Last Friday, the International Monetary Fund (IMF) Board of Governors voted to censure Argentina for failing to revise its widely-disputed inflation data. Censure by the IMF is historic for a G20 member—having never occurred previously—and will likely harm Argentina's already-limited access to foreign capital. If Argentina does not provide new inflation data and implement “remedial measures” stipulated by the IMF by September 29, 2013, the country could face further sanctions, including expulsion.
But the IMF is not the only adversary that the Argentine government is currently facing, and Argentina’s censure by the Washington-based lender further underscores other challenges looming on the country’s horizon. If Argentine President Cristina Fernández de Kirchner can afford to ignore the IMF, the same cannot be said of Argentina's legal battle over sovereign debt restructuring.
Since 2010, approximately 92 percent of Argentina’s total debt of $136 billion (or 44 percent of GDP) has been restructured—something the Argentine government hails as a great justice, since most of the debt was incurred during Argentina's years of military dictatorship. However, the limited number of “holdouts” who refused the renegotiated terms are now involved in a legal tug-of-war over whether Argentina can continue to pay renegotiated bondholders without paying them first. While the holdouts on the debt only represent a small percentage of its entire value, their demands to be paid on equal footing as the other bondholders could force Argentina into default.
Ripple effect on debt renegotiations
The October 2012 court ruling obtained by hedge fund NML Capital to impound the Argentine navy frigate ARA Libertad in the Ghanaian port of Tema—eventually overturned in December by order of the UN International Tribunal for the Law of the Sea— has been the most spectacular episode in the long-running feud between the Argentine government and the so-called “vulture funds.” The quarrelling parties will reconvene in court on February 27 for what some experts are now calling “the trial of the century in sovereign debt restructuring.”
The holdouts claim that under a pari passu clause—a legal stipulation promising equal treatment of creditors—included in the sovereign bond issuances, they are entitled to payment at the same time as other bondholders, a claim upheld by Judge Thomas P. Griesa in the federal district court for the Southern District of New York. Argentina is appealing that ruling in the U.S. Second Circuit Court of Appeals, but if it fails, the country could be forced to put $1.33 billion into escrow for the holdouts before it could continue paying the other bondholders.
The United States government has expressed concern about Judge Griesa’s interpretation of the pari passu clause. In an amicus brief, it said that the ruling may not only have negative ramifications for Argentina, but also set a legal precedent complicating sovereign debt renegotiations globally. If holdouts are vindicated in the Argentine case, it is possible that future bondholders will be more likely to reject proposals for debt restructuring. This has led analysts to call for the revival of the IMF-sponsored Sovereign Debt Restructuring Mechanism (SDRM), a bankruptcy regime for countries intended to make defaults proceed more smoothly when they are necessary and to protect against creditor litigation during the debt restructuring process.