New York, NY – Argentina’s notorious history of defaults and legal battles in U.S. courts is highlighted by its largest default to date: a staggering $100 billion in bonds in December 2001. Despite restructuring 76% of this debt in 2005, offering investors just 34 cents-on-the-dollar, approximately $20 billion of the defaulted bonds holders refused to accept the terms and turned to the courts for resolution. What followed was a decade-long legal battle, overseen by Judge Thomas P. Griesa of the United States District Court for the Southern District of New York, who grew increasingly frustrated with Argentina’s refusal to pay the court-ordered judgments.
During this period, the plaintiffs’ argument shifted from emphasizing the importance of honoring contracts to accusing Argentina of disrespecting the authority of the court. The court’s exasperation stemmed from Argentina’s refusal to comply with judgments despite having willingly submitted to the court’s jurisdiction and waived its sovereign immunity. This shift in focus and the mounting frustration paved the way for a significant event in February 2012.
At a hearing on February 23, 2012, lead plaintiff NML Capital, an affiliate of New York hedge fund Elliott Associates, requested an injunction to prevent Argentina from paying the 92% of bonds that had already settled. This unconventional move put payments to other creditors at risk with the hope of compelling Argentina to repay the holdout investors in full. The proposal received criticism from academic experts and international policymakers, who believed it would set a disruptive precedent for future sovereign debt restructurings.
Judge Griesa, who had previously supported Argentina during the debt restructuring process, faced a dilemma. On the one hand, he was keen to end the decade-long litigation, which had resulted in over 270 lawsuits, numerous hearings, and appeals. On the other hand, imposing the injunction risked default on $30 billion of performing bonds. Faced with an honorable debtor that willingly paid its obligations, this dilemma wouldn’t arise. However, Judge Griesa’s concerns centered around Argentina’s lawlessness and refusal to honor its debt instruments.
In a surprising ruling, Judge Griesa decided to impose the injunction, acknowledging its potential flaws but emphasizing his frustration with Argentina’s behavior. The ruling ignited a nightmare scenario for all parties involved. Argentina ultimately opted to not pay the holdout creditors and went back into default on tens of billions of dollars of bonds in June 2014. The situation was only resolved in April 2016 when the newly elected government of Mauricio Macri initiated genuine settlement negotiations.
Judge Griesa’s 2012 ruling and Argentina’s subsequent default had a profound impact on sovereign debt markets. Rather than collapsing, the events led to an improvement in restructuring practices. The market embraced powerful new quasi-bankruptcy voting clauses that bound all bondholders to the terms if voted in favor by 75% of the creditors. This development minimized the likelihood of future sovereign debt litigation, as potential holdouts would be forced to accept the terms accepted by the majority.
Judge Thomas P. Griesa, known for his historic ruling in the Argentina bond cases, passed away on December 24, 2017, leaving behind a legacy in the realm of sovereign debt restructuring.
(Note: This article is an adapted excerpt from “Default: The Landmark Court Battle over Argentina’s $100 Billion Debt Restructuring” by Gregory Makoff.)