Argentine debt vultures win big, but have they broken sovereign investment?
Question: when is a sovereign not a sovereign? Answer: when the rights in question are attached to Argentinian government debt – or at least, that is the worrying implication of a recent court ruling.
The consequences of the New York court decision raises not just the prospect of an imminent Argentinian default but also deeply worrying questions about both the future tenability of sovereign restructures and the rights of governments under sovereign immunity.
The New York appeals court decision – a major victory for leading vulture fund Elliott International – ruled that Argentina could not continue paying dividends to owners of restructured New York law bonds without also paying out to investors who never signed the 2005 and 2010 debt exchanges.
While referring back the fine detail to a district court for a decision, the New York appeals court ruled that any intermediary who paid out to debtholders – primarily the Bank of New York, trustee for the dividend payments – would be liable to charges of aiding and abetting a crime.
Wider implications
‘If you extrapolate from this, then you would have to say you are offering a big disincentive to people to tender into any future debt exchange [following default],’ says Citywire AA-rated Colm McDonagh, manager of the Absolute Insight Emerging Market Debt fund.
With the world facing an overhang of previously high-rated sovereign debt at a real danger of never being paid back, the implications of the ruling have a lot of people very worried.
‘I bet the “risk factors” sections of sovereign prospectuses are getting a close read just now,’ said sovereign debt legal specialist Professor Anna Gelpern of the Washington College of Law.
McDonagh admits he has reread some of the contractual wording on debt in his portfolio but says until there is further legal clarification, there is little managers can do beyond taking each debt issue on its own merits.
Argentinian debt responded dramatically to the ruling, with the spread of credit default swaps rising by 585 basis points and yields on all classes of paper spiking, but so far there has been little read-across to other countries.
