Restructuring Debt Restructuring

BERKELEY – Sometimes the worst intentions yield the best results. So it is, unexpectedly, with Argentine debt.

The story begins with Argentina’s financial crisis in 2001-2002. There is no question that the crisis left the country unable to service its debts. But Argentina made no friends by waiting four years to negotiate with its creditors and then offering settlement terms that were stingy by the standards of previous debt restructurings.

Still, the terms were acceptable to the vast majority of the country’s creditors, who exchanged their old claims for new ones worth 30 cents on the dollar. All, that is, except for a few holdouts who bought up the remaining bonds on the cheap and went to court, specifically to the US District Court of the Southern District of New York, asking to be paid in full.

This quixotic strategy met with unexpected success when Federal Judge Thomas Griesa ruled in the holdouts’ favor. Griesa idiosyncratically reinterpreted the pari passu, or equal treatment, clause in the debt contracts to mean that “vulture” funds refusing to participate in the earlier debt exchange should receive not 30 but 100 cents on the dollar.