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PhD – Exposé
Word Count: 4.812 (excl. preliminary bibliography)
Dissertation Title:
“The Holdout Problem in International Financial Law – Sovereign Debt
Restructuring after NML Capital v Republic Argentina”
Doctoral Candidate
Mag. iur. Sebastian Grund (a0908819)
Supervisor
o. Univ.-Prof. MMag. Dr. August Reinisch, LL.M. (NYU)
Research Field
Public International Law and International Financial Law
1. Outline – Sovereign financing and debt crises
Walter Wriston, CEO of Citicorp between 1967 and 1984, became famous for his frequent
statement that “states don’t go bust”. While Wriston was clearly familiar with the difficulties
and peculiarities of sovereign financing, he was reluctant to accept the vulnerability of states
operating within capital markets and the political short sightedness of officials. In fact,
between 1980 and 2010 more than fifty per cent of all sovereign nations were unable to fulfil
their repayment obligations towards their creditors.1 According to the IMF, 28 of the poorest
nations have a high risk of debt crises due to their over-exposure to financial markets.2
Moreover, in the aftermath of an unprecedented international financial crisis, excessive
indebtedness even struck member states of the European Union, which is typically regarded
as one of the wealthiest regions and the most advanced supranational organisation. Hence,
amid the Greece sovereign debt crisis in 2009, the German Chancellor, Angela Merkel, was
eager to stress that it is contrary to Wriston’s opinion what depicts the modern reality of the
International Financial system. She humourlessly noted: “There’s a rumour going around that
states cannot go bankrupt, this rumour is not true”.3
Despite the dismaying political and economic implications of such crises, sovereign debt
plays a vital and fundamental role to promote development and prosperity. Sovereign debt
financing has firmly accelerated within the last decade, surpassing $40 trillion in 2010. 4
Essentially states issue debt for four reasons: to finance investment in physical or human
capital, smooth business cycles, affect intertemporal distribution of wealth and respond to
exceptional events such as wars or natural crises. 5 If used well, sovereign debt can
1 Allen & Overy, State insolvency – what bondholders and other creditors should know (2010), 2
<https://www.aohub.com/aoos/attachment_dw.action?key=Ec8teaJ9VaqwHSvmnlS0msxgHJMKLFEppVpbbVX+3OXcP3PYxlq7sZUjdbSm5FIetvAtgf1eVU8=&attkey=FRbANEucS95NMLRN47z+eeOgEFCt8EGQJsWJiCH2WAVISQAykZ42j0s8pmSAXv+7&fromContentView=1&fromDispatchContent=true&nav> (accessed on 29
th October 14).
2 International Monetary Fund, World Economic Outlook Database, April 2009. Washington, D.C.: International
Monetary Fund < http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf> (accessed on 4th
November 14). 3 <http://www.spiegel.de/international/world/iceland-on-the-thames-can-countries-really-go-bankrupt-a-
604523.html> (accessed on 17th
November 14), from a technical point of view the lack of an international bankruptcy regime makes bankruptcy per-definitionem impossible. However, currently sovereign debt restructuring, which is characterized by ad-hoc solutions rather than a multilateral framework, (insufficiently) substitutes a bankruptcy regime for states. 4
Committee on International Economic Policy and Reform, Revisiting Sovereign Bankruptcy (2013) <http://www.brookings.edu/~/media/research/files/reports/2013/10/sovereign%20bankruptcy/ciepr_2013_revisitingsovereignbankruptcyreport.pdf> (accessed on 19
th October 14).
5 Espósito C./Li Y./Bohoslavsky J.P., Sovereign Financing and International Law: The UNCTAD Principles on
Responsible Sovereign Lending and Borrowing, 15.
contribute to consistent economic growth and help stabilizing fluctuations.6 It is a powerful
tool to bolster sustainable development and positively affect the democratisation process.
Sovereign financing however, is adjunct to a high level of uncertainty, most notably if the
degree of indebtedness is substantially high. From hyper-inflation to increasing interest rates,
state insolvency frequently prompts manifold domestic repercussions as well as massive
socio-economic ramifications.
From a legal point of view however, the inexistence of a stringent framework to prevent and
resolve international sovereign debt crises appears appalling. Although sovereign insolvency
in the sense of liquidating state owned property was never considered a viable option, it is
first and foremost the paucity of an orderly and predictable process for debt restructuring
which caused enormous repercussions in international finance. 7 International financial
institutions – pressured by political leaders of their member states – were alarmingly
reluctant to mitigate the risks of over-indebtedness and enormous leverage ratios
accumulated in the private sector in the 1990’s and 2000’s.8 Although sovereign debt has
continually been subject of international restructuring procedures, such restructurings are
neither based upon a predictable international rule of law nor can they always provide
equitable solutions.9
In fact – due to the lack of international legal instruments – sovereign debt crises and their
outcome seem to increasingly depend on the discretion of domestic courts and the drafting of
sovereign bond contracts. A very recent U.S. Supreme Court ruling10 against Argentina in
July 2014 underlines the legal uncertainty in the field of sovereign financing and has given
rise to a whole new situation, which will potentially enable bondholders to interfere with other
creditors in the due course of a restructuring process.11 The next section shall inter alia
outline the verdict’s line of argumentation and its relevance to the future of sovereign debt
restructuring.12
6 Gallagher K., Financial Crisis and International Investment Agreements: The Case of Sovereign Debt
Restructuring, Global Policy Volume 3 (3), 2012, 363. 7 The Hague Conference Sovereign Insolvency Study Group, State Insolvency: Options or the Way Forward (The Hague: International Law Association, 2010), 6. The imminent reasons for this approach shall be discussed in the course of this doctoral thesis. 8 Schaefer H.-B., The Sovereign Debt Crisis in Europe, Save Banks Not States, The European Journal of
Comparative Economics, Vol. 9, n.2, p, 181. 9
<http://www.emergingmarkets.org/Article/3389531/JOSEPH-STIGLITZ-The-world-needs-a-sovereign-debt-restructuring-mechanism.html> (accessed on 11
th January 2015).
10 NML Capital, Ltd v Republic of Argentina, U.S. No. 12-842 (2014).
11 See 2.
12 Sovereign debt restructuring is usually referred to as the process of bond exchange after a take-it-or-leave-it
offer. The sovereign, after informing its creditors about its deteriorated financial situation, develops a new issue of bonds with modified payment terms. The lacking bankruptcy framework for states makes restructuring the
2. Current State of research – relevance of the topic
The acceleration of external lending and the global community’s increasing interest in
promoting financial stability have led to a broad and considerably fruitful academic debate on
comprehensive international bankruptcy or restructuring regimes. 13 The same is true for
proposals regarding the modification of sovereign bond contracts in order to enhance legal
certainty in sovereign debt litigation.14 While several attempts to establish a multilateral
framework for sovereign insolvency failed miserably in the recent decades, the quest for
robust and potent clauses to avoid sovereign default appears promising in the wake of the
unprecedented ruling in NML v Argentina.15
2.1. The holdout problem and NML Capital v Republic of Argentina
Amid summer 2014, the US Supreme Court severely shook the foundations of sovereign
financing with their decision in NML Capital v Republic of Argentina.16 The litigation stemmed
from Argentina’s default in 2001 over $80 billion of its bonds17 and the ensuing restructuring
negotiations with its creditors.18 The bonds – alike a majority of sovereign debt instruments
issued – were governed by the law of New York endowing N.Y. courts with a broad
jurisdiction in the event of legal remedies against sovereigns.
cutting edge of measures to resolve sovereign debt crises. See Hague Conference Sovereign Insolvency Study Group, above no. 7, 13. 13
<http://www.nytimes.com/roomfordebate/2014/08/01/the-justice-of-argentinas-default/a-global-system-is-needed-for-debt-restructuring> (accessed on 15th October 14). For an overview on the academic debate so far see Rogoff K./Zettelmeyer J., Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2002, IMF Working Paper No 02-133 <https://www.imf.org/external/pubs/ft/wp/2002/wp02133.pdf> (accessed 21
st November 14)
and Sedlak J., above no. 50, 1483; Bogdandy A./Goldmann M. in Espósito C./Li Y./Bohoslavsky J.P., above no. 5, 41; Malaguti M.C., above no. 23, 308; Mody A., Sovereign Debt and Its Restructuring Framework in the Eurozone, Oxford Review of Economic Policy, Volume 29, No. 4, 2013, 725 et. seq. 14
Compare e.g. Wright M., Interpreting the Pari Passu Clause in Sovereign Bond Contracts: It’s All Hebrew (and Aramaic) to Me, Federal Reserve Bank of Chicago, and National Bureau of Economic Research <https://www.chicagofed.org/publications/working-papers/2014/wp-06> (accessed on 26
th December 14).
15 Weidemaier W.M.C., Sovereign Debt After NML v Argentina, Capital Markets Law Journal, Vol. 8, No. 2, 2013,
123. 16
NML Capital, Ltd v Republic of Argentina, above no. 10. 17
Sovereign bonds are referred to as a written promise to pay money after a certain time elapses. Although such obligations are not collateralized they are typically traded on international capital markets. Compare Auray R., In Bonds We Trustee: A New Contractual Mechanism to Improve Sovereign Bond Restructurings, Fordham Law Review, Volume 82 (2), 902. 18
<http://www.cliffordchance.com/briefings/2014/06/sovereign_pari_passuclausesnmlcapital20.html> (accessed on 25th December 14).
After Argentina’s failure to pay in 2001 93% of all investors had accepted an exchange of
their bonds against new, less favourable, bonds.19 NML Capital though, the lead plaintiff and
part of the remaining 7%, refused to accept the terms of reorganisation and claimed full
compensation for the pending bond value. This strategy is usually referred to as “holding
out”, implying that such investors are not willing to reschedule their debt under the debtor
country’s terms and conditions. 20
Following NML Capital’s submissions the Southern District Court of Manhattan for the first
time issued injunctions against Argentina after NML and other holdouts have been pursuing
Argentina through courts around the world ever since.21 However, it is crucial to mention
here, that NML Capital is a highly specialized hedge fund, which acquires distressed bonds
at heavy discounts and must be clearly distinguished from “typical” bondholders, such as
banks subscribing sovereign bonds after their first issuance.22 The strategy of such holdout
investors is typically intertwined with a priori refusal to restructure the bond as well as
subsequent litigation. Whilst such legal procedures may last for years the economic
attractiveness of such operations is staggering, providing for astronomical profit margins of
over 1000%.23
Until 2014 the greatest triumph of holdouts resulted in a settlement with Peru in 1996, which
shirked litigation fearing that multitudinous repercussions could harm Peru’s ability to further
utilize capital markets for its financial needs.24 The fund had obtained an ex parte restraining
order against Peru from a court in Brussels arguing that it ranked equally (pari passu) with
restructured investors.25 Afraid of defaulting on its obligations Peru – contrary to Argentina –
settled and paid a sizable return to Elliott Associates, a fund closely linked to the plaintiff in
NML v Argentina26.
Two central reasons are to be emphasised to point out the exceptionality of NML v
Argentina 27 , which led to a remarkable victory of holdouts. Firstly, due to the lack of
19
Ibid. Compare above no. 12. 20
Ibid. 21
Auray R., above no. 17, 912. 22
NML Capital, Ltd v Republic of Argentina, above no. 10. 23
NML Capital’s success before U.S. courts was both, a legal triumph and the rewarding outcome of a risky business transaction. <http://www.usatoday.com/story/money/business/2013/03/30/argentina-offers-to-pay-debts-with-cash--bonds/2038349/> (accessed on 11
th January 2015).
24 Weidemaier M./Scott R./Gulati M., Origin Myths, Contracts, and the Hunt for Pari Passu, Law & Social Inquiry, Vol. 38, Issue 1, 74. 25
Elliot Associates, L.P. v Banco de la Nacion, 12 F. Supp. 2d 328 (S.D.N.Y. 1998). 26 NML Capital, Ltd v Republic of Argentina, above no. 10. 27 Ibid.
aggregated Collective Action Clauses28 in the bond contract, investors could not be legally
forced to accept restructuring by a super majority of bondholders. 29 Hence, certain
bondholders, such as the holdout NML Capital, were able to refuse debt rescheduling and
sought for relief by the means of litigation. Secondly and even more appallingly, the court
established a new and unconventional interpretation of parri passu clauses 30 within
sovereign debt bonds. According to judge Thomas Griesa Argentina must rateably and
equally repay every creditor, regardless of prior refusal to restructure debt.31
Many authors argue that this novelty of pari passu interpretation32 in U.S. case law, namely
that holdouts as well as restructured creditors have to be paid pro rata, will alter the practice
of sovereign debt restructuring and demands a new assessment of the practicality and
reasonableness of the current legal system of sovereign financing.33 To name one amongst
many, Wright 34 tries to outline the potential positive and negative implications of this
interpretation of the pari passu clause. On the one hand the U.S. court may act as a saviour
by strengthening creditor rights and allowing for less risky sovereign borrowing at lower
interest rates. On the other hand judge Griesa could wreak havoc in the market for sovereign
debt – by causing Argentina to default, leading bondholders to abandon New York court
jurisdiction and eventually hindering future sovereign debt restructuring operations.35
Due to the lack of an international legal system for sovereign insolvency and sovereign debt
restructuring the arbitrary interpretation of sovereign bonds by domestic courts became and
will remain crucial. In order to prevent and mitigate both, implications of sovereign debt crises
in general and the holdout problem in particular, it is key to understand the different ways
28
Such CAC’s typically enable a (super-)majority of bondholders to cram holdouts down in the debt restructuring agreements, compare Miller M./Thomas D., Eurozone Sovereign Debt Restructuring: Keeping the Vultures at Bay, Oxford Review of Economic Policy, Vol. 29 (4), 2013, p. 760. 29
Weidemaier W.M.C., above no. 15, 123. Undoubtedly CACs could have avoided certain implications of this ruling but as outlined below CAC’s may not offer full relief to the holdout problem and appear to be an arguably unnecessary compromise. 30
Usually the pari passu clause provides something such as the follow: “These Notes rank, and will rank, equally (or Pari Passu) in right of payment with all other present and future unsecured and unsubordinated External Indebtedness of the issuer.“ Weidemaier M./Scott R./Gulati M., above no. 23, 74. 31
NML Capital, Ltd v Republic of Argentina, above no. 9.; <http://online.wsj.com/articles/argentine-debt-crunch-puts-u-s-judge-in-focus-1406660549> (accessed on the 15th October 14); <http://dealbook.nytimes.com/2014/09/03/argentine-economic-figure-urges-payments-to-bond-holdouts/>(accessed on 29
th September 14); Weidemaier, above no. 15; IMF Policy Paper, Strengthening the
Contractual Framework to address Collctive Actions Problems in Sovereign Debt Restructuring, October 2014, <http://www.imf.org/external/np/pp/eng/2014/090214.pdf>. 32
Compare below 2.2. 33
<http://www.nytimes.com/roomfordebate/2014/08/01/the-justice-of-argentinas-default/a-global-system-is-needed-for-debt-restructuring> (accessed on 15th October 14). 34
Wright M., above no. 14. 35
Ibid.
national courts interpret sovereign debt provisions such as the pari passu clause with
regards to sovereign bond litigation.
According to many, the holdout problem must not be understood as a consequence of
reckless sovereign financing but rather as a result of national judges misinterpreting
sovereign bond contracts.36 To this extent, following Chabot and Gulati37, two facts render
the pari passu clause central: Its controversy amongst practitioners as well as its ubiquitous
usage in virtually every modern sovereign debt contract.38
2.2. The Pari Passu Clause
Despite their almost universal utilization in sovereign debt bonds, pari passu clauses are not
only ambiguous but remain debatable even amongst those lawyers, who regularly draft
sovereign debt contracts.39 Essentially such clauses ought to provide equal treatment of
holders of identical claims as pari passu translates “equal footing”. Undoubtedly this clause
became an indispensable part of unsecured debt transactions – be it on the private level or
within sovereign finance.40 Such clauses’ chief objective is to substitute inexistent insolvency
laws on the international level by providing “intercreditor equity” – a social norm inherited by
almost every domestic legal culture.41 Zamour however argues that the judge in NML v
Argentina attempted to revive the long-dead doctrine of ratable payment, in order to thwart
preferential treatment of restructured bondholders and selective resumption of payment.42
But the deeply international character of sovereign finance43 requires a broader and more
sophisticated view on the interpretation of sovereign financing than the N.Y. judgment
implies. For instance Burn, an English lawyer, argues that pari passu embodies at least two
different meanings according to English case law and academic literature.44 Firstly, it is a
ranking clause, affirming that the obligations rank and will rank pari passu with all other
36
Ibid. 37
Chabot B./Gulati M., Santa Anna and his Black Eagle: the origins of pari passu?, Capital Markets Law Journal, Vol. 9, No. 3, 216. 38
Weidemaier M./Scott R./Gulati M., above no. 23, 74. Usually the pari passu clause provides something such as the follow: “These Notes rank, and will rank, equally (or Pari Passu) in right of payment with all other present and future unsecured and unsubordinated External Indebtedness of the issuer.“ 39
Ibid, 216. 40
Wright M., above no. 14, 2. 41
Ibid, 2. 42
Zamour R., NML v Argentina and the Ratable Payment Interpretation of the Pari Passu Clause, The Yale Journal of International Law Online, Volume 38 (2013), 55. 43
See above 1. 44
Burn, Pari Passu clauses: English law after NML v Argentina, Capital Markets Law Journal, Vol. 9, No. 1, 4.
unsecured debt as a matter of mandatory law. This interpretation is also referred to as the
narrow interpretation and holds that only subordination of the protected debt by some legal or
mandatory measures shall allow legal remedies against the debtor.45 Secondly, pari passu
indicates, that the borrower has undertaken that it will in fact pay its obligations pro rata
(ratable) when it is unable to pay all of them in full.46 Due to the paucity of an international
bankruptcy regime equal payment of creditors must in fact be ensured by the means of
contractual provisions.
However, this second – wider – interpretation has proven questionable, as it appears to
contradict not only the sovereign’s interests to sustain governmental control but also the
creditor’s interest to avoid a collapse into anarchy and a subsequent halt to repayment.47
Despite a commercial perspective reveals the unreasonableness of such an interpretation of
the parties’ intentions, judge Griesa ostensibly chose to establish this view in the most
important market place for sovereign bonds.
But why did reactions amongst journalists and academic authors include a language that
harshly condemned this ruling? According to Weidemaier, the new interpretation of pari
passu clauses and its confirmation by the U.S. Supreme Court rendered restructuring a
repugnant undertaking.48 If holdout creditors have a significant chance of recovering their
claims in full, creditors who would otherwise have agreed to participate in the restructuring
will become less inclined to do so. 49 As mentioned above, according to U.S. courts
intercreditor equality in the sense of pari passu treatment shall only apply ex ante to
restructuring. In the case of Argentina 93% of bondholders have reduced their claims to less
than 70% of the bond value whilst holdouts retained all rights regarding their bonds before
litigation was initiated.50 The interpretation ex post restructuring by the N.Y. court however,
did not recognise this difference between the restructured and un-restructured debts,
throwing the gates wide open for holdout investors. Contrary to the initial aim of pari passu
provision, namely to ensure just equality between the creditors51, the N.Y. court enabled
holdout creditors to extract considerably higher payments on their bonds than restructured
bondholders.
45
Allen & Overy, The pari passu clause and the Argentine case, Global Intelligence Unit, 27th
December 12, 2. 46
Burn, above no. 41, 4. Also compare Financial Markets Law Comittee: Issue 79 – Pari Passu Clauses. 47
Burn, above no. 41, 5. 48
Weidemaier, above no. 15, 123. 49
<http://www.imf.org/external/pubs/ft/survey/so/2014/new100614a.htm> (accessed 30th October 14). 50 Wright M., above no. 14, 6. 51
Chabot B./Gulati M., above no. 34, 233.
As Burn and Wright, two practitioners, argue, the academic world has not provided a sound
analysis regarding the meaning of pari passu and ways to prospectively avoid an
interpretation by domestic courts favouring holdout investors and their trading scheme.52
According to the academics Weidemaier, Scott and Gulati no one really knows what the pari
passu clause means, arguing that eminent practitioners have acknowledged this fact for a
long time.53 Raffer on the contrary contends that the pari passu interpretation as in NML v
Argentina only guarantees the rule of law and enables the creditors to assert justified claims
against a distressed sovereign.54 These and other expert opinions will receive due attention
in the course of this doctoral research and shall be scrutinised in the context of legal
rationales as well as economic necessities inherent to the issue of sovereign financing.
2.3. Enforcement of sovereign debt obligations by the means of litigation
Another issue closely linked to and supposedly resulting from the new interpretation of pari
passu terms is the broad injunction against payment facilitators on U.S. soil issued by the
Southern District Court. This injunctive order entitles holdout creditors to effectively interfere
with payments of bondholders who assented to a government’s restructuring proposal.55
Argentina loudly claimed that this ruling violates its sovereignty as the court order restricts
any Argentinean payment towards any of its other creditors as long as the country hasn’t
fulfilled its financial obligations towards the holdout investors.56
Cotterill supports the Argentinean view and acknowledges that holdouts have been able to
gain expansive powers of enforcement through judicial discretion. 57 The enforcement of
sovereign bonds by the means of injunctive orders is a particularly new phenomenon, which
must not be left aside in the discussion on holdout investors and sovereign debt
restructuring. In fact, according to academic literature, the option to enforce sovereign debt
obligations rendered the future implications of NML v Argentina58 sweeping and dangerous –
especially from an international legal point of view.
52
Burn, above no. 41, 5; Wright, above no. 14, 6. 53
Weidemaier M./Scott R./Gulati M., above no. 23, 74. 54
Raffer K. in Espósito C./Li Y./Bohoslavsky J.P., above no. 5, 185. 55
Kim S.H., Parri Passu: The Nazi Gambit, Capital Markets Law Journal, Vol. 9, No. 3, 250. 56
http://blogs.wsj.com/law/2014/08/07/argentina-sues-u-s-in-international-court-of-justice-over-debt-dispute/ (accessed on 4th January 2014). 57
Coterrill, The injunction has landed: the “Black Eagle”, pari passu and sovereign debt enforcement, Capital Markets Law Journal, Vol. 9, No. 3, 278. 58
NML Capital v Republic of Argentina, above no. 10.
According to Steel, Zarrini and Goldinstein on the contrary the ruling in NML v Argentina59
may provide for greater certainty that contractual terms can in fact be enforced and will
encourage participation in the debt markets by lenders and borrowers.60 A legal regime that
mitigates their financial risk by offering a powerful injunction for investors against the debtor
state may mark a step towards a more predictable system of sovereign finance.61 As judge
Griesa argues in his ruling, the contextual interpretation of the pari passu clause – regardless
of other factors intertwined with particularities of the Argentinean case – was necessary to
uphold the rule of law. The issuance of a court order against all payment facilitators was
inevitable in order to ensure an equal treatment between sovereigns and private corporations
when they enter into a commercial transaction.62
Those evidently different views within academic literature regarding both, the interpretation of
pari passu and subsequent enforcement measures against sovereign nations shall be
subject to critical analysis within my thesis. On the one hand it is beyond any doubt that the
rule of law must prevail in domestic jurisdictions as well as on the international level. On the
other hand the concept of sovereignty makes a clear distinction between countries and
private actors necessary and must too be carefully considered in the law of international
finance.
2.4. Response by international actors
Following the first ruling in NML v Argentina 63 Eurozone has committed to introduce
aggregation clauses into all Euro area bonds starting in 2013 as well as into the framework of
the European Stability Mechanism in order to allow a supermajority of bondholders to impose
restructuring on a minority.64 However, this strategy may not solve problems of different
interpretations of pari passu clauses around the world. Collective action does not necessarily
provide for equitable treatment of creditors and can lead to higher refinancing costs on the
sovereign’s balance sheet. In fact when Greece restructured its debt by ex post
implementing Collective Action Clauses, bondholders with similar claims were treated
extremely different leading to an unprecedented degree of discrimination.65
59
Ibid. 60 Steel H./Zarrini E./Goldinstein A., NML Capital v Argentina: a lesson in indenture interpretation, Insolvency and
Restructuring International, Vol. 8, No. 2, September 2014, 33. 61
Ibid, 34. 62
See NML Capital, Ltd v Republic of Argentina, 727 F.3d 230, 247 (2d Cir 2013). 63
Ibid. 64
Zettelmayer J./ Trebesch C./Gulati M., The Greek Debt Restructuring: An Autopsy, Petersen Institute for International Economics Working Paper, WP 13-8. 65
Ibid.
The IMF too has not held back in openly criticising the amplification of the holdout problem
by the ruling in NML v Argentina66 and has announced its intentions to firmly fight the overt
vulnerability towards holdouts by advancing the robustness of sovereign bonds.67 According
to the Fund “Copycat” litigation is relatively certain and has already commenced when a
Taiwanese bank sought specific performance of the pari passu clause contained in defaulted
loans made to Grenada in March 2013.68 The IMF policy paper published in September 2014
reveals the funds severe concerns and not only stresses the importance and imminence of
modifying sovereign debt contracts but offers compelling ideas.69
Moreover the United Nations General Assembly has detected potentially adverse
implications of NML v Argentina and passed a resolution, which aims to adopt a multilateral
framework for countries to emerge from financial commitments.70 The U.N. acknowledges
the risk the so-called “vulture funds” (i.e. holdout investors) pose to all future debt
restructuring processes following recent U.S. litigation. In addition it criticises the vast
resources sovereigns need to divert to handle such litigation as a result of legal uncertainty.
According to the U.N. a legal framework shall be created capable of facilitating orderly
restructuring of sovereign debt and acting as a deterrent to disruptive litigation that creditors
could engage in during restructuring negotiations.71
3. Research Questions
What are the legal implications of NML Capital v Republic of Argentina72 for the
future of sovereign debt restructuring?
Why do holdout investors pose a vital threat to sovereign debt restructuring efforts?
o Why are holdouts presumed “vulture funds” and what legal argumentation is
their business strategy intertwined with?
o Why are current ad-hoc solutions to reschedule sovereign debt in
international law vulnerable to holdout litigation?
o How do different capital markets address the holdout issue and why does
New York attract holdout litigation?
66
NML Capital v Republic of Argentina, above no. 10. 67
See <http://www.imf.org/external/pubs/ft/survey/so/2014/new100614a.htm> (accessed 30th October 14). 68
Ibid. 69
Ibid. 70
<http://www.un.org/en/ga/search/view_doc.asp?symbol=A/RES/68/304> (accessed on 26th December 14). 71
Ibid. 72
NML Capital, Ltd v Republic of Argentina, above no. 10.
Why and how does the new interpretation of sovereign debt bonds by U.S. courts
affect sovereign debt restructuring?
o Why does NML v Argentina 73 mark a caesura regarding the legal
underpinnings of sovereign debt restructuring operations?
o How do U.S and other domestic courts balance the rule of law and the
necessity of debt restructuring in the light of a lacking international
bankruptcy procedure and what instruments do judges have at hand?
o What is the role of pari passu clauses in sovereign debt contracts and why
does U.S. case law amplify their danger for sovereign debt restructuring
procedures?
o How may pari passu clauses render sovereign debt obligations enforceable
– even if restructuring took place?
o How do pari passu terms interplay with collective action clauses?
How can the holdout problem be effectively tackled after NML Capital v Republic of
Argentina74?
o What contractual framework may be capable to ensure predictable and
equitable sovereign debt restructuring procedures in the future?
How can the rule of law and the interest of sovereigns to restructure
their debt be balanced in the light of the line of argumentation
established in NML v Argentina75?
What modifications to sovereign debt bonds are necessary to reduce
the attractiveness of holdout litigation?
Which interpretation of the pari passu clause could mitigate legal
uncertainty triggered by recent U.S. case law?
What role may collective action provisions assume and what are their
advantages and disadvantages?
Could sovereign contingent convertible bonds (“sovereign cocos”)76
offer relief to holdout issues whilst enhancing predictability of
sovereign debt restructuring?
What central issues and suggestions will modern debt restructuring
after NML v Argentina77 inevitably have to seize?
73
Ibid. 74
Ibid. 75
Ibid. 76
Compare Barkbu/Eichengreen/Mody, Financial crises and the multilateral response: What the historical record shows, Journal of International Economics 88 (2012), 433. 77
Ibid.
o How do recent IMF and UNGA proposals – in response to NML v Argentina78
– tackle the holdout problem in particular and what would it mean to the
future sovereign debt restructuring in general?
What role will international financial institutions play in the future of
sovereign debt crises?
How could they address the issue of holdout litigation?
4. Research Aims and intended course of the analysis
Academics and practitioners agree that the current situation within the international financial
order following the ruling in NML v Argentina79 will harm financial markets as it caused
considerable legal uncertainty, not only for sovereign debtors, but for any bank or
cooperation concerned with sovereign financing.80 It appears vital to analyse the ambiguous
and controversial findings in the recent ruling, which some consider crucial to ensure the rule
of law 81 and others deem unequitable and illegitimate. 82 The exceptionality of NML v
Argentina83 for the international financial legal order – especially with regards to potential
enforceability of sovereign debt obligations – made it necessary to provide a comprehensive
reassessment of the status quo by conducting this research.
My preliminary research rendered the pari passu clause – besides Collective Action Clauses
– the most prominent as well as the most ambiguous piece in the puzzle of holdout litigation
and sovereign debt restructuring. The unconventional interpretation of pari passu provisions
by N.Y. courts has certainly transformed sovereign debt obligations, previously deemed de-
facto unenforceable, into strong claims of investors, capable of severely hampering
restructuring efforts. Through analysing this provision as well as critically discussing its
interpretation within literature and by courts around the globe, this thesis shall eventually try
to make a contribution to the academic discourse. By providing a comparative analysis of
how different interpretations of pari passu shape and will shape sovereign debt restructuring
as well as the enforcement of sovereign claims the research shall bring to light potential
solutions to this equivocal situation within the international financial architecture.
78
Ibid. 79
Ibid. 80
See for example Weidemaier, above no. 15, 123; Nguyen D., Too big to fail – Towards a Sovereign Bankruptcy Regime, Cornell International Law Journal, Vol. 45, No. 3, 2013, 697; Allen & Overy, above no 36, 6. 81
Raffer K. in Espósito C./Li Y./Bohoslavsky J.P., above no. 5, 185. 82
Weidemaier, above no. 15, 123; Coterrill, above no. 48, 278; Chabot B./Gulati M., above no. 34, 216. 83
NML Capital v Republic of Argentina, above no. 10.
In the first chapter my doctoral thesis will outline the law of sovereign financing and explore
the international financial system with a focus on sovereign debt crises and sovereign debt
restructuring. This will include a brief overview of the history of sovereign debt restructuring,
an introduction into the chief challenges and an assessment of international efforts to
balance legal certainty and economic necessities before, amid and after sovereign debt
crises.
Chapter two shall examine the problem of holdout investors for sovereign debt restructuring,
which will inter alia include an analysis of their emergence in the late 1980’s and an
assessment of the most prominent lawsuits concerning holdout litigation. This chapter will too
explore, why holdouts may pose a threat to the efficiency and predictability of sovereign debt
restructuring negotiations and what proposal have been made to avoid legal action following
repayment difficulties. Chapter two will function as an introduction to the broad academic
discourse surrounding the holdout issue, while chapter five will conduct an in-depth analysis
of contractual modifications that may offer relief.
In the third chapter my thesis will compare the most significant capital markets for sovereign
bonds, namely New York, London and Frankfurt, and assess their respective legal exposure
to the holdout problem. This chapter shall analyse the legislative measures taken in favour or
against holdouts and hence determine the foundations for a successful sovereign debt
rescheduling. Chapter three will not offer a detailed description of different capital markets
laws but approach this comparison with very broad brushstrokes in order not to go beyond
the scope of this research.
Chapter four will then come back to recent holdout litigation and will aim to provide a sound
and comprehensive analysis of the ruling in NML v Argentina84 as a case in point. The chief
goal of this chapter will be to thoroughly analyse the legal argumentation and the guiding
principles established in this case as well as possible consequences for the marketplace
New York. By applying an objective approach the thesis shall discuss both, potentially
positive and potentially negative implications of this ruling.
After having evaluated the principles and the chief implications of this domestic court
decision with regards to holdouts, the fifth chapter will focus on the interpretation of the pari
passu claus. As outlined above courts, academics as well as international organisations hold
remarkably different views on the meaning of this – at least for holdout investors – vital
provision in sovereign debt bonds. This chapter shall thus offer a comparative analysis of the
84
NML Capital v Argentina, above no. 10.
different interpretations of pari passu, not only focusing on the distinction between common
law and civil law traditions but also with regards to economic realities of the parties involved,
which are typically reflected by greater bargaining power. Eventually this section will attempt
to answer the question which interpretation of pari passu terms could successfully mitigate
holdout issues whilst achieving its original aim to provide intercreditor equality.
Chapter six will then try to assess the operational implications of the (new) pari passu
clause interpretation under New York law and will offer an analysis rather than actual
solutions. The potential enforceability of sovereign debt indentures through broad injunctions
as inaugurated in NML v Argentina85 demands for a re-evaluation of global sovereign debt
enforcement. The sixth chapter will therefore focus on these injunctions, which enable
holdouts to interfere with the payment of other creditors and will try to examine how courts,
academics and lawyers balance investor protection and sovereignty in the light of holdout
litigation.
In chapter seven the thesis will elaborate on solutions proposed by literature and
practitioners to prospectively avoid the holdout problem. The focal point of this research will
be centred on contractual solution to the holdout problem, as their practical implementation
appears – at least under the current circumstances – more feasible than a multilateral
restructuring framework. As chapters five and six concentrate on the pari passu clause
chapter seven will pay special attention to Collective Action Clauses as they are often
deemed to offer effective relief to unsolicited holdout practices. However, as academics
around the globe have extensively discussed CAC’s and their functioning this thesis will only
broach this subject. CAC’s will first and foremost be assessed with regards to their interplay
with pari passu clauses in sovereign debt bonds. They will be discussed in the light of
intercreditor equality and with regards to a potential power shift to sovereign debtors.
Moreover this chapter will review the academic proposal to introduce sovereign contingent
convertible bonds (“sovereign cocos”) as their concept might mitigate holdout risks and
enhance the certainty during restructuring operations.86
The eighth chapter will try to draw a conclusion informed and guided by the research results
in the prior sections. Although my thesis will not attempt to offer an exhaustive solution to the
issue of holdout investors, it shall deliver a comparative analysis of how – due to the absence
of international legal regulations – contractual terms and their interpretation shape sovereign
financing and debt restructuring. Furthermore the thesis will – infused by the findings – put
forward the author’s opinion on how the current situation may be enhanced by modifying
85
NML Capital v Argentina, above no. 10. 86
See Barkbu/Eichengreen/Mody, above no. 66, 431.
contractual terms whilst ensuring a fair and predictable process of debt restructuring and
mitigating the delay and risk holdouts constitute for future debt restructuring.
5. Methodology
This dissertation aims to provide a comprehensive analysis of the legal implications triggered
by the holdout problem, especially following NML Capital v Argentina.87 This thesis shall
primarily adopt a library-based research approach and will use the Internet as a material
source for pertinent legal documents and publications. In order to fully understand the
outlined questions, a thorough assessment of the history of sovereign insolvency and debt
restructuring is necessary. This will require an analysis of both, the relevant legal sources
and the global policies intertwined with sovereign financing and debt restructuring.
Furthermore the chief part of the research will involve an examination of current sovereign
debt restructuring mechanisms, their legal value and their interplay with international law.
This will especially require a consideration and interpretation of soft law instruments88 as well
as (legally binding) restructuring arrangements, which can be found on the Internet. To
inform this analysis, reliance will be placed on academic literature. Moreover IMF
publications as well as papers of leading private financial institutions, such as the American
Bankers Associations will serve as an integral source. The recent proposals by the IMF and
the UN General Assembly to effectively mitigate the risks of holdout investors can be found
on the Internet.
Further, research will review the solutions proposed by scholars and practitioners to enhance
the status quo by implementing a more practicable interpretation of sovereign debt contracts.
The underlying documents are mostly accessible on the Internet. The pertinent articles and
books cited in the preliminary bibliography can mostly be found in the libraries at University
of Vienna and will be extended by further research in the due course of this study. A planned
research semester at a University in an English speaking country shall too contribute to the
literature, which will be assessed and analysed in the due course of completing this thesis.
6. Schedule
87
NML Capital, Ltd v Republic of Argentina, above no. 10. 88
Such as the UNCTAD Principles on Sovereign Lending and Borrowing, <http://unctad.org/en/docs/gdsddf2011misc1_en.pdf> (accessed on 8
th November 14).
The proposed research shall progress as follows:
Time Span Research Objective Coursework
Winter term 2014/15 Submission of the exposé
Presentation of the research
proposal
Signing of the dissertation
agreement
VO Juristische
Methodenlehre (2 SWS)
KU zur Judikatur- und
Textanalyse (Spinoza’s Ethik
– 4 SWS)
Summer term 2015 Research semester at the
University of New South
Wales
Drafting chapter 1 to 2
Wahlfächer im International
(Financial) Law (<8 SWS)
Winter term 2015/16 Drafting and completion of
chapter 3 to 4
Summer term 2016 Drafting and completion of
chapter 5 to 7
Winter term 2016/2017 Revision in the light of new
developments and
submission of the doctoral
thesis after the completion of
chapter 8
6. Preliminary Bibliography
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