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This blog by @JosephEStiglitz @howserob @SlaughterAM in @ProSyn raises awareness on the regression that the proposal made by some of Argentina's holdouts would mean to the already regressive legal architecture of sovereign debt restructuring. A thread 
https://www.project-syndicate.org/commentary/argentina-sovereign-debt-rules-creditors-by-joseph-e-stiglitz-et-al-2020-07
https://www.project-syndicate.org/commentary/argentina-sovereign-debt-rules-creditors-by-joseph-e-stiglitz-et-al-2020-07
In contrast with domestic bankruptcy laws, which ensure an orderly procedure for the distribution of losses of insolvent individuals or companies based on justified legal hierarchies, there are no such rules for States facing an insolvency problem.
Most sovereign debt is governed by only two jurisdictions in the world - New York and England. Under these laws, creditors can choose whether they will accept a restructuring offer made by the debtor State, which gives them significant leverage to negotiate restructuring terms.
An exception to this rule occurs where they expressly agree to be bound by certain majorities. The contractual provisions that govern such majorities are called Collective Action Clauses (CACs). These, however, are only applicable to bond debt, not other types of sovereign debt.
Even so, CACs are important because bond debt responds to most sovereign debt today. Yet collective action contractual clauses are not uniform – each bond issuance may have a different CAC or none at all.
The way CACs are written matters because they determine how binding majorities can be achieved, which may facilitate or complicate the restructuring.
CACs can be classified into 3 generations. In the 1st, majorities can only be achieved in a single bond issuance (“series-by-series”). In the 2nd, they can be established across bond issuances, provided that a minimum threshold is reached within each issuance (“two-limb”).
Under these CACs, a debt restructuring can be blocked if a blocking minority (which large hedge funds can easily purchase) is reached in any of the series. This gives the most powerful creditors significant leverage in the negotiation.
Yet in the 3rd generation, a majority can be achieved across all selected bond issuances without the need of minimum thresholds in each one (“aggregated single-limb”). These clauses have been supported by the IMF and the ICMA, and also endorsed by the G20.
These clauses do not prevent that a country’s largest creditors, typically hedge funds, associate with each other to block the restructuring. Yet they can give the State more leverage in the negotiation. Chances of reaching a deal that helps overcoming insolvency become higher.
Some of #Argentina’s bonds being restructured are 2nd generation and some are 3rd generation. The most powerful holdouts are requiring that should a restructuring deal be reached; all 3rd generation CACs should move back to 2nd generation.
This is not only a problem for Argentina, but also for every country in the world issuing or restructuring bonds. It would exacerbate collective action problems and provide perverse incentives for States to issue bonds that may become very hard to restructure.
Making bonds harder to restructure does not prevent insolvency crises. Rather, it causes a reallocation of risk to the State’s population should any occur, as it will be required to bear the costs of insolvency alone in the form of harsh austerity and structural adjustment.
Another infamous part of the creditor’s proposal is changing the contractual rules on sovereign immunity to cover not only the Republic of Argentina, but also its instrumentalities located in any foreign territory.
The proposed change includes a presumption of commercial purpose for all the assets of these instrumentalities which are located in foreign territory, except those that are at all times used for diplomatic or military purposes.
The proposal does not specify whether the waiver includes immunity from execution. I understand that it would because there is a specific provision on immunity of execution in the 2016 indenture. If this interpretation is correct, this would mean that assets of Argentina’s....
... national bank @prensabna or the national pension system's investment fund (FSG @ansesgob), among other assets associated with essential public services that are located in foreign territory may be targeted by the holdouts.
This would make Fragata Libertad’s seizure a minor event in history. The issue is not only having assets seized, but also financial transactions blocked, which in practice could obstruct the functioning of core instrumentalities of the Republic.
This is probably the most colonial practice proposed in the world of sovereign debt since gunboat diplomacy and the direct administration of custom revenues by European powers in the 19th century. It should be condemned by all governments and international institutions.
To read the Ad Hoc (BlackRock, Ashmore, Fidelity) and Exchange (Monarch) groups’ proposal, visit: https://www.argentina.gob.ar/sites/default/files/joint_proposal_adbg_y_ebg.pdf
