“If this makes debt relief harder, the IMF’s job is made much harder,” said Anna Gelpern, senior fellow at the Peterson Institute for International Economics and a law professor at Georgetown University.
Charles Blitzer, a former IMF official and a consultant with significant experience in debt restructurings like Argentina’s, said the US and IMF concerns are overblown, and not based on evidence or careful analysis.
The ruling, Blitzer said, would only be applicable to a very few cases because the language in the bond contracts was unusual. The case revolves around clauses in the original 1990s bond contracts that gave equal rankings for all kinds of debt.
Secondly, the ruling was explicitly a reaction to Argentina’s behavior toward creditors, such as its unwillingness to negotiate and obey other court orders, Blitzer said.
He also noted many recent bond contracts have collective action clauses that allow a majority, say 75 percent, to determine whether all bondholders go along with a debt restructuring.
Blitzer said there are some serious misconceptions about why previous debt restructurings, with the exception only of Argentina, have been highly successful with acceptance rates well above 90 percent.
“The vast majority of the institutions which own sovereign bonds are in the business of only managing performing, liquid debt,” he said. “Pursuing holdout strategies simply is not part of the mandates they have from their own investors. That business focus will not change regardless of how this suit is ultimately resolved.”
The judge’s ruling to force Argentina to pay using the US funds transfer system prompted alarm reflected in a flood of legal briefs from US banks, the Federal Reserve, the US government and other institutions, warning of serious damage.
The Federal Reserve and the Clearing House, a trade group representing the world’s largest commercial banks, told the judge to make sure his order would not affect the US funds transfer system.
The entire system depends on transfers being “immediate, final and irrevocable” when processed, the Federal Reserve said. Requiring intermediaries to identify, stop and divert payments according to court orders “would impede the use of rapid electronic funds transfers in commerce by causing delays and driving up costs.”
Argentina says it cannot possibly comply with the judge’s order without ruining its economic recovery. The country has been unable and unwilling to issue new bonds in a foreign currency because of the case as it would have to pay prohibitive interest rates. Anyone wanting to insure current Argentine debt against another default must pay the highest prices in the world.
Additional reporting by Michael Warren