How Argentina’s Finance Settlement Changed Sovereign Debt Law

Argentina’s 2016 settlement with holdout hedge funds changed sovereign debt law by exposing a fatal weakness in the standard bond contract and forcing the market to rewrite it. A New York court’s reading of the pari passu clause let a 7% minority of creditors block payments to the 93% who had accepted a restructuring, and once Argentina paid roughly $4.65 billion to end the standoff, the industry moved quickly to close the door the ruling had opened.¹

The Pari Passu Ruling That Made the Case a Precedent

Argentina defaulted on roughly $100 billion in bonds in 2001. Two debt exchanges, in 2005 and 2010, drew in about 91% of bondholders, who accepted new bonds worth around 27% to 30% of the originals on a net present basis. Argentina’s Congress passed the “Lock Law” (Ley Cerrojo) to bar the government from ever offering the remaining 7% better terms.²

Those holdouts, led by NML Capital, sued in the Southern District of New York. In 2012, Judge Thomas Griesa read the pari passu clause in Argentina’s original bond contracts — a boilerplate provision requiring that payment obligations rank equally — to mean that Argentina could not pay its restructured creditors unless it also paid the holdouts in full at the same time. He extended the injunction to trustees, payment agents, and banks anywhere in the payment chain. The Second Circuit upheld him, and in June 2014 the Supreme Court declined to hear Argentina’s appeal.³

On the same day, in Republic of Argentina v. NML Capital, Ltd., the Court ruled 7–1 that the Foreign Sovereign Immunities Act did not stop U.S. courts from ordering discovery of a foreign sovereign’s worldwide assets, giving creditors a global tool to locate attachable property.⁴ Argentina, unable to route payments through New York, entered a technical default on July 30, 2014, missing a $539 million interest payment.⁵

What the 2016 Settlement Established

The election of Mauricio Macri in late 2015 broke the standoff. On February 29, 2016, Argentina agreed to pay approximately $4.65 billion to four holdouts — NML Capital, Aurelius Capital, Davidson Kempner, and Bracebridge Capital — covering about 75% of the principal and interest they claimed.⁶ NML collected $2.28 billion on a $617 million investment. Bracebridge received $950 million on principal of $120 million, a return of roughly 800%.⁷ The 93% of creditors who had accepted restructuring received about 35 cents on the dollar.

The deal was conditional. Argentina’s Congress had to repeal the Lock Law and the related Sovereign Payment Law. The lower house voted 165 to 86 on March 16, 2016, and the Senate followed on March 31 after a twenty-hour debate.⁷⁸⁹

The settlement’s legal significance was not the dollar figure. It was the confirmation, borne out by Argentina paying, that a determined minority creditor armed with the Griesa reading of pari passu could halt a sovereign restructuring accepted by more than nine in ten bondholders.

The Contract Rewrite

The market responded before the ink on the Supreme Court’s 2014 decisions was dry. In August 2014, the International Capital Market Association published new model provisions for sovereign bonds. The revised pari passu clause states explicitly that an issuer has no obligation to make equal or pro rata payments across different series, directly foreclosing the interpretation Judge Griesa had adopted.¹⁰

The rewrite also strengthened Collective Action Clauses. The new “single-limb” mechanism allows a restructuring to bind all bondholders across every series of a sovereign’s debt if a 75% aggregate supermajority approves, rather than requiring separate votes series by series.¹⁰ Assembling a blocking stake across an entire debt stock is far more expensive than cornering a single issue, which was the strategy that made the Argentina holdouts profitable.

Uptake was fast. By October 2016, roughly 85% of new international sovereign bond issuances included the enhanced provisions, according to the IMF.¹¹ For new debt, the Argentina playbook was largely closed off within two years of the settlement.

How Courts Have Since Narrowed the Precedent

Later decisions treated the Griesa injunction as a product of its facts rather than a general rule. In Export-Import Bank of the Republic of China v. Grenada, courts found that a breach of a pari passu clause alone would not support injunctive relief without the kind of “extraordinary circumstances” present against Argentina — specifically, the Lock Law and Argentina’s public defiance of the court’s orders.¹¹ A future sovereign that neither legislates against its holdouts nor openly refuses to comply is unlikely to face the same remedy.

The discovery ruling in the companion Supreme Court case, by contrast, remains available to creditors as a live tool for locating a sovereign’s assets abroad.⁴

What Remains Unresolved

The contract fix applies to new issuances. Approximately $900 billion in outstanding sovereign bonds still carry the older, vulnerable pari passu and CAC language, and that stock will continue to pose holdout risk until it matures or is refinanced.¹⁰

No statutory framework filled the gap either. Argentina pushed for one at the United Nations, and in September 2015 the General Assembly adopted nine non-binding principles on sovereign debt restructuring — including sovereignty, good faith, and majority restructuring — by a vote of 136 in favor, six against, and 41 abstentions.¹² The principles carried no legal force. The change in sovereign debt law that came out of the Argentina saga is a change in contract drafting, backed by a narrowing line of case law, rather than a change in the underlying legal architecture.

1
NPR. Argentina Reaches Settlement With Hedge Funds, Ending 15-Year Dispute
2
Every CRS Report. Argentina’s Defaulted Sovereign Debt: Dealing With the Holdouts
3
Clifford Chance. Sovereign Debt Restructuring: NML Capital v. Argentina
4
Justia. Republic of Argentina v. NML Capital, Ltd.
5
New York Times. In Hedge Fund, Argentina Finds Relentless Foe
6
South Centre. Implications of Argentina’s Deal With Super Holdouts
7
Third World Network. Argentina’s Settlement With Vulture Funds
8
DW. Argentina Returns to Credit Markets With First Bond in 15 Years
9
Jones Day. Sovereign Debt Update
10
CIGI. Sovereign Debt Restructuring and the New Collective Action Clauses
11
Oxford Academic. The Pari Passu Clause and the Argentine Litigation
12
Harvard International Law Journal. U.N. General Assembly Adopts Basic Principles on Sovereign Debt Restructuring