Apr 11, 2024 - Economy

How Argentina's debt crisis changed the sovereign debt market

Illustration of the sun from Argentina's flag looking scared and hiding.

Illustration: Shoshana Gordon/Axios

It's been nearly a decade since hedge fund Elliott Management's 15-year battle royal with the government of Argentina — and advocates, investors and legislators are still trying to prevent a repeat.

What they're saying: "There are bad actors in this field," says New York State Senator Gustavo Rivera, who has introduced legislation to combat so-called predatory sovereign lenders who he compares to "Goodfellas" types: "F-you, pay me."

The big picture: In broad strokes, the bill would provide a few ways to force sovereign bondholders to accept less money than they want in a restructuring — a process known as a cramdown — when the bonds at issue are governed by New York law (which is about half the market).

  • But critics say that while well-intentioned, it could inject new uncertainties into the market, and penalize the investors who provide nearly all the private sector lending to emerging market economies. That could lead to higher borrowing costs for these countries.
  • At stake: The humans caught in the middle when a drawn-out restructuring prolongs their country's economic pain.

The background: In one of the most infamous Wall Street brawls of the aughts, Paul Singer's Elliott Management was an Argentina creditor that refused to sign on to a restructuring deal that most of the other creditors had agreed to — effectively holding the country's finances hostage.

My thought bubble: Vulture holdouts of the Elliott-Argentina variety in sovereign debt restructurings aren't really a thing now. That's a battle that markets have fought, and largely won, via innovations in bond contracts that allow for cramdowns — and were catalyzed by the Argentina fracas.

  • But Rivera is animated about taking on vultures, whom he compares to payday lenders, and he doesn't think "market solutions" work. The term makes "the hair stand up on the back of my neck," he says.
  • His motivation also seems much bigger than addressing holdout legal procedure — or even than what could be accomplished in the confines of New York law. He wants to reset the relationship between borrower and lender.

He points to his native Puerto Rico, which went through a grueling bankruptcy starting in 2016 and still needs to wrap up the debt restructuring of its state-owned power company.

  • "The decisions that had to be made by the government of Puerto Rico, to be able to pay back what was demanded of them by the vulture funds that lent to Puerto Rico, meant that schools had to close, meant that state agencies would have to get rid of employees," he said.
  • Decisions "that were more about the financial benefit of the folks who are lending them money, as opposed to the people who they need to serve. That's what I'm talking about here."
  • As such, his proposed bill "reorganizes the conditions under which restructuring happens," he added.

Reality check: It's worth unpacking Rivera's comments, and the way they relate to what his bill could feasibly accomplish.

  • The bill requires debtor countries to choose one of two options: Reorganize under a new, bankruptcy-like procedure overseen by an independent monitor (with cramdown capabilities); or force private sector bondholders to accept the same treatment that official sector creditors (i.e. other national governments) receive.
  • For its part, Puerto Rico did have a formal legal process to oversee its bankruptcy — it's a U.S. territory, after all — which appears analogous to the bill's first option. Taking a page from the U.S. bankruptcy code, it allowed holdouts to be bound to a restructuring plan as long as other impaired creditors signed onto said plan.
  • The presence of that legal framework wasn't a mechanism for preventing immense pain and suffering on the island stemming from the government's financial distress — the debt problem was bigger than that.

Between the lines: Incumbent market participants can of course be counted on to oppose anything that may cut into their returns, or inject uncertainty into the market.

  • Groups representing firms like mutual funds and insurance companies have outlined their concerns; so has Cleary Gottlieb, a law firm that tends to represent the borrowing countries.
  • Whether their worst fears would play out if the bill became law, we don't know. At the very least, sovereign bond deals would migrate to London.

Zoom out: What everyone does agree on is that the restructuring process needs to be fixed.

  • Zambia defaulted three years ago and is only now entering the final stretch of restructuring talks. The protracted process has kept it from investing in its economy and from dealing effectively with a drought that's devastated its agricultural sector.
  • China was widely reported to be holding up the Zambia process, but the bill does little to compel official sector creditors since they aren't bound by New York law.
  • When asked who the holdout creditor was in Zambia that this bill, were it in place, would have addressed, Rivera answered: "Paul Singer. That's the type of guy I'm talking about."
  • (Fun fact: Singer and Elliott weren't known to be involved in Zambia.)

Go deeper ... IMF: N.Y. bill could "prolong and complicate" sovereign debt restructurings

Go deeper