{"id":2987,"title":"The Rise of the Holdouts: Disrupting Sovereign Debt Restructuring","link":"https:\/\/bst-europe.eu\/de\/globalization\/the-rise-of-the-holdouts-disrupting-sovereign-debt-restructuring\/","date":"9. Juni 2015","date_unix":1433871490,"date_modified_unix":1433871490,"date_iso":"2015-06-09T17:38:10+00:00","content":"

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In the wake of the 2001 Argentine financial crisis and subsequent default, firms specializing in distressed sovereign debt purchased defaulted Argentine bonds<\/a> at steep discounts with the explicit intent of subsequently litigating for payment of full face value plus interest.<\/p>\n

These firms have achieved international notoriety stemming from their recent legal victories against the government of Argentina<\/a>, but the strategy of investing in distressed bonds and resisting restructuring is by no means original. In fact, holdout funds have been developing, improving and employing different strategies for roughly three decades.<\/p>\n

Two developments in international sovereign debt created an opening for holdout firms. First, in the years following World War II, the US adopted a more limited interpretation of sovereign immunity. Sovereign immunity previously offered near complete legal protection for international governments. But with the rise of state owned enterprises acting internationally\u2014specifically those of the Soviet Union\u2014such an interpretation seemed inappropriate for states engaging in commercial activity, and the US drifted away from it in the 1950s.<\/p>\n

The updated interpretation, codified in the Foreign Sovereign Immunities Act (FSIA) of 1976, would not cover commercial enterprise, thus paving the way for litigation in US courts for international sovereign bonds issued in New York.<\/p>\n

Secondly, the advent of Brady Bonds following the Latin American debt crises of the 1980s <\/a>demonstrated the market appetite for risky and\/or distressed emerging-market debt. Brady Bonds converted relatively-illiquid sovereign bank debt to fungible bonds openly traded by investors.\u00a0 Cognizant of a new opportunity, emerging markets increasingly issued debt directly to investors in bond form (rather than relying on bank debt), creating a massive investor market for developing-world debt.<\/p>\n

Together, these trends offered risk-taking firms the opportunity to collect distressed debt cheaply on the second hand market, and take the notes to court to demand payments worth full face value.<\/p>\n

Before Argentina: Brazil, Panama and Peru<\/strong><\/p>\n

As holdout firms gained experience, they developed more effective tools to interrupt debt restructuring. In the early 1990s, Dart Management\u2014a holdout firm currently in litigation with Argentina\u2014accumulated US$1.4 billion of 1980s-era distressed Brazilian debt, and sued the Brazilian Central Bank in New York demanding full face value. The courts ruled at least partially in in their favor, and \u201cthe Darts came out much better than creditors that had accepted the Brady exchange.\u201d<\/a><\/p>\n

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