Argentinians may be mourning their soccer team’s loss in the World Cup final, but another setback suffered by the country this summer, this one in the US Supreme Court and involving payment of bondholders, is causing consternation in both Buenos Aires and capitals around the world. The development has added urgency to a project undertaken by Professor Robert Howse and other members of a United Nations working group that is aiming to design global rules for sovereign debt restructurings.
In June, the US Supreme Court let stand a lower court ruling that requires Argentina to pay a group of hedge funds in full for their investment in government bonds that the country defaulted on in 2001. More than 90 percent of the holders of the bad debt accepted restructuring deals that would pay them about 30 cents on the dollar, but the hedge funds rejected those terms. A federal district judge in New York enjoined Argentina from making any payments on the restructured bonds until arrangements are made to pay the holdouts.
The Argentine case has created a stir around the globe, raising questions about sovereign authority, the balance of power between debtor nations and their creditors, and the functioning of markets that nations rely on to finance their deficits. A series of UN resolutions have recognized debt restructuring as a vital tool for debt crisis prevention and resolution, and in 2013 the United Nations Conference on Trade and Development (UNCTAD) formed a working group to examine the creation of a “debt workout mechanism” for sovereign debt. Howse, who is the Lloyd C. Nelson Professor of International Law, was named to the group, which includes a range of scholars and experts from universities, NGOs, and lending institutions from around the globe.
Howse says that his scholarship on sovereign debt issues emerged from his work as a Canadian diplomat in Belgrade in the 1980s, when he followed rescheduling of Yugoslav debt. Enrolling in law school, he wrote a student note on a case arising out of a 1980s debt crisis that, he says, “has some resemblances to the recent Argentina litigation.” More recently, Howse has focused on the issue of “odious debt,” debt incurred by an oppressive regime for non-public interested purposes. He has also recently written about UNCTAD’s principles on sustainable lending and borrowing, which, he notes, provide a basis for the working group’s efforts to design a sovereign debt restructuring mechanism.
The working group last met in March 2013 in Buenos Aires, in conjunction with a conference NYU Law held there on sovereign debt. Members convened again for a drafting session at NYU Law’s campus on Washington Square on July 7, just three weeks after the Supreme Court’s decision in the Argentina case.
“Intellectually, I think there is a bigger lesson here,” says Howse, referring to the bind Argentina is now in. “We need to rethink the very concept of default as a kind of ‘nuclear trigger’ event.” A sovereign debt workout mechanism, he says, could help “take the default threat off the table to allow restructuring negotiations to proceed in an orderly way, where no one can threaten to pull the plug on a country, putting it into default.”
UNCTAD says it hopes to release its first draft of a debt workout mechanism by the close of 2014.
Posted on July 23, 2014