Best of enemies? IMF looks to back Argentina in holdout fight
Just when the wait in the Argentine-holdout debt battle was getting wearing, enter the IMF with to add a controversial twist to the saga.
On Tuesday, its board will be discussing whether to wade into the argument.
A quick refresher: what Argentina, the holders of its performing debt, and the unpaid creditors who spurned its two restructurings in 2005 and 2010 (as well as other parties with no dog in this fight but concerns about the feasibility future sovereign restructurings and so forth) have been waiting for avidly for months is a ruling by the Second Circuit Court of Appeals in the landmark suit.
That ruling will determine whether Argentina has to pay the so-called “holdouts” led by Elliott, a hedge fund, when it pays holders of current debt, and whether the strings attached to any such order will give it any wiggle room or not. If, as is likely, the ruling goes against Argentina, its only hope of overturning a ruling that could spell a new sovereign default (albeit a technical one) would be to appeal to the Supreme Court.
There’s still no sign when the Second Circuit will rule. But the IMF caused a stir last week with news that it was planning to file a controversial amicus brief supporting Argentina’s request for a Supreme Court hearing.
That struck many as pretty unusual – after all, the IMF and Argentina are hardly on amical terms. Argentina blames the IMF for leading it down the path to default and hanging it out to dry; the IMF has meanwhile, censured Argentina over its faulty official inflation statistics.
On Tuesday, the IMF’s board meets to approve the amicus brief, apparently believing that the time is right to intervene – not in defence of Argentina, mind you, but to protect future sovereign restructurings which could be adversely impacted by a negative appeals court ruling for Argentina.
As IMF head Christine Lagarde said in Moscow on Monday:
We’re not supporting one party against the other. We’re simply alerting the court to the detrimental consequence that the finding would have on our ability to discharge our mandate, which is intended to maintain financial stability in the world.
France is also murmured to be preparing a similar brief, though neither Elliott nor the Argentine government had comment on that.
The IMF has not commented but the lender is likely to discuss in its brief is whether collective action clauses (present in most bond issues these days but not in the bonds on which Argentina defaulted) eliminate or mitigate systemic risk in defaults. It is hardly likely to want its amicus to be seen as endorsement of Argentine government policy.
Still, the fund is playing with fire, says Joshua Rosner of Graham Fisher. As he says in a report to clients:
An amicus threatens to undermine the IMF’s credibility, create risks to its neutrality and lead to possible embarrassment of the fund for a lack of understanding of the issues remaining to be addressed. This is a slippery slope. [IMF Managing Director Christine] Lagarde is inviting the IMF to intervene on a whole number of future legal disputes – a significant departure from past practice.
He says filing an amicus would indicate that the IMF has “abandoned” longstanding commitment to staying neutral in debt battles (he quotes a nearly 30-year-old executive board meeting document to that effect, though in this case it’s a dispute between an IMF member and its creditors rather than two IMF members).
Rosner wonders:
So why would the IMF get involved? The most likely explanation is that there is a small group within the IMF that is so upset that there’s no SDRM [sovereign debt restructuring mechanism] that it wants to try to impose its policy prerogative at any turn, even if it embarrasses the Fund. The Fund, with its failed 2003 attempt to build consensus for a formal institutional SDRM framework, has been down the SDRM road before but the US and others opposed such a framework then and, despite the IMF-backed conference on SDRM in Washington DC in January 2013, there are no workable mechanisms to be implemented.
The IMF has been rethinking its approach to bond restructurings – as outlined in a paper earlier this year. Will Argentina’s suit move the argument forward? Stay tuned.
Related reading:Lobbyists urge Argentine bondholders to challenge IMF, FT
Argentina’s bondholders deserve their day in court, FT
Argentin holdouts saga file, beyondbrics
Pari Passu saga, FT Alphaville
Argentina’s bondholders deserve their day in court, FT
Argentin holdouts saga file, beyondbrics
Pari Passu saga, FT Alphaville
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