{{The New York legal case over Argentina’s debt poses a deep challenge to all future sovereign debt restructurings, the International Monetary Fund said in a report Thursday.}}<\/p>\n
A US judge’s decision ordering Argentina to completely repay bondholders who refused to take part in a restructuring of its debt could have “pervasive implications” in other such cases, giving holdout creditors too much power in negotiations, the IMF said.<\/p>\n
That in turn would challenge sovereign rescues of the type that the IMF and European Union carried out in Greece, where bondholders were persuaded to take hefty write-downs of their investments to make the rescue work.<\/p>\n
The success of a restructuring depends on strong support for collective action — that is, all debt holders equally agreeing to take “haircuts” or other such losses on the bonds to ensure some recovery of value further down the road.<\/p>\n
But such deals could falter if holdouts are able to lay claim later to full payouts, as the court has allowed in the Argentina case.<\/p>\n
Having court support in that case would give potential holdouts more power to limit the haircuts in negotiations, for one, according to the report.<\/p>\n
That in turn could make it harder to achieve restoring the borrower’s finances to some level of sustainability, the study said.<\/p>\n
“The ongoing Argentina litigation has exacerbated the collective action problem, by increasing leverage of holdout creditors,” according to the report.<\/p>\n
If, based on the New York court’s ruling, bondholders see that holdouts can actually disrupt payments after a restructuring, the bondholders will be discouraged from joining a voluntary restructuring — like that crucial to Greece’s rescue, the IMF said.<\/p>\n
Moreover, the New York court’s decision could “increase the risk that holdouts will multiply and creditors who are otherwise inclined to agree to a restructuring may be less likely to do so due to inter-creditor equity concerns.”<\/p>\n
The New York judge who ruled against Argentina argued that the solution is to include collective action clauses (CAC) in a sovereign debt issue.<\/p>\n
Such a clause would require all debt holders to accept a restructuring if, for instance, 75 percent agree.<\/p>\n
But the IMF said that even such clauses could be less effective in the wake of the Argentine case.<\/p>\n
The court’s confidence in CACs “appears somewhat optimistic given the ability of holdout creditors to take blocking positions in individual bond issuances,” it said.<\/p>\n
The implication is that, if it needs the private sector to take a haircut on sovereign bonds to ensure that a bailout program goes through, the IMF will have to take a tougher line to ensure the program works sustainably, the report said.<\/p>\n
For one, the IMF will have to require a very high participation rate in the restructuring.<\/p>\n
And secondly, the Fund could more aggressively raise the possibility that a deal.<\/p>\n
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