Settling Sovereign Debt's 'Trial of the Century'

Abstract

NML v. Argentina, the "trial of the century" in sovereign debt, is finally poised for settlement negotiations. International experience, incentives for the parties themselves, and even statements by the presiding federal judge, all suggest that it is high time for a settlement between the parties. However, major challenges remain. In this Article, we analyze a subset of the key economic and legal factors underlying this litigation, with a particular emphasis on issues relevant to a potential settlement. We document the wide heterogeneity of holdout rates across Argentina's 150 defaulted bonds (of which seventy-four still have holdout rates greater than five percent) and focus the subsequent analysis on the seven most held-out bonds-which have holdout rates between twenty and eighty-two percent and account for about thirty percent of total holdout principal. We show that New York's statutory real rate of interest on overdue interest has been 6.6% on average during the years affecting this suit compared to 3.1% during the previous forty years. As such, this rate has become more punitive than compensatory. We also illustrate the growth of the value of holdout claims for the seven bonds from their initial $1.7 billion in principal up to $4.3 to $7 billion in current value, depending on when holdouts obtained judgments. We analyze the sensitivity of holdout claims to different approaches to overdue interest-an issue that has become increasingly controversial in New York state law in recent years. We next assess the returns that investors would have obtained by purchasing the seven-bond basket at different times since 2002. We find that investors would have multiplied their money an average of eight times if

Sovereign defaults in court

“…10 Sturzenegger and Zettelmeyer (2006) and Panizza, Sturzenegger and Zettelmeyer (2009) provide an overview on the development of sovereign debt law and litigation. 11 Miller and Thomas (2007) and Cruces and Samples (2016) analyze the Argentine litigation episode from an economic perspective, while Bradley, Cox and Gulati (2010) and Hebert and Schreger (2017) analyze the impact of landmark court decisions in sovereign debt cases on financial markets. In a companion piece (Schumacher, Trebesch and Enderlein, 2015), we study the determinants of litigation using the dataset developed for this paper.…”

A Soft Law Mechanism for Sovereign Debt Restructuring Based on the UN Principles

“…Besides, vulture funds that buy defaulted debt may receive interest payments at this rate before there is a sentence even for periods between the default and the purchasing date, a period of time during which they did not hold the bonds. This is what happened in the dispute between Argentina and the vulture funds following the default of 2001 (see Cruces and Samples, 2016;Guzman, 2016b).…”

Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of CACs

“…The reason is that, as mentioned in Section 2, we exclude coupon and principal strips for which crucial contractual information (such as governing law) is missing. We cover 145 of the 315 eligible securities listed in the exchange offer, and the coverage is comparable to Schumacher (2014) and Cruces and Samples (2016) and twice as large as Zettelmeyer (2006, 2008). 20 Unfortunately, despite our best efforts, we could not find initial (pre-CACs) bond-level participation rates for Greece's domestic-law bonds.…”