New Ruling Could Complicate Sovereign Debt Restructuring

By Joe Vladeck

The legal battle between the Republic of Argentina and hedge fund Elliott Associates (a.k.a. NML Capital, Ltd.) appears to be headed to the Supreme Court.  The long and hard-fought dispute is set for yet another round following the Second Circuit's recent refusal to strike down an injunction that, in short, would prevent Argentina from continuing to pay bondholders who agreed to a 2005 restructuring agreement unless Argentina also agreed to pay a small group of holdout bondholders.  Check out Credit Slips' exhaustive coverage of the case to get caught up.

The injunction and the Second Circuit's ruling, which Reuters columnist Felix Salmon characterized as pinched, pedantic, and poltroonish, have the potential to dramatically shift the balance of power in the global sovereign debt markets.  Bondholders who agreed to Argentina's restructuring plan face the prospect of not getting paid, and payment system participants may be found liable for facilitating Argentina's selective bond payments. The strategy of the holdouts is close to vindication.  For the time being, the Second Circuit stayed enforcement of the injunction so that the Supreme Court can consider Argentina's petition for a writ of certiorari.  Absent further action from the Supreme Court, the forecast for sovereign debt restructuring looks cloudy.