THE HOYOS FILE: The end of debt restructuring as we know it
Recently the United States Supreme Court, despite pleas from the US itself and other governments, completely changed the rules with regard to sovereign debt restructuring.
After more than a decade of litigation with hedge funds, Argentina has seen US court decisions put it in a place, which the Supreme Court refused to review this past week, that make a sovereign debt default a very real possibility for the South American country.
And before you say, “well that’s just Argentina, it doesn’t affect us here in Barbados’, Consider this: the same ruling might make another debt restructuring along the lines of the one Jamaica did last year either illegal, or open to immediate challenge in court. That’s much closer to home.
Essentially, the US courts have ruled that when a country decides to restructure its debt, the lenders of bondholders who refuse to go along with the new reduced repayment offer will retain their rights to full reimbursement. In the past, the holdouts, as they are called, could be simply ignored completely, or might eventually take the deal the other lenders or investors took in order to get something back. Now, they have the right to be paid in full. In a separate case, the US courts also ruled that Argentina must disclose where all of its assets are around the globe. You know, to make seizing them a lot easier.
It might surprise you to learn, as it surprised me, that there is no legal procedure to resolve debts of destitute countries, and neither is there is any court to approve a restructuring plan that will wipe out some debts and convert others to equity, as there is for companies, according to the New York Times.
In short, there is no bankruptcy law for sovereign debtors, because, as one banker has said “countries don’t go bankrupt.” Instead, if they can’t pay their debts, they negotiate with lenders – usually the banks in the old days, and more recently, bondholders – to restructure their debts.
That restructuring could involve reducing the amount owed (called a “haircut”), lowering the interest rate, extending the maturity of the debt, or some combination of the three.
In Jamaica’s case, there was no haircut, but it swapped about JAM$900 billion worth of debt for new bonds with longer repayment periods and close to two per cent less interest. In the case of Sagicor Group Jamaica, the debt swap cost it, alone, US$9 million, and it is not the biggest lender. Sagicor has
about J$60 Billion in government paper out of close to J$900 Billion of the total government debt of JAM$1.7 trillion that was targeted for the swap.
Does that suggest that Jamaica will save about US$150 million in interest payments? By the way, since I can’t think in trillions, it turns out that Jamaica’s debt is equivalent to around US$15 billion. Now, this debt swap was part of a package Jamaica had to undertake in order to secure a loan of around US$1.3 Billion from the International Monetary Fund (IMF).
In the past, bondholders who held out, says the Times, “faced the risk that the restructuring would go through and those who agreed would get (partial) payouts, while the holdouts got none”.
The refusal by the Supreme Court to hear the case may reduce the pre-eminence of New York as a financial capital, some analysts say, as countries may go to other markets, like London, were the old deals might still be legal.
But the current problem facing Argentina is a ticking time bomb, because it has a scheduled interest payment on a set of bonds due at the end of June. Argentina wants to pay, but the US courts say that this interest cannot be paid unless Argentina pays all it owes on the bonds it defaulted on years ago. Argentina says it cannot afford to do that and won’t.
Argentina is instead trying the old debt swap, but across borders this time. It wants to convert the bonds on which it wants to make payment into new bonds that would not be subject to New York law. “Whether it can pull that off may depend on whether there are banks and other financial institutions willing to risk the ire of American courts,” says the Times.
Here’s another wrinkle: When the IMF comes in to a country, says the Times, the tradition has been that it has a higher call on repayment for its loans to the country than the holdout bondholders. It’s position has been akin to a debtor-in-possession. But that may not be the case now, either, as “it is at least possible that the (court’s) opinion could, in the future, be used to keep the IMF from having a preferential standing over the holdouts in any restructuring that did occur.”
I am sure IMF officials just spat out their coffee and said “Whaaaa?”
I tell you, I have never had so much fun thinking about our own national debt predicament as I did recently that Freundel Stuart predicted that his Government could indeed go down in history as the best one this country has ever had, even as it was raising borrowing limits again.