Argentina Debt Litigation and Implications
for Future Sovereign Defaults
Jessica Terry
ITRN 603
Spring 2014
SOVEREIGN IMMUNIT Y & DEBT
ENFORCEABILIT Y
 The principle of Sovereign Immunity has traditionally
protected sovereign debtors, making sovereign debt contracts
largely unenforceable.
 Foreign Sovereign Immunities Act (1976): Allows sovereigns to
be sued by private parties in the US justice system if the
action is based on a commercial activity undertaken in the US
by a foreign sovereign.
 Sovereign immunity does not protect sovereign debtors from
being sued by its creditors BUT sovereign immunity protects
sovereign assets and makes collection of favorable court
judgments dif ficult
ARGENTINA DEFAULT
 Argentina defaulted on $81 billion of government bonds in
2001
 Leading up to and after the default, investors specializing in
distressed debt began purchasing Argentina’s exceedingly
discounted bonds. Known as “vulture funds”, these experts
purchased the debt for pennies on the dollar with the strategy
to opt-out of any debt restructuring offers and pursue
litigation that could potentially result in highly profitable
returns.
 Pari Passu Clause: requires creditors to be paid equally and
without preference. The courts have ruled that if Argentina
makes payments on new debt it must also pay the holdouts.
 Argentina’s options: (1) pay NLM $1 .4 billion or (2) default on
over $50 million of new bonds
IMPLICATIONS
 Argentine Ambassador: “If the U.S. cour ts uphold the
complainant’s position, negative consequences will be felt by
the U.S. and the rest of the world. Sovereign debt
restructurings will be vir tually impossible in the future. What
rational creditors would agree to restructuring a debt if they
know the flow of payments can be interrupted by holdouts
through litigation?”
 Argentina has asked the U.S. Supreme Court to review the
case.
 If Argentina loses: Possibility of another default. Federal
courts become “clearing houses” for distressed debt holders.
 If Argentina wins: ( i) Bond payments to be protected by
sovereign immunity; AND/OR (ii) interpretation of pari pussu
clause overruled
POLICY PROPOSAL
 Objective: Avoid creditor holdouts from derailing sovereign debt
restructurings in the future.
 1 . Sovereign Bankruptcy Regime: attractive in theory but difficult
to implement politically. Regime would provide a framework that
strengthens incentives for a sovereign and its creditors to reach
a rapid and collaborative agreement on a restructuring of
unsustainable debt in a manner that preserves the economic
value of assets and facilitates a return to medium -term viability.
Sovereign debt would be enforceable according to international
treaty provisions.
 2. Bond Contract Reform: (i) Collective Action Clauses (CACs)
that prevent holdouts and (ii) Pari Passu clause modification or
removal.