The Growth of Debt and the Debt of Growth: Lessons from the Case of Argentina

Date01 March 2017
AuthorCecilia Nahón,Pablo J. López
Published date01 March 2017
DOIhttp://doi.org/10.1111/jols.12016
JOURNAL OF LAW AND SOCIETY
VOLUME 44, NUMBER 1, MARCH 2017
ISSN: 0263-323X, pp. 99±122
The Growth of Debt and the Debt of Growth: Lessons from
the Case of Argentina
Pablo J. Lo
¨pez* and Cecilia Naho
¨n**
Argentina's case is a `game changer' in the discussion about sovereign
debt across the globe, particularly regarding debt restructuring. This
article reviews Argentina's sovereign debt and economic growth
process over the last 25 years and draws lessons from the country's
trajectory. Alternating austerity and heterodox economic policies
resulted in different outcomes throughout this period. One lesson, in
particular, stands out: sustainable debt has been a necessary condition
for sustainable growth. Conversely, austerity policies combined with a
lax approach toward debt have led to economic recession and debt
unsustainability alike. Argentina's case underscores that the only way
to overcome the debt-recession trap is a timely and big-enough debt
restructuring that provides an economy with a fresh start. Neither
austerity policies nor debt roll-overs have done the job. That is why an
orderly, predictable, fair, and balanced sovereign debt restructuring
system is such a relevant ± still pending ± component of the
international financial architecture.
99
*University of Buenos Aires, Av. Co
Ârdoba 2122, Buenos Aires, Argentina.
Secretary of Finance at the Argentine Ministry of Economy, 2013±2015.
palopez77@gmail.com
** Model G20 Initiative, School of International Service, American
University, 4400 Massachusetts Avenue, NW, Washington, DC 20016,
United States of America. Argentine Ambassador to the United States, 2013±
2015.
cnahon@gmail.com
We are grateful to MartõÂn Guzman, SebastiaÂn Soler, Ana Adelardi, Marija Bartl, and
Markos Karavias for their valuable comments on an earlier draft of this article. Though
their feedback contributed to improving the article, we alone are responsible for its final
content.
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INTRODUCTION
Argentina made headlines around the world in June 2014 when, after debt
litigation lasting a decade, the United States Supreme Court let stand a ruling
in favour of distressed-debt hedge funds known as `vulture funds'. The
judicial system ruled against the arguments put forth by the United States
government, Brazil, France, and Mexico as amici curiae in support of the
Argentine position throughout the litigation. While Argentina had faced debt
problems in the past,
1
this time the situation was unique in domestic and
international terms alike.
Following a successful debt restructuring voluntarily accepted by 92.4 per
cent of Argentine bondholders, New York Federal Judge Griesa stated ± in
an unprecedented ruling ± that the country had violated a standard pari passu
clause in its un-restructured sovereign bonds that the country had stopped
paying in December 2001. Argentina was ordered to refrain from making
any payments on the new performing bonds until it made a ratable payment
to the holders of the old defaulted bonds (the so-called holdouts). When
Argentina payed its exchange bondholders in June 2014 as it had done since
2005, Judge Griesa blocked these overwhelming majority of good-faith
creditors ± unrelated to the litigation ± from collecting their payment by
prohibiting financial intermediaries from distributing the funds. The payment
chain was abruptly interrupted. Argentina denounced this unprecedented
negative ruling and rallied overwhelming international support.
In April 2016, the country once again made headlines when a newly
elected government decided to quickly put an end to the debt litigation by
paying off vulture funds through a multi-millionaire bond issuance, once
again under New York law. This decision is part of an `austerity' and
structural reform package currently being implemented in the country, with
foreseeable consequences: higher poverty and unemployment rates. At the
same time, after 15 years outside the international bond markets, Argentina
is now `back in business,' a return celebrated by many Wall Street bankers.
2
The case of Argentina has been a game changer in the sovereign debt
world, exposing the enormous obstacles that sovereign countries face within
the current international system to attaining and maintaining sustainable debt
levels compatible with sustainable growth. Debt overhang continues to be a
major threat to many advanced and developing economies alike. The goal of
100
1 Argentina defaulted seven times between 1825 and 2001: see E. Basualdo, Estudios
de Historia Econo
Âmica Argentina (2013).
2
Indeed, Wall Street is not only celebrating but, according to Bloomberg, `Wall Street Is
in Charge in Argentina (Again)' (2016) as `President Mauricio Macri, a former
businessman himself, has loaded his administration up with traders, financiers, entre-
preneurs, economists and corporate executives': see
art icl es/ 201 6-0 3-0 9/j pmo rga n-a nd- deu tsc he- ban k-b oys- are -ru nni ng- the -ne w-
argentina>.
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this article is to broadly review Argentina's sovereign debt and growth
process over the last 25 years, particularly focusing on Argentina's succes-
sive debt restructurings and the litigation with the vulture funds in the United
States, and draw lessons from this trajectory.
HOW ARGENTINA GOT TO THE BIGGEST DEFAULT IN HISTORY
(1990±2001)
1. The Brady plan: `too little, too late'
The 1980s are known as the `lost decade' for Latin America. But it was not
all about `loss'. A decisive transference of power from nation states to its
international creditors ± mainly Wall Street banks ± took place throughout
the decade.
After a period (1974±1981) of lavish and loose loans to Latin American
economies ± mostly channelled through international banks' syndicates ± as
a result of the excess of liquidity in global financial markets, the `debt crisis'
exploded in 1982 after an abrupt hike in United States interest rates.
Cornered by over-indebtedness, most Latin American countries were unable
to meet upcoming debt maturities, even after the implementation of painful
adjustment programmes. Likewise, creditors, mostly United States commer-
cial banks, were reluctant to acknowledge the losses on their balance sheets,
which would have forced many into bankruptcy and expose the fragility of
the international financial system. The structural insolvency problem was not
addressed until the end of the decade, when it became apparent that the
persistent debt burden on the sluggish f iscal budgets required debt-
restructuring actions.
United States Treasury Secretary Nicholas Brady led the push for a
restructuring scheme that was accepted by ± and most likely designed with ±
international banks. The so-called `Brady Plan' consisted of an exchange of
old banking debt for newly issued sovereign bonds ± with a haircut on the
face value and an extension of maturities ± guaranteed by United States
securities. In order to secure the funds to acquire the United States collateral,
debtor countries would receive direct loans from international financial
institutions that were conditional upon the implementation of structural
adjustment programmes and reform packages. Mexico was the first to sign a
Brady deal in 1989. Many Latin American countries and other developing
economies followed, implementing their own Brady-type deals.
3
The World
Bank and the IMF eagerly backed the scheme because it furthered the then-
101
3 See J. Schumacher, C. Trebesch and H. Enderlein, `Sovereign Defaults in Court: The
Rise of Creditor Litigation 1976±2010' (2013), at
papers.cfm?abstract_id=2189997>.
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revered `Washington Consensus' throughout the South. According to former
Colombian Finance Minister Jose Antonio Ocampo, this scheme was `an
excellent way to deal with the US banking crisis, and an awful way to deal
with the Latin American debt crisis.'
4
Argentina reached an agreement with its creditors in 1992. In exchange
for debt amounting to around $30 billion ($21 billion in capital plus interest
in arrears), the country issued new securities in April 1993 with a face value
of $25.6 billion, partially guaranteed by United States securities and a
deposit at the Federal Reserve.
5
Different analysts calculated the haircut on
this transaction to be between 20 and 35 per cent.
6
There were two important consequences of the Brady plan in Argentina,
in particular, but also in Latin America in general. First, the nature and
profile of countries' creditors changed, as sovereign bonds ± mostly issued
under New York law ± began to circulate on a large scale in international
capital markets. As the banking sector was in practice `bailed-out', bond-
holders became highly atomized, anonymous, and widespread across the
globe, including a growing number of hedge funds increasingly specializing
in such bonds. Whereas sovereign bonds represented 27 per cent of the total
public debt before the Brady deal (in December 1992), their weight rose to
almost 70 per cent of the total Argentine public debt after the plan's imple-
mentation a year later. Debt with international financial institutions also
increased, although modestly. Conversely, commercial banks reduced their
participation as creditors of the country from 34 per cent before the Brady
plan to roughly 2 per cent after the restructuring.
7
A second result of the
Brady plan ± arguably its main goal ± was to get debtors ready to regain
access to international capital markets.
Briefly, the Brady restructuring was the pillar of a new debt cycle in
Argentina and throughout the region, setting the basis for a new phase of
over-indebtedness a decade later. Although it involved certain haircuts in
face value, it turned out to be a clear example of the so-called `too little, too
late' problem in debt restructurings.
8
In the case of Argentina, just a few
months after the Brady deal's implementation, total public debt was already
102
4 Cited by J. Roos, `Since the Mexican Debt Crisis, 30 years of neoliberalism' ROAR
Magazine, 22 August 2012, at
neoliberalism/>.
5 For the Brady Plan in Argentina, see R. Lavagna and L. Sigaut, `Un anaÂlisis del ingreso
argentino al Brady' (1992) 2(16) Nuestros Bancos de Provincia; M. Sangermano, `Los
planes Baker y Brady. Alternativas de solucioÂn a la crisis de la deuda de argentina y
paõÂses latinoamericanos' (2005) FundacioÂn EGE Working Paper.
6 For a discussion on different methodologies to estimate haircuts in debt restructuring
processes, see J.J. Cruces and C. Trebesch, `Sovereign Defaults: The Price of
Haircuts' (2013) 5(3) Am. Economic J.: Macroeconomics 85.
7 Data from the Ministry of Economy of Argentina.
8 See M. Guzman, J.A. Ocampo, and J. Stiglitz, Too Little, Too Late: The Quest to
Resolve Sovereign Debt Crises (2016).
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higher than before the agreement ($71 billion in December 1993 as opposed
to $63 billion in December 1992).
2. The convertibility regime: lots of austerity and lots of debt
Re-entering the debt cycle was necessary to finance Argentina's structural
reform package, which included capital deregulation, market liberalization,
and privatization of public utilities and the pension system.
9
In April 1991,
the Menem administration passed the `Convertibility Law,' which estab-
lished a currency board that pegged the Argentine peso to the US dollar to
stabilize the economy and bring back economic growth. Under this regime,
the monetary base had to be backed by foreign reserves, so monetary policy
was basically eliminated as an economic tool. Initially, the convertibility
regime was effective in controlling hyperinflat ion, and the economy
experienced a few years of positive economic growth as a consequence of
new investments in some specific sectors and a consumption boom financed
by foreign capital. Argentina's `success' was then showcased around the
world.
However, as early as 1994, the Mexican `Tequila' crisis hit Argentina and
revealed the artificial and fragile foundation of convertibility, as well as its
devastating consequences on production and employment. At first, GDP
growth was unstable ± and jobless ± and became definitively negative from
mid-1998 onwards (Table 1). Unemployment stabilized at double-digit rates,
with poverty levels rising from 19 per cent in 1994 to 35.4 per cent in 2001.
The primary fiscal result did not improve due to the decline in revenues, a
consequence of economic stagnation and the privatization of the pension
system. Additionally, the growing bulk of interest payments deepened the
negative fiscal result and increased pressure on the balance of payments.
Fiscal austerity and the appreciation of the peso resulted in a decline of
tradable sector activities, with the exception of the traditional primary low-
value-added sector, as imported goods flooded the economy, deepening the
structural current account deficit. With a few exceptions, Argentina's
manufacturing sector was significantly reduced: its contribution to GDP
decreased from 16.5 per cent in 1991 to 13.6 per cent in 2001.
The mid-decade crisis also made it apparent that the convertibility regime
relied on unlimited flows of foreign currency to maintain an increasingly
overvalued exchange rate. At the beginning of the decade, foreign currency
was mostly provided by a massive privatization process ± strategic state
companies were undersold overnight ± and foreign direct investment (FDI),
103
9 For an analysis of convertibility, see M. Damill, R. Frenkel, and R. Maurizio,
`Argentina: A decade of currency board. An analysis of growth, employment and
income distribution' (2002) ILO Employment Paper 2002/42. On the privatization
process in Argentina, see, among many, E. Basualdo et al., El proceso de
privatizacio
Ân en Argentina. La renegociacio
Ân con las empresas privatizadas (2002).
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104
Table 1. Performance of selected macroeconomic variables, 1993±2002
Real Economy Fiscal Result Balance of Payments
GDP Industrial Unemploy- Primary Fiscal Interest Capital Current Current
growth GDP ment rate Fiscal Result Payments Account Account Account
rate growth Result including to Public ($million) ($million) (to GDP)
rate (to GDP) interest Tax
payments Revenues
(to GDP)
1993 9.6% 2.59% 1.25% 6.0% 14,180 ÿ8,209 ÿ3.77%
1994 5.79% 4.50% 11.5% 1.29% ÿ0.04% 6.9% 13,764 ÿ10,981 ÿ4.63%
1995 ÿ2.66% ÿ7.16% 17.5% 1.14% ÿ0.58% 9.2% 7,687 ÿ5,104 ÿ2.14%
1996 5.16% 6.45% 17.2% ÿ0.36% ÿ2.20% 9.7% 12,198 ÿ6,755 ÿ2.69%
1997 7.69% 9.15% 14.9% 0.54% ÿ1.60% 10.9% 17,643 ÿ12,116 ÿ4.49%
1998 3.82% 1.85% 12.9% 0.94% ÿ1.48% 12.2% 18,281 ÿ14,465 ÿ5.25%
1999 ÿ2.93% ÿ7.93% 14.3% 1.32% ÿ1.82% 15.9% 13,623 ÿ11,910 ÿ4.54%
2000 ÿ0.72% ÿ3.82% 15.1% 1.09% ÿ2.58% 18.5% 8,826 ÿ8,955 ÿ3.40%
2001 ÿ3.96% ÿ7.36% 17.4% 0.58% ÿ3.48% 23.4% ÿ5,442 ÿ3,780 ÿ1.51%
2002 ÿ9.32% ÿ10.96% 19.7% 0.77% ÿ1.54% 13.3% ÿ11,339 8,702 2.95%
Source: Elaborated by the authors with data from Argentina's Ministry of Economy and National Statistics Agency (INDEC)
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but these sources slowed after the crisis. As a result, foreign borrowing
became the main way of sustaining convertibility.
10
The debt path was
explosive (Tables 2 and 3). Private sector debt increased sevenfold between
1991 and 2001.
11
But it fell to the public sector to cover convertibility's
ever-increasing foreign currency needs. Foreign indebtedness became the
main channel for financing the balance of payments, maintaining inter-
national reserves, and sustaining the nominal value of the domestic currency.
The economy fell into recession in the fourth quarter of 1998, and the debt
burden began to escalate. Additionally, the successive crises in emerging
markets in the second half of the 1990s (the 1997 Asian financial crisis, the
Russian crisis in 1998, the Brazilian crisis and devaluation in 1999) had
inevitable contagion effects on Argentina, as liquidity fled (back) to ad-
vanced economies. The country's risk premium rose, increasing the weight
of interest debt payments (for both public and private debt) and making it
harder (more expensive) to issue new international bonds to cover upcoming
debt maturities.
12
105
Table 2. Public Debt, 1992±2002
Total Public Debt ($million) Total Public Debt (to GDP)
1992 63,250
1993 71,112 33%
1994 81,820 34%
1995 88,711 37%
1996 99,046 39%
1997 103,718 38%
1998 114,134 41%
1999 123,366 47%
2000 129,750 49%
2001 144,222 57%
2002 152,974 166%
Source: elaborated by the authors with data from Argentina's Ministry of Economy and
National Statistics Agency (INDEC)
10 On the relation between capital flight, debt, and FDI, see C. NahoÂn, `Financiamiento
externo y desarrollo econoÂmico en la Argentina: la dinaÂmica de flujos cruzados
durante el reÂgimen de Convertibilidad' in Transformaciones recientes en la economõ
Âa
argentina: tendencias y perspectivas, eds. V. Basualdo and K. Forcinito (2002) 279.
11 On private debt evolution, see E. Basualdo, C. NahoÂn, and H. Nochteff, `La deuda
externa privada en la Argentina (1991±2005). Trayectoria, naturaleza y protagonistas'
(2007) 47 Desarrollo Econo
Âmico 193.
12 Public debt interests over GDP expanded from 1.6 per cent in 1993 to 3.8 per cent in
2001. The average risk premium was 430 points in 1997, 675 in 1998, and 870 points
in 1999: see Graph 1.
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Notwithstanding these challenges, the Argentine government, in tandem
with the IMF and World Bank, determined to comply with the currency
parity, kept the debt wheel going. New schemes were implemented to
capture international liquidity, such as issuing debt securities in European
markets (mostly in Germany and Italy) through second-tier local banks, or
106
Table 3. International bonds issued by Argentina, 1991±2001
Number of Nominal Value Average maturity
operations ($million) (years)
1991 2 500 2.0
1992 1 250 5.0
1993 6 2,121 6.9
1994 19 2,600 3.3
1995 18 6,370 4.0
1996 30 10,413 8.2
1997 18 10,214 14.9
1998 24 11,664 13.3
1999 40 11,869 7.6
2000 16 12,359 11.8
2001 11 32,519 16.8
1991±2001 185 100,879 12.2
Source: elaborated by the authors with data from Ministry of Economy, Argentina
Graph 1: EMBI+ Argentina (monthly average)
Source: elaborated by the authors, based on Bloomberg
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offering instruments with odd structures that would become very expensive
for the country in the end.
By the early 2000s, very few genuine sources of capital were available for
the country. To cover debt maturities, the government put together a so-
called `blindaje' (shield) involving $39.7 billion in loans from international
institutions, Argentine institutional investors, and private bondholders.
Disbursements of funds under these facilities were conditional upon the
implementation of additional reforms and adjustment policies overseen by
the IMF, including a 13 per cent nominal reduction of public employees'
wages and pensions to reach a `zero fiscal deficit'. But a few months later,
the country needed new financing to pay the debt services, while the risk
premium doubled again. A last, desperate attempt to avoid default and
devaluation of the local currency took place in the second half of 2001: a
mega debt swap (the so-called `mega-canje') for close to $30 billion in short-
term debt in exchange for bonds with longer maturities but higher interest
rates and face value. The IMF played a significant role in the design and
implementation of these successive debt arrangements and supported
Argentina's efforts to sustain convertibility through 2001.
13
Lastly, in the midst of a depressed economy, convertibility collapsed in
December 2001.
14
Almost immediately, Argentina's Congress formally
declared a default on all of the country's public external debt. Soon after, in
early 2002, the peso was sharply devalued and the debt-to-GDP ratio
rocketed to 166 per cent, as most of the public debt was held by non-
residents denominated in foreign currency. It was the biggest default in
history: 152 different types of bonds in eight legislations and six currencies
that represented $81 billion at face value and interest in arrears.
HOW ARGENTINA GOT TO THE `TRIAL OF THE CENTURY' IN
SOVEREIGN DEBT RESTRUCTURING (2003±2015)
1. `The dead do not pay their debts'
In 2001, after a decade of being the poster-child of neoliberalism, Argentina
defaulted on its sovereign debt. It also defaulted on its people. Contrary to
claims that `the Argentine people essentially had a wild party and woke up
with a hangover,'
15
Argentines were unquestionably the default's main
107
13 The role played by the IMF raised sharp criticism, even from its own Independent
Evaluation Office (IEO): see IMF, Report on the Evaluation of the Role of the IMF in
Argentina, 1991±2001 (2004).
14 See M. Damill and R. Frenkel, `Argentina: Macroeconomic Performance and Crisis'
in Stabilization Policies for Growth and Development, eds. R. French-Davis, R.D.
Nayyar, and J.E. Stiglitz (2003).
15 D. Bandow, `Supreme Court Moves Us Closer To Holding Deadbeat Argentina
Accountable' Forbes, 31 October 2013.
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victims. With 53 per cent of the population living in poverty (May 2002),
Argentina was at a critical juncture, with a paralysed economy and a dire
political situation.
It took the country more than two years to hold new presidential elections
and be able to face its sovereign debt default. The total amount of defaulted
public external debt was close to $100 billion, including $81 billion of debt
with private bondholders. In the absence of an international bankruptcy
framework for sovereign nations, Argentina followed established inter-
national market practices to restructure its debt through a voluntary debt
exchange. In 2005, Argentina launched a global bid to exchange defaulted
bonds for new securities with modified terms. Contrary to the experience in
the 1990s, the country chose not to resort to the IMF and World Bank for
assistance in the restructuring, avoiding therefore any conditionality on
economic policy.
Two main principles guided the restructuring. First, Argentina's offer was
determined based on its real payment capacity, which required a significant
70 per cent haircut and a lengthening of maturity.
16
The so-called financial
community around the world accused the government of imposing too big a
haircut, triggering enormous pressure on the country to `sweeten' the deal.
However, the Kirchner administration argued that the debt restructuring
would have to be deep enough to provide the conditions for sustainable
economic growth with social inclusion, that would ultimately be convenient
for investors too. The rationale was very simple but still ground-breaking at
the time: Argentina needed to grow to be able to honour its debts. As
President Kirchner famously stated at the United Nations General Assembly
in New York in September 2005: `The dead do not pay their debts.'
In order to increase acceptance among bondholders, the final exchange
offer incorporated Gross Domestic Product (GDP)-linked securities, through
which bondholders would receive extra payments if the economy grew at a
higher than base-case threshold growth rate of around 3 per cent.
17
In fact,
restructured bondholders benefited greatly from Argentina's high growth
rates until 2011, because almost every year GDP growth surpassed the base-
case threshold value.
18
However, the fact that these securities were valued at
low levels at the time of the exchange raised questions about their
effectiveness.
108
16 Estimates of the haircut applied in this case range between 65 per cent and 75 per
cent, depending on the methodology used in the calculations: see Ministry of
Economy of Argentina, `Exchange Offering. Final Announcement', at
www.mecon .gob.ar/fin anzas/sfinan /documentos /180305_anun cio_resulta dos.pdf>;
Cruces and Trebesch, op. cit., n. 6.
17 See S. Kim Park and T. Samples, `Towards Sovereign Equity' (2016) 21 Stanford J.
of Law, Business and Finance 31.
18 See M. Guzman, `An Analysis of Argentina's 2001 Default Resolution' (2016) CIGI
paper no. 110, at
resolution>.
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The second principle that guided the debt restructuring was inter-creditor
equity, guaranteeing all similarly-situated private bondholders the same deal.
This equal treatment commitment was critical to maximize the level of
acceptance of the offer, stimulating bondholders to join the swap voluntarily,
since no better exchange deal would be offered to bondholders in the future.
Legally, this principle was introduced in the bonds' prospectus as a clause
known as Rights Upon Future Offers (RUFO). According to the RUFO
clause, if Argentina `voluntarily' made a better offer to some creditors before
the end of December 2014, the rest of the bondholders would be entitled to
the same treatment.
Over three-quarters (76.1 per cent) of Argentina's bondholders adhered. A
second debt exchange, under the same terms of the 2005 debt swap, followed
in 2010 during President Cristina FernaÂndez de Kirchner's first term,
elevating the total restructured bonds to 92.4 per cent of the original
defaulted nominal value. Participants received new performing debt instru-
ments honoured ever since. The debt-to-GDP ratio rapidly reflected the
impact of the restructuring: public debt declined from 106 per cent of GDP
in 2004 to 52 per cent in 2006, and external public debt came down from 62
to 21 per cent in the same period. After the 2010 exchange, these ratios
reached 36 per cent and 13 per cent, respectively (Table 4). Consistent with
the strategic goal of reducing dependency on foreign flows and recovering
policy sovereignty, in 2006 Argentina paid all of its IMF obligations ahead
of schedule ($9.5 billion).
109
Table 4. Public debt, 2003±2014
Total Public Total Public External Debt with
Debt Debt (to Debt (to private sector
($million) GDP) GDP) in foreign
currency (to GDP)
2002 152,974 166% 95% NA
2003 178,821 139% 79% 79%
2004 191,296 106% 62% 60%
2005 128,630 60% 29% 16%
2006 136,725 52% 21% 15%
2007 144,729 44% 19% 13%
2008 145,975 39% 15% 10%
2009 147,119 39% 15% 9%
2010 164,330 36% 13% 10%
2011 178,963 33% 11% 8%
2012 197,464 35% 11% 8%
2013 202,630 39% 12% 8%
2014 221,748 43% 13% 9%
Source: Elaborated by the authors with data from the Ministry of Economy, Argentina
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The two exchange transactions meant that the country issued more than
$40 billion in face value of new bonds, and honoured from that moment on
all its serviced maturities, including almost $10 billion in additional
payments between 2005 and 2011 because the real GDP growth rate passed
the base-case threshold of the GDP-linked securities.
2. Heterodox economics on the move: a model of growth with social inclusion
The process of debt reduction was a key element within the major goal of
growth with social inclusion that Argentina implemented since 2003.
19
The
devaluation in early 2002, in a strongly recessive environment with high
levels of unemployment and idle capacity, had a moderate impact on prices
(pass-through). Consequently, in the following years, the country was able to
sustain a competitive real exchange rate. In addition, active policies to
promote production and to reactivate the domestic market ± through both
consumption and investment demand ± were put in place. In a favourable
international context due to high commodity prices, Argentina also reintro-
duced taxes on its main primary export products. These taxes, together with
the fiscal relief resulting from the default status, allowed the government to
develop active inclusion policies and al locate resources to subsidize
production ± and consumption of certain basic services ± without putting
at risk the fiscal result (Table 5).
In the years following the exchange, the country did increase its payments
to bondholders of the GDP-linked securities as a result of the high growth
rates achieved (Table 6). The mechanism was virtuous: debt servicing did
not prevent the country from growing at high levels and, in turn, economic
growth allowed for increased debt payments. All in all, since 2007, public
debt interest payments stabilized at around 2 per cent of GDP, nearly half the
burden it represented at the end of the 1990s.
Between 2003 and 2008, within a context of favourable terms of trade for
Latin America, domestic output grew by 7.7 per cent per year on average and
unemployment dropped to 7.3 per cent over the same period, after reaching
levels of around 20 per cent in 2002.
20
The recovery and later expansion of
the manufacturing sector was critical for the creation of millions of jobs. As
a result, income distribution improved considerably. According to the World
110
19 There is an intense on-going debate about the achievements and shortcomings of the
economic policy over those years: see Centro de Investigacio n y FormacioÂn de la
Repu
Âblica Argentina (CIFRA), `La naturaleza polõÂtica y la trayectoria econoÂmica de
los g obie rnos k irch neri sta s' (20 15) Wo rkin g Pap er no. 1 4, at http ://
www.centrocifra.org.ar/docs/final.pdf>; M. Damill, R. Frenkel, and M. Rapetti,
`Macroeconomic Policy in Argentina during 2002±2013' (2015) 57 Comparative
Economic Studies 369; M. Guzman and J. Stiglitz, `Argentina shows Greece there
may be Life after Default' Huffington Post, 5 March 2015.
20 Official 2003±2015 GDP growth estimates are currently being revised; we take
available data as of August 2016.
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Bank, the GINI index descended from 53.5 in 2003 to 46.3 in 2008 (Table 5)
and the income share of the lowest 10 per cent almost doubled from 2003 to
2008. Despite persistent inflation ± in two digits for most of the decade ±
wages and pensions experienced a positive evolution in real terms due to
higher nominal increases that more than compensated for price rises.
21
This
sustained improvement in purchasing power and income distribution was
essential to increase aggregate demand and create a virtuous cycle of
inclusive growth.
22
With a growing domestic market and a significant
111
Table 5. Selected macroeconomic indicators, 2003±2015
Real Economy Fiscal Result Income
Distribution
GDP Unemploy- Primary Fiscal Result GINI
growth ment rate Fiscal including index*
rate (4th quarter Result interest
of each year) to GDP payments
to GDP
2003 8.84% 14.5% 2.31% 0.48% 53.54
2004 9.03% 12.1% 3.88% 2.60% 50.18
2005 9.20% 10.1% 3.70% 1.77% 49.27
2006 8.36% 8.7% 3.54% 1.78% 48.26
2007 8.00% 7.5% 3.17% 1.14% 47.37
2008 3.10% 7.3% 3.13% 1.41% 46.27
2009 0.05% 8.4% 1.51% ÿ0.62% 45.27
2010 9.14% 7.3% 1.74% 0.21% 44.50
2011 8.55% 6.7% 0.27% ÿ1.66% 43.57
2012 0.95% 6.9% ÿ0.20% ÿ2.57% 42.49
2013 2.93% 6.4% ÿ0.67% ÿ1.93% 42.28
2014 0.38% 6.9% ÿ0.87% ÿ2.48% NA
2015 2.20% 5.9% ÿ2.06% ÿ4.44% NA
* For the GINI index we used the World Bank Database; 2013 is the last available figure
for Argentina.
Source: elaborated by the authors based on IMF, World Bank, and Argentina's Ministry
of Economy and National Statistics Agency (INDEC) as of August 2016
21 Briefly, the inflationary process was a consequence of several domestic and
international factors. The cycle of rising commodity prices pushed local food prices
up. Also, the existence of rigidities and non-competitive market structures in certain
productive sectors put extra pressure on prices. Moreover, the increase in the
exchange rate also fuelled inflation over this period.
22 Due to the controversy raised about the reliability of the official inflation indicators in
2007, alternative estimates were developed with uneven degrees of accuracy. Despite
the differences among them, all official and private sources agree that real wages and
pensions increased every year between 2003 and 2015: see CIFRA, op. cit., n. 19.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
expansion of public works, investment also boomed: gross capital formation
recovered from 12 per cent of GDP before 2003 to more than 20 per cent in
2008, comprising domestic and foreign investment alike.
23
The 2008 outbreak of the financial crisis at the heart of Wall Street
shocked the global economy. In a context of volatility and flight-to-quality in
international capital markets, Argentina's low debt levels and limited
reliance on foreign flows served as a positive buffer. However, the global
crisis did impact the domestic economy, mainly through the `trade channel.'
In 2009, output stagnated, but active counter-cyclical fiscal policies were put
in place, which allowed the country to recover high growth rates in 2010 and
2011. During the following years, the global economy remained unstable and
anaemic, hitting Argentina's main trading partners ± notably Brazil and, to a
much lesser extent, China. The collapse of commodity prices, which started
after the peak of 2011, added to an already difficult international scenario, as
Latin American countries faced a reversal of the favourable terms of trade
they had benefited from in the previous decade.
As a result, the 2013±2015 period in Argentina was characterized by a
heterodox economic policy in a highly adverse international and regional
landscape.
24
Numerous speculative financial attacks against the Argentine
peso were also registered during this phase, putting additional stress on the
balance of payments and the Central Bank's international reserves. Macro-
economic policy was defensive in many aspects, but it proved effective in
sustaining employment and economic activity thanks to capital controls,
import barriers, and counter-cyclical fiscal and income policies as well as
credit incentive measures (Table 5).
Even in this challenging context, Argentina managed to make all its debt
payments without resorting to the austerity and adjustment policies widely
`recommended' by the IMF and World Bank. Indeed, in 2013, Argentina
reached an agreement with the Paris Club creditor nations to repay its 2001
overdue debt ($9.7 billion). Argentina also settled outstanding investment
treaty (ICSID) arbitration awards in 2013. As a result of this decade-long
process of international financial normalization, public debt as a percentage
of GDP declined from 166 per cent in 2002 to 43 per cent in 2014, with
public debt in foreign currency with private creditors standing below 10 per
cent (Table 4). However, the strength of the debt strategy would be seriously
challenged in 2014 in the United States.
3. From restructuring to litigation, from litigation to extortion
Vulture funds filed a lawsuit against Argentina as early as 2002, and
followed different litigation strategies throughout the decade until their
112
23 See World Bank data indicators, at .
24 As MeneÂndez explains in his contribution to this volume, the 2008 collapse is far
from over.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
decisive legal victory in 2014. This small minority of bondholders refused to
join the 2005 and 2010 Argentine debt exchanges, converting themselves
into `holdouts.' They had never lent money to Argentina. Instead, they
purchased already defaulted bonds for pennies on the dollar on the secondary
market with the sole purpose of making windfall profits by suing the country
for the original face value of the bonds plus interests and penalties.
25
Vulture funds profit from the absence of an international sovereign
bankruptcy regime and have preyed on stressed sovereign debt on all
continents for more than three decades. During the debt crisis in the 1980s
and the Brady restructurings, collective action was possible because debt was
in the hands of a fairly small number of large creditors. However, the global
shift since the 1990s from syndicated bank loans to bond markets has made
sovereign debt restructurings much more difficult due to the increasing
atomization of creditors, leading to the rise of debt serial litigators.
26
Furthermore, the partial elimination in 2004 by the New York state
legislature of the so-called `Champerty defense', a law that prohibited the
purchase of debt with the intent of bringing a lawsuit, provided significant
impetus to the sovereign debt litigation business in the United States.
27
The Argentine case was the last link in a chain of events eroding
sovereign immunity, tilting the playing field in favour of the most aggressive
and speculative stakeholders of the financial system. In the case of NML
Capital Ltd. v. Argentina, New York Federal Judge Griesa adopted a novel
interpretation ± contrary to established market understanding ± of the pari
passu boilerplate clause included in soverei gn bonds and ruled that
Argentina had breached it.
28
According to the most widely held inter-
pretation, the pari passu clause typically provides that certain bond debt will
rank pari passu with other debt, protecting creditors against legal sub-
ordination to another debt issued (or to be issued) by the same borrower.
However, Judge Griesa gave it a wider, odd, interpretation, ruling that a
sovereign cannot pay any of its debts without a ratable payment of other
(defaulted) debts within the scope of the pari passu clause.
29
By declining to
113
25 Guzman provides evidence of how the overwhelming majority of the bonds held by
the main litigant against Argentina, Paul Singer, were purchased after the debt
exchange of 2005: Guzman, op. cit., n. 18.
26 For an analysis of the process of debt atomization, see Schepel's article in this
volume. See, also, J.I. Blackman and R. Mukhi, `Evolution of Modern Sovereign
Debt Litigation: Vultures, Alter Egos, and Other Legal Fauna' (2010) 73 Law and
Contemporary Problems 47.
27 In 2004, the prohibition of the purchase of debt with the intent of bringing a lawsuit
was eliminated in New York State for debt purchases above $500,000.
28 `Brief for the United States of America as Amicus Curiae in support of the Republic
of Argentina's petition for panel rehearing and rehearing en banc', 28 December
2012.
29 Allen & Overy Global Law Intelligence Unit, `The pari passu clause and the
Argentine case' (2012).
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
review the case, the United States Supreme Court let Griesa's interpretation
stand.
30
Specifically, the ruling stated that Argentina was to refrain from making
any payments on its exchange bonds until a ratable payment ± of face value
plus interests, and a compensatory interest rate ± was made to the holdouts.
The required payment amounted at the time to $1.6 billion, four times the
bonds' face value of $0.44 billion. The ruling crafted an `equitable remedy'
that brought about the most inequitable result. The Financial Times chief
economics commentator, Martin Wolf, put it bluntly: `This is extortion
backed by the US judiciary.'
31
In its brief filed before the New York Court of
Appeals for the Second Circuit (4 April 2012), the United States government
stated that:
the district court's interpretation of the pari passu provision could enable a
single creditor to thwart the implementation of an internationally supported
restructuring plan, and thereby undermine the decades of effort the United
States has expended to encourage a system of cooperative resolution of
sovereign debt crises.
As the Brookings Institution said, this may be `[. . .] the first broadly replic-
able remedy against sovereign debtors since the days of gunboat diplomacy a
century ago.'
32
It could be argued that the new pari passu interpretation by
United States courts contradicts international law, violates third-party rights,
and goes against well-established financial practices and common sense. Not
surprisingly, the ruling also opened a Pandora's box of cross-litigation,
because the courts overstepped their jurisdiction and also obstructed col-
lection of payments of Argentine bonds denominated in euros, yens, and
pesos issued under European, Japanese, and Argentine laws.
Faced with such a ruling, Argentina reaffirmed its committed to honour its
obligations with 100 per cent of its bondholders under fair, equitable, legal,
and sustainable conditions, refusing to accept the vulture funds' extortion.
First, because in addition to paying the litigants $1.6 billion, Argentina
would have had to make additional payments of more than $15 billion to the
rest of the holdouts. Second, offering the vulture funds privileged treatment
over the overwhelming majority of its creditors would have violated
Argentine legislation and the RUFO clause, in force until the end of 2014.
The exchange bondholders would have had the right to demand the same
conditions as the vultures, which would have derailed Argentina's entire debt
114
30 For an in-depth analysis of the different interpretations of the pari passu clause, see
L.C. Bucheit and J.S. Pam, `The pari passu clause in sovereign debt instruments'
(2004) 53 Emory Law J. 869; S. Chodos, `From the pari passu discussion to the
``Illegality'' of making payments' in Guzman et al., op. cit., n. 8.
31 M. Wolf, `Defend Argentina from the vultures' Financial Times, 24 June 2014.
32 Brookings Institution, `Argentina and the Rebirth of the Holdout Problem' in
Revisiting Sovereign Bankruptcy (2013) ch. 3.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
restructuring and led to claims for more than $120 billion.
33
Simply put,
Argentina could not pay all bondholders what the vulture funds were
demanding for themselves.
In July 2014, after several meetings between Argentine authorities and the
litigants, no agreement was reached. Once again, the holdouts refused to join
the debt exchange under equitable conditions to those accepted by 92.4 per
cent of the bondholders, a deal which would have given them an immediate
profit of 300 per cent.
34
But they were litigating ± and speculating ± for a lot
more. On April 2016, a newly elected Argentine government would make
their wildest dreams come true.
HOW ARGENTINA GAVE IN TO THE VULTURE FUNDS (2016)
1. Back to the old business of issuing debt to pay debt
In December 2015, immediately after Mauricio Macri became President of
Argentina, the economic policy of the country underwent a complete
reversal, shifting back to a neoliberal economic model. A new package of
austerity policies and structural reforms ± detailed below ± is being
forcefully implemented.
The new government announced the removal of all existing restrictions on
foreign capital flows, devaluating the domestic currency by around 40 per
cent. In addition, the Central Bank increased the interest rates by more than a
third. These joint decisions exposed the domestic economy overnight to
highly volatile short-term speculative flows, providing for a lucrative
financial business at the expense of productive investments.
35
Additionally,
taxes relating to commodity exporters were lowered or eliminated, a measure
which, along with the currency devaluation and the significant hikes in
public utilities' prices, more than doubled the level of inflation to around
40 per cent.
36
An abrupt process of trade liberalization also had a negative
impact on domestic production ± especially manufacturing activities ± and
employment, contributing to a profound decline in GDP. According to the
115
33 This figure is a conservative estimate based on what the 2005 exchange bondholders
would have received in 2014 if granted the same financial treatment that vulture funds
obtained from Judge Griesa (net of the present value of the portfolio received in the
2005 exchange).
34 To estimate this, we consider the price MNL paid for the defaulted bonds as
documented by Guzman, op. cit., n. 18, versus the present value of the 2005 exchange
portfolio.
35 Between January and May 2016, US dollar speculative investors benefited from 38
per cent annual yields on the Central Bank peso bills.
36 The Buenos Aires City CPI Index reported a 43.5 per cent inter-annual increase in
August 2016: see data in
uploads/2016/09/ir_2016_1045.pdf>.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
IMF, the Argentine economy will fall by 1.5 per cent in 2016.
37
Supporters
of the neoliberal policies being implemented argue that this drop is an
inevitable consequence of the macroeconomic adjustments necessary to deal
with the so-called `heavy legacy' inherited. However, the clear-cut shift for
the worst in most ± if not all ± economic indicators in the first months of the
new government supports the perspective of a self-inflicted recession. These
abrupt policy changes were justified in the name of promised future rewards,
under the logic of trickle-down economics, of which there are no signs. In
fact, in the first six months of the new government, average real wages fell
by 12.1 per cent.
38
The Macri administration was also eager to put a quick end to the debt
litigation, and so they did. Two reasons stand out. The first was a political
decision to send a strong signal to investors of the new, market-friendly
Argentina. Second, there was a financial decision to clear the way for a new
phase of indebtedness. At the beginning of 2016, the new authorities began a
process of hurried `negotiations' with the holdouts. Within less than two
months, the country settled with the vulture funds and other smaller groups
of holdouts for a payment very close to the terms that Judge Griesa had set.
The Macri administration also agreed to pay tens of millions of dollars in
legal fees for the litigants that had harassed the country around the globe for
more than a decade.
39
On 31 March 2016, the Argentine Congress passed a
law to comply with the signed agreements, authorizing payments of up to
$12.5 billion to the holdouts.
40
Days later, Judge Griesa lifted the pari passu
injunction, releasing the disbursements made to good-faith bondholders. On
mid-April, Argentina issued New York jurisdiction bonds worth $16.5
billion in face value to raise the money required to pay the holdouts in cash.
The vulture's victory was as wide-ranging as was Argentina's capitula-
tion. First, the dispute resolution was very expensive for Argentina which, in
the end, paid the face value of the original defaulted bonds many times over,
in some cases up to nine times (Table 6). Whereas in the 2005 and 2010
restructurings, new debt of $43 billion was issued in exchange for defaulted
bonds with a face value of $75 billion, representing 92.4 per cent of
bondholders, the 2016 deal implied that the country issued bonds worth
$12.5 billion in exchange for about $6 billion in old debt in the hands of less
of 7.6 per cent of bondholders. Basically, the country paid almost four times
116
37 See IMF, World Economic Outlook database, updated as of 19 July 2016. The impact
on the industrial sector has been strongly reflected from March on, with the following
performance of the INDEC industrial index: ÿ3.8 per cent in March, ÿ5.2 per cent in
April, ÿ4.5 per cent in May, ÿ6.4 in June, and ÿ7.9 per cent in July.
38 CIFRA, Macroeconomic Report No. 20 (2016).
39 Argentina was forced to litigate in the courts of France, Japan, the United States,
Belgium, Switzerland, and Ghana, among others, to prevent vulture funds from
seizing diplomatic and military assets and bank accounts protected by international
law.
40 See Law 27.249 of `Public Debt Normalization and Credit Recovery'.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
more for each dollar restructured in 2016 than in the two previous
restructurings.
Second, the Macri Administration's deal enshrined inter-creditor inequity,
not only in favour of holdouts vis-aÁ-vis exchange bondholders but also
among holdouts themselves.
41
Table 6 shows the cash amounts received by
different groups of Argentine holdouts, illustrating the unequal yields
steaming from the settlements with the different holdouts, which range from
one and a half to nine times the face value.
42
However, a closer analysis
117
Table 6. Settlement with selected holdouts, 2016
Original Amount of Amount of settlement as
Face Value Settlement percentage of the defaulted
($million) ($million) bonds' principal value
Italian bondholders 900 1,350 150
NML Capital, Ltd 617 2,426 393
Blue Angel 177 410 232
Aurelius Group* 299 845 283
Bracebridge Capital, 120 987 823
LLC**
EM Limited 595 849 143
Montreux Group*** 42 308 733
* Aurelius Group includes four hedge funds: Aurelius Capital Master LTD, Aurelius
Capital Partners LP, Aurelius Opportunities Fund II LLC, and ACP Master LTD.
** Bracebridge Capital is the owner of three hedge funds that litigated against Argentina:
Olifant, FFI Fund, and FYI Fund.
*** Montreux Group includes four hedge funds: Montreux Partners LP, Los Angeles
Capital, Wilton Capital LTD, and Cordoba Capital.
Source: elaborated by the authors based on Office of the Cabinet Chief (August 2016)
41 See A. Gelpern, `Sovereign debt: now what?' (2016) 41 Yale J. of International Law
Online Special Edition; M. Guzman and J. Stiglitz, `How Hedge Funds Held
Argentina for Ransom' New York Times, 1 April 2016; and Guzman, op. cit., n. 18.
42 Though Table 6 does not exhaustively list all the holdout deals, it includes the most
relevant ones. For example, in the case of the Italian bondholders that litigated against
Argentina at ICSID under the Italian Bilateral Investment Treaty, the settlement was
less favourable since the case was not over: they received a payment of 150 per cent
of the original face value. For the holdouts litigating in New York, the differences
between the settlements relative to the original face value are mainly explained by: (i)
the different structures and interest rates of the defaulted bonds (not all the holdouts
had the same defaulted bonds) and (ii) the year in which each hedge fund obtained the
favourable judgment from the Court. Until the moment of the judgment, the Courts
recognized the full original face value plus the full interest, plus a `compensatory'
pre-judgement interest rate. In New York courts, this compensatory interest rate is
fixed at a usurious 9 per cent level since 1981. However, the post-judgment interest
rate follows the annual United States bond interest rate, considerable below 9 per
cent. In this sense, a favourable judgment earlier in time was a disadvantage
compared with those who received judgment more recently.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
reveals that the disparities were much greater. Considering that the vulture
funds purchased most of the Argentine bonds at huge discounts after the
2001 default, their return after the settlement was substantially higher. It is
insightful to review the case of NML Capital, the most aggressive litigant:
since they received three times the original face value of the defaulted bonds
but they purchased them for only 28 per cent of face value on average, they
received 14 times their original disbursement. NML's profitability was close
to 1,300 per cent.
43
This exorbitant profit contrasts with the situation of the
exchange bondholders ± the 92.4 per cent ± who accepted a haircut of around
70 per cent of face value. Even when considering the recovery in the market
value of the new Argentine bonds and the additional payments of the GDP-
linked securities, the current value of the 2005 exchange ranged between
0.99 and 1.33 dollars per dollar of the original face value in 2015, according
to estimates by Cruces and Samples under different scenarios.
44
Hence,
although restructured bondholders recovered the original face value thanks
to the GDP growth rate, the profits gained by vulture funds produced a
sizeably unequal distribution.
45
In a word, aggressive speculation and litiga-
tion paid off, as holdouts multiplied their profits compared with good-faith
investors.
Issuing debt to pay off the vulture funds was the first step into a new
tunnel of increased indebtedness. New additional debt has already been
issued by the federal government and certain provinces to pay maturities, to
finance current fiscal expenditure, and to provide foreign currency for
incessant capital flight. Though the low debt ratios achieved by the Kirchner
governments after 12 years of debt reduction provide room for a certain
degree of new commitments without affecting sustainability, this space is
being consumed all too rapidly, putting the Argentine economy on a risky
path once again. Numbers speak for themselves: in less than a year, the debt
to GDP ratio of total Argentine external debt increased by 12 percentage
points and the public external debt grew by more than 10 percentage points
(Table 7). Debt is growing again; the Argentine economy is contracting
again.
1. Beyond Argentina: the systemic implications of the Argentine case
The vulture funds' litigation against Argentina was a game changer in
sovereign debt markets. Multilateral and regional organizations, heads of
state and members of congress across the globe, NGOs, world-renowned
118
43 See Guzman, op. cit., n. 18.
44 J.J. Cruces and T. Samples, `Settling Sovereign Debt's ``Trial of the Century''' (2016)
Emory International La w Rev. (forthcoming). Avai lable at /
abstract=2719282> or .
45 Gelpern acknowledged that creditors who participated in the restructurings netted a
20±25 per cent return on principal: Gelpern, op. cit., n. 41.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
experts, and academics warned about the grave consequences of this case for
the predictability and stability of the international financial system and for
the rights of sovereign nations.
By blocking the flow of payments to creditors unrelated to the litigation,
United States courts empowered holdouts to sabotage sovereign debt
restructurings, rendering them virtually impossible in the future. Roubini
argued: `why would any future creditor who benefits from an orderly
restructuring vote for it if its new claims can be blocked by even a single
holdout creditor?'
46
The incentives to hold out have dramatically increased.
Indeed, while there is a way out for a company that has gone bankrupt,
sovereign nations have almost no sustainable way of restructuring their debts
to recover growth.
In the aftermath of the ruling, coordinated international efforts to limit
predatory behaviour and ensure orderly and predictable sovereign debt
restructurings have gained ground. Two main approaches stand out. On the
one hand, a `contractual' or `market-based' approach has been led by the
IMF, the G20, and the International Capital Markets Association (ICMA) to
promote the inclusion of so-called `vulture-proof clauses' in sovereign debt
contracts. An aggregated Collective Action Clause (CAC) and an updated
pari passu clause will make it more difficult for holdouts to block debt
restructurings. Despite its positive value, this approach does not address the
vulnerabilities generated by the $900 billion stock of performing inter-
national sovereign bonds, with maturities ranging from short term to 15±20
years, without the enhanced clauses.
47
In addition, there can be no certainty
that these provisions will not be circumvented ± or wrongly interpreted by a
court ± in the future. There are no fully `vulture-proof' clauses. In addition,
119
46 N. Roubini, `Gouging the Gauchos' Project Syndicate, 1 July 2014.
47 IMF, Progres s report on inc lusion of en hanced cont ractual pr ovisions in
international sovereign bond contracts (2015).
Table 7. External total and public debt, December 2014 to June 2016
Total Public Total Public
External External External External
Debt Debt Debt Debt
($million) ($million) to GDP to GDP
December 2014 144,801 80,731 29.40% 16.40%
September 2015 157,271 86,273 28.91% 15.86%
December 2015 152,631 83,876 36.78% 20.21%
March 2016 163,236 92,470 40.95% 23.20%
June 2016 188,266 121,299 40.30% 25.95%
Source: elaborated by the authors with data from Argentina's Ministry of Economy and
National Statistics Agency (INDEC)
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
this approach does not address the root causes of `too little, too late'
restructurings.
In a different approach, within the framework of the United Nations,
sovereign nations took action to build a `statutory' solution for sovereign
debt restructuring processes. On 10 September 2015, the United Nations
General Assembly (UNGA) adopted Resolution A/ 69/L.84 on `Basic
Principles on Sovereign Debt Restructuring Processes' with 136 states in
favour. With this historic resolution, the UN stated that sovereign debt
restructuring processes should be guided by customary law and by basic
international principles of law, such as sovereignty, good faith, transparency,
legitimacy, equitable treatment, and sustainability.
48
Despite the resolution's
approval by the vast majority of countries, it faced harsh opposition from
creditor nations: the United States, Germany, Japan, Canada, Israel, and the
United Kingdom.
CONCLUSIONS
The Great Recession has brought sovereign debt sustainability back to the
forefront. A recent McKinsey study concludes that, since 2007, global debt
has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage
points.
49
Global debt has grown in absolute and relative terms ± outpacing
GDP growth ± and has expanded in advanced and developing countries alike.
Within this fragile global context, the review of Argentina's sovereign
debt and growth process over the last 25 years delivers valuable lessons for
domestic and international debt policies in the future. The following lessons
stand out:
i. The combination of a cyclical overabundance of market liquidity at the
global level ± endlessly seeking profits through a lavish supply of
financial instruments ± with a highly deregulated domestic balance of
payments pushes countries all too often into the trap of accumulating
more and more debt to deal with present and future challenges.
Specifically, foreign indebtedness has played a relevant role in the short-
term survival of neoliberal economic models, but with dreadful longer-
term results when debt, most likely, becomes unsustainable. When
output stagnates (and unemployment increases) as a consequence of
recessive policies, tax revenues decline further, and public debt becomes
the main source for financing fiscal expenditures and meeting debt
maturities, without increasing either productivity or repayment capacity.
As Argentina's vicious-cycle experiences of the 1980s and late 1990s
120
48 UNCTAD, `United Nations General Assembly adopts basic principles on sovereign
debt re struc turing ' (2015 ), at tp://u nctad .org/e n/pag es/new sdeta ils.a spx?
OriginalVersionID=1074>.
49 McKinsey Global Institute, `Debt and (not much) deleveraging' (2015).
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
show, aus terity poli cies combin ed with a lax ap proach towa rd
indebtedness make for a dangerous cocktail. Indeed, current trends in
Argentina are also an issue of concern, as debt/GDP ratios are rising all
too fast.
ii. The pervasive incentives and pressure to continue increasing debt, which
lie at the heart of the current international financial system, coexist with
a highly unbalanced playing field in favour of creditors ± investment
funds, bondholders, banks, and their advanced `home' nations ± at the
expense of debtor nations. This means that after being pushed to increase
debt to sustain structural reforms and replace the downturn in tax
revenues resulting from austerity policies, highly indebted countries tend
to avoid restructurings as much as they can. Threats of the financial
plagues stemming from recognizing debt stress, or the mere intention of
restructuring, tend to lead countries to postpone a resolution as long as
they can. They may end up cutting key public services in order to service
the sacred debt. The Argentine case shows the failure of such attempts to
overcome high debt levels through fiscal adjustment policies, because
austerity ended up deepening the recession and, as a consequence, both
the fiscal deficit and the debt-to-GDP ratio increased. Evidence shows
that the only effective way of addressing a significant debt overhang is
through debt restructuring with debtors accepting a significant haircut.
As President Kirchner said: `the dead do not pay their debts.'
iii. Argentina's case also exposes the obstacles and challenges over-
indebted countries face ± as was the case of Argentina in 2002 after a
decade of austerity policies ± in attempting to restructure their debts
sustainably within the current international (non)system. The 2005/2010
deals show it is possible to undertake deep-enough debt restructurings,
compatible with output growth and social inclusion. However, this
precedent also revealed there are still too many loopholes in the
international sovereign debt system, and amplified uncertainty regarding
the legal framework and enforcement process, that make this outcome
extremely complicated and vulnerable. Recently, Argentina paid the
holdouts almost in full, and a new phase of austerity and increasing debt
has started. Briefly, the `trial of the century' raised bondholders'
incentives to sabotage debt restructurings, making it even harder for
countries to obtain the haircuts needed, when needed, to restore
economic growth.
iv. Is debt a bad thing? Though acquiring debt can have a positive effect on
growth, Argentina's case confirms that debt levels matter: sooner or
later, high public debt levels, typical of neoliberal austerity phases, have
had a negative impact on growth; conversely, lower levels of debt,
achieved through a heterodox economic model, have been a necessary
condition for sustainable growth. The use of such debt flows also
matters: issuing debt to pay for debt maturities and finance capital flight
gets countries into downward debt traps; conversely, longer-term debt
121
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
flows channelled to expand the real economy or conduct public works
could be a positive intertemporal assignment of resources, if they are
limited in volume and bring about repayment capacity.
In conclusion, despite Argentina's own shortcomings, its debt trajectory
over the last 25 years reveals that we are faced with an international
sovereign debt (non)system that disproportionally rewards speculation at the
expense of the people, and in which financial institutions and creditor
nations hardly ever pay their fair share or shoulder their responsibility. The
overwhelming support for the 2015 United Nations sovereign debt resolution
across developing nations exposed the profound need for stronger inter-
national legal and financial reform to deal with sovereign debt in a way that
is compatible with inclusive economic growth. We urgently need a new
framework to ensure that the growth of debt does not impede our ability to
honour the debt of growth.
122
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School

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