Washington, DC - The International Capital Market Association (ICMA), a group of banks and investors, will call Friday for reforms aimed at preventing repeats of the Argentina/NML Capital debt dispute. The ICMA's plan would reduce the ability of hold-out creditors to litigate and undermine debt restructurings, in part by using contract clauses to bind all bond-holders to debt restructurings that 75% of all holders agree on.Additionally, the plan will argue that the "pari passu" or parity clauses in existing bond contracts should always mean that hold-out funds should always receive the same restructured bonds that the majority of investors agree on.
"This is a step in the right direction and we really applaud the US government's leadership on this," noted Eric LeCompte, Executive Director of the religious debt relief organization Jubilee USA. "I am concerned that this won't do enough to prevent litigation against poor countries in the next decade. We still need a statutory approach."
The Argentina/NML case could soon impact other countries facing creditor litigation. Last month, a US judge in New York ordered the Democratic Republic of the Congo (DRC) to pay $68 million to two hedge funds that acquired the country's debt on the secondary market and then sued. The award included nearly $50 million in interest on loans dating back to the early 1980's. According to the United Nations, the DRC is the world's second-poorest country. Meanwhile, the Import-Export Bank of Taiwan is suing the Caribbean nation of Grenada, making an identical legal argument to the one used against Argentina. The case is currently on hold as Grenada attempts to resolve its debt situation.
"The Argentina case has a global impact and we need a global solution," said LeCompte. "We need an international bankruptcy process to make default less likely and force hold-outs to sit at the table."
An international bankruptcy process would in theory bind all creditors and debtors to the decisions of a neutral third party. In the wake of the Argentina/NML case, there have been calls for instituting such a system to address the issue of hold-out creditors. As the Financial Times notes, creditor litigation against defaulting nations has doubled in the last decade, while debt levels continue to rise.
Read a history and timeline of the Argentina case.
Read Jubilee's USA's filing that urged the Supreme Court to take the case. The court declined to hear the case and the lower court ruling stood.