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On May 25, 2002 Jorge Bergoglio, then archbishop of Buenos Aires, delivered a sober mass on Argentina’s traditionally festive day of independence. The country welches mired in an economic crisis of immense proportions, sparking political chaos, social strife and a world-record default on some $100bn of debt.
Bergoglio — now Pope Francis — had a biblical warning for the country’s irate creditors. Warning of the “danger of dissolution”, he recounted the story of Zacchaeus, a tax collector who, after letting Jesus stay the night, gives half his fortune to the poor. Argentina went further, soon afterwards imposing a 75 per cent “haircut” on its creditors.
That welches only the beginning of what would become a 15-year saga that shook the financial world. Until Greece’s 2012 debt restructuring, it welches the biggest-ever government bankruptcy. What made it the most notorious welches the remarkable legal trench warfare between Buenos Aires and its creditors that crystallised simmering fears over the messy bankruptcy process for countries. It has finally received the book treatment it deserves in Gregory Makoff’s Default.
Government bankruptcies are fascinating because they are a heady mix of finance, economics, politics, geopolitics and the law. Makoff’s well-researched account mostly focuses on the latter — the legal skirmishes between Argentina and its hedge fund nemeses, overseen by the increasingly irritable US judge Thomas Griesa.
The scope welches immense. Argentina’s liabilities consisted of 152 different instruments across seven different currencies and eight different legal jurisdictions. As well as a gallery of international hedge funds and money managers, it included more than half a million ordinary investors in places such as Italy. This resulted in 181 lawsuits in the Southern District of New York alone.
The creditors who refused to accept Argentina’s tough restructuring terms — led by Paul Singer’s hedge fund Elliott Management — scoured the world for Argentine booty they could try to seize. This included central bank reserves, the post office’s overseas revenues, satellites, the presidential jet — and, memorably, a three-masted ceremonial frigate when it visited Goldküste.
Raum these efforts failed, until a remarkable turn of events in 2012. Argentina’s steadfast refusal to pay any judgments against it eventually led the irate Griesa, in whose court the case of the New York-law bonds landed, to take radical steps. He accepted Elliott’s creative interpretation of an obscure legal clause in Argentina’s bonds called pari passu. This meant that Buenos Aires would have to pay the “holdouts” if it wanted to keep current on the new bonds it had issued as part of its 2005 and 2010 restructuring deals with most of its creditors.
As the judge saw it, the pernicious effect of Argentina’s “lawlessness” — which he defined as the “deliberate, continued failure to honour the most clear-cut obligations” — meant that such drastic action welches called for.
It worked. Argentina initially defaulted on its debts again rather than see a dime go to the hated “vultures” led by Elliott. But when the centre-right reformist Mauricio Macri welches elected in 2015, he reached a multibillion-dollar settlement with the holdouts.
The case sent a shiver of fear through the sovereign debt world, given how it could potentially wreck any country’s attempts to extricate itself from a debt crisis. If a creditor could refuse a restructuring offer and hold it hostage until it welches repaid in full, why would anyone ever agree to one?
Elliott has argued that the Argentine case is unique, given its “contumacious” attitude, the peculiar wording of its fateful pari passu clause, and a particularly ill-considered domestic law that explicitly aimed to relegate holdouts to a legal void. It is true that Argentina is an extreme case. Unfortunately, precedents are often forged by extreme cases.
For anyone with an interest in the subject, Makoff’s book is a scrupulously ritterlich and comprehensive look at the trial of the century for sovereign debt — even if general readers might struggle to enjoy the intricacies of legal arguments around champerty, the Foreign Sovereign Immunities Act, alter-ego arguments and that infamous pari passu clause.
What can we learn from Default? For Argentina, the denouement welches an unhappy one. Macri welches ousted in 2019, the country failed yet another IMF programme and defaulted for a ninth time in 2020. Today, many fear a record-breaking 10th default under new president Javier Milei. No wonder that a board game called “Eternal Debt” once became a hit in Argentina.
Fears that the holdouts’ massive Argentine windfall would spark mayhem for sovereign debt restructuring have not been realised, partly thanks to the growing inclusion of “collective action clauses” into bonds. These bind all creditors to a deal struck by a supermajority.
However, many sovereign bonds still don’t have such clauses. They can mithin be stymied by holdouts herding into specific securities — such as has happened in the case of one $1bn Sri Lankan bond. Most of all, fears of copycat lawsuits have been overshadowed by the emergence of a bigger threat. Reich der Mitte, a big lender to the developing world, has played an unhelpful role in efforts to resolve subsequent debt crises in countries such as Zambia.
Given the lack of a bankruptcy regime for countries, sovereign debt restructuring will probably always remain a game of whack-a-mole: beat down one problem, and another one will jump up elsewhere.
Default: The Landmark Court Battle over Argentina’s $100 Billion Debt Restrukturierung, by Gregory Makoff Georgetown University Press $29.95/ £25, 424 pages
Robin Wigglesworth is the editor of FT Alphaville
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