The Holdout Saga: Season Finale
Potential costs to holdout creditors and New York courts are enough to catalyze a settlement to Argentina’s debt dispute, writes former central bank chief economist Eduardo Levy Yeyati
Despite the complexity of the
case, there are not many options open to the different parties
involved in the Argentine holdout saga. Should Argentina fail
to secure a stay, the country is prepared to face a selective
default on the bonds affected by Judge Thomas
Griesa’s injunction, in order to avoid payments to
holdouts triggering the Right Upon Future Offers (RUFO) clause
included in the original bonds, leading to the failure of the
2005 and 2010 exchanges.
The holdouts know this and have
become ostensibly more flexible, indicating that they will
accept a payment in bonds, as was the case
with Repsol’s deal in February. Indeed, it is the
holdouts who may eventually request a new stay to give
Argentina time to elude RUFO and avert a lose-lose selective
The unexpected setback at the
Supreme Court frustrated the Argentine
government’s original plan to negotiate a
settlement with the holdouts in January 2015 (upon expiration
of the RUFO clause). The Argentine government’s
current priority is to avoid the failure of the 2005 and 2010
exchanges, which would happen if the RUFO clause were
successfully invoked, even at the risk of a selective
A selective default would
probably trigger the acceleration of the exchange bonds
governed by New York law, should BONY continue to be enjoined
from distributing payments (bonds under English law are likely
to be serviced on time, although Judge Griesa has not yet been
explicit on that). In the case of a selective default, the most
likely scenario would be an exchange of the defaulted bonds in
January 2015 (after expiration of the RUFO clause) for new
bonds under a non-US jurisdiction.
The effectiveness of this
selective default option as a bargaining tool depends on its
costs for each of the parties involved. I believe these costs
are large enough to catalyze a settlement.
What is the cost for Argentina?
One should not underestimate the immediate implications of a
new default. True, the default will be partial and probably
temporary. But, unlike 2001, when the debt crisis preceded the
default itself, in this instance the Argentine economy has not
yet suffered any consequences. And, unlike 2009, when Argentina
had ample reserves and fiscal flexibility to counter the global
crisis, now the twin deficits and meager reserves severely
reduce the policy space to mitigate the pain. From
today´s fragile starting point, a selective default would
lead to a deepening of Argentina’s recession, with
an associated political cost that would be hard for the
government to blame on third parties.
What is the cost to the holdouts?
Since there is no pari passu ruling covering the bonds governed
by non-US law, a default leading to a jurisdictional change
would indefinitely postpone the payment to the holdouts. And,
more generally, once Argentina has incurred the cost of a
selective default, the country´s incentives for a quick
settlement would weaken considerably. In any event, it does
appear that a rapid settlement (including a mix of cash and
bonds) is in the holdouts’ interest.
What is the cost to the Court?
Judge Griesa would not want to be remembered as the one who
discredited New York as a financial center and led an
emerging economy to default and financial crisis. The same is
true for Special Master Daniel Pollack, the
Court’s facilitator, whose prestige and
compensation are contingent upon a successful settlement.
What is the cost for emerging
markets in general? In principle, the prevalence of collective
action clauses (CACs) in later vintage sovereign issues should
open a door to cram down creditors in an exchange, leaving no
space for holdouts – that is, if the majorities
required to activate CACs are reached.
But holdouts may be encouraged by
the promise of a full payment Griesa-style, rendering those
majorities harder to get – which would call for lower
majorities in future CACs. At any rate, the die is cast:
whether the epilogue is a settlement or a selective default,
the exposure of US-law sovereign bonds to holdout litigation
has increased. While emerging economies now issue global bonds
only marginally, frontier economies making their first
appearances in global markets may want to reconsider where and
how to borrow.
In sum, the costs of default look
more evenly distributed among the parties than would appear at
first sight: every actor has a strong incentive to settle,
which is why I think that, barring an accident, a settlement is
more likely than a default. The season finale may be long and
complex and uncertainty may well extend beyond July 30th; but,
besides the press campaigns and the public speeches and
posturing fuelling the headline risk, the true negotiation
carries on behind closed doors. LF
Eduardo Levy Yeyati
is chief economic advisor at ACGM, and was previously chief
economist at the Argentine central bank.