereby set a harmful precedent for other country restructurings, of which there could be a good number in the wake of the coronavirus. Of course, other countries seem to have consistently better relations with their creditors and it is thus difficult to gauge the potential for any such contamination from current Argentine/creditor talks.
Still, the best and simplest way to deal with this situation would be for Argentina and creditors to use the ICMA clauses. Argentina is a member of the G20 and the IMF. Argentina and its creditors should stick to the internationally agreed enhanced CAC standard in any deal. That is in everybody's best interests.
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