The sovereign debt dispute involving Argentine bonds has attracted substantial attention and raised a number of novel and significant legal issues. This short essay provides a brief overview of this controversy.<\/p>\n
In 2001, the Republic of Argentina experienced a severe economic crisis. Inflation rose to over 40%, the stock market lost 60% of its value, and nearly half of the population was living below the poverty line. In response, Argentina declared a temporary moratorium on payments on more than $100 billon of public external debt. In 2005 and 2010, the government offered to exchange the defaulted bonds for new debt instruments, worth approximately 30% of the original bonds. Most bondholders accepted the new terms, and these agreements covered 92.4% of the debt.<\/p>\n
Several hedge funds that had purchased Argentine bonds on secondary markets refused to exchange their defaulted bonds for new securities. Instead, they filed lawsuits to collect the debt in full, plus interest. By 2014, these firms obtained final judgments in a U.S. court totaling nearly $2.4 billion.<\/p>\n
In some of these actions, the court relied on \u201cpari passu\u201d clauses in the bonds, providing that the obligations in the original bonds would rank equally with Argentina\u2019s other foreign debt obligations, to preclude Argentina from paying the exchange bondholders unless it also paid the hedge funds in full, and entered an injunction to this effect. The broad injunction covered not only Argentina, but also third parties, such as banks who act as intermediaries in making payments on Argentinian obligations. In June 2014, the U.S. Supreme Court denied Argentina\u2019s petition for certiorari.<\/p>\n
Payments to exchange bondholders were due June 30, 2014. In late June, Argentina deposited over $500 million, the amount of interest it owed to those bondholders who had agreed to new terms, with Bank of New York Mellon (BNY), the bondholders\u2019 indenture trustee. However, Argentina refused to make payment to the hedge funds, because they had not agreed to new terms. As BNY was subject to the court\u2019s injunction, it did not distribute payments to the exchange bondholders, and Argentina was declared to be in default.<\/p>\n
In fall 2014, Argentina sought to replace BNY as the trustee with a state-owned bank in Argentina. The federal district court judge declared that this effort was \u201cillegal and cannot be carried out,\u201d and found Argentina to be in contempt of court. Argentina\u2019s foreign minister denounced the contempt order as a \u201cviolation of international law.\u201d In August 2014, Argentina filed suit against the United States at the International Court of Justice; however the case will only proceed if the United States consents to jurisdiction \u2013 a highly unlikely development.<\/p>\n
When private firms default, domestic bankruptcy procedures typically provide for an orderly resolution among creditors and the debtor. By contrast, no formal bankruptcy system exists for sovereigns.<\/p><\/blockquote>\n
Among other issues, the Argentina sovereign debt dispute raises questions about whether the informal system that has developed \u2013 in which states attempt to restructure their debt with creditors, typically integrating debt relief with new financing and economic policy adjustment \u2013 is still viable, or whether a new, multilateral mechanism is needed. Given the trillions of dollars directly or indirectly affected by the integrity of sovereign debt and the ability to restructure that debt, Argentina\u2019s case could truly prove to be the case of the century.<\/p>\n","protected":false},"excerpt":{"rendered":"
The sovereign debt dispute involving Argentine bonds has attracted substantial attention and raised a number of novel and significant legal issues. This short essay provides a brief overview of this controversy. In 2001, the Republic of Argentina experienced a severe economic crisis. Inflation rose to over 40%, the stock market lost 60% of its value,<\/p>\n","protected":false},"author":5,"featured_media":212,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[47,8,19],"tags":[],"coauthors":[48],"class_list":["post-210","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bankruptcy","category-faculty-authored","category-finance","masonry-post","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"\n
Sovereign Debt and the \u201cTrial of the Century\u201d - The Temple 10-Q<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/law.temple.edu\/10q\/sovereign-debt-trial-century\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Sovereign Debt and the \u201cTrial of the Century\u201d - The Temple 10-Q\" \/>\n<meta property=\"og:description\" content=\"The sovereign debt dispute involving Argentine bonds has attracted substantial attention and raised a number of novel and significant legal issues. This short essay provides a brief overview of this controversy. In 2001, the Republic of Argentina experienced a severe economic crisis. 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