Sovereign Debt: Solving Insolvencies
Need for Sovereign Debt Restructuring Mechanism becoming more apparent
Since Argentina defaulted on its debt in 2001, most of its creditors have agreed to some restructuring. However, a few have not. And according a court ruling last November, that is the problem. The New York court ruled that Argentinamust repay in full the bondholders which have not agreed to restructuring (New York hedge funds Elliot Associates and Aurelius Capital). In addition, the court ruled that if Argentina does not repay them, then it would be illegal for Argentinato fulfill its commitments to creditors that did restructure. If the original bond agreements would have included collective action clauses (CACs), the majority of bondholders could have required the “holdouts” (e.g., Elliot Associates and Aurelius Capital) to accept a restructured agreement. Without CACs, one bondholder can block any agreement to restructure a country’s debt obligations.