Argentine Case Sets No Precedent, Says S&P

Argentine Case Sets No Precedent, Says S&P

Post date : 11.26.2014 4:28 pm

Standard and Poor’s announced today the release of a report which concludes that Argentina’s historic legal defeat to creditors in no way sets a precedent for future sovereign debt restructurings.  Titled, “Why Argentina’s Legal Defeat to Creditors Is Unlikely to Set a Precedent for Other Sovereign Debtors,” S&P’s pronouncement follows on a similar report issued by Moody’s, March 3, 2014, titled, “Impact of Court Ruling on Argentina’s Debt on Future Sovereign Debt Restructuring Is Likely Limited.”

The S&P rationale is straightforward:  In the U.S. Federal Court of Appeals ruling issued in favor of NML Capital in 2013, there were highly idiosyncratic factors that contributed to Argentina’s legal defeat. Those factors included the Argentine government’s notoriously confrontational negotiating strategy along with “credit-friendly bond documentation” (i.e., the highly specific pari passubond covenants that guaranteed equal treatment to all bondholders).  This confluence of factors, argue the authors, “rendered this unique litigation by holdout creditors more promising.”

Will the court’s action in favor of holdouts embolden creditors to take similar actions in other sovereign debt battles?  The answer again, according to the ratings experts is definitively: no.  Keep in mind that the nearly 15-year legal battle to enforce payment by middle-class Argentina (Latin America’s third largest economy and a G20 peer) has demonstrated the exorbitantly high cost of litigation over a protracted timeframe against a debtor who has had the means to pay, but repeatedly sought refuge behind claims of sovereign immunity and threats of global contagion. The cost of litigation alone would in most all cases outweigh potential gains resulting from a successful settlement.

For those of our readers who have followed the Equal Treatment case in the aftermath of the U.S. Federal Court Decision in 2013, you’ll recall that a central strategy of the Argentine government and its law firm Cleary Gottleib in asking for U.S. Supreme Court review was the (now debunked) argument that should holdout creditors prevail in this landmark dispute, it would undermine future restructurings. There remains a chorus of “Chicken Littles” (Columbia University’s Joseph Steiglitz and Jubilee USA’s Eric LeCompte, and the UN Human Rights Council among them) who continue to espouse these spurious arguments, but this new report adds to the body of evidence against them.

A press release issued today by S&P concludes undramatically:  “We’ve taken no sovereign rating actions as a result of the ruling, other than declaring a selective default on Argentina after the holders of discount exchange bonds did not receive payment.”

View the full S&P report here.