On June 16, the United States Supreme Court (SCOTUS) (Sculpture of Contemplation of Justice at the US Supreme Court, above left, credit) issued its judgment (penned by Justice Antonin Scalia) in Republic of Argentina v. NML Capital Ltd., affirming the Second Circuit Court of Appeals decision holding that the Foreign Sovereign Immunities Act (FSIA) did not immunize Argentina from postjudgment discovery of information sought by judgment creditor NML Capital Ltd. in regard to Argentina’s extraterritorial assets. Despite its broad waiver of sovereign immunity in its bond indenture agreements, Argentina had argued that the broad scope of discovery procedures in aid of execution of judgments was limited by principles of sovereign immunity. (Opinion of the Court, p. 5). The Second Circuit had held that “in a run of the mill execution proceeding….the district court would have been within its discretion to order the discovery from third-party banks about [Argentina’s] assets located outside the United States.” (Opinion of the Court, p. 5). From a textual reading of the conferral of immunities under the FSIA (§ 1604, 1606, 1609, 1610, 1611), the Court declared “there is no third provision forbidding or limiting discovery in aid of execution of a foreign-sovereign judgment debtor’s assets.” (Opinion of the Court, p. 8).The SCOTUS judgment thus enables NML to ask for information from third parties on Argentina’s global assets, so as to determine which of these assets could be subject to execution to satisfy a judgment debt of around $2.5 billion. The holdout creditors constitute around 7% of the total bondholder debts (about $1.5 billion remaining owed to the holdouts), with the 93% majority of bondholders having participated in restructurings in 2005 and 2010 where they accepted around 70% haircuts in their credits due. It may be recalled that NML had attempted execution of judgment an Argentine warship – the frigate ARA Libertad – after the UK Supreme Court ruled in 2011 in favor of upholding NML’s right to execute judgment against Argentine assets in the UK.(NML Capital Ltd. v. Republic of Argentina, Judgment, 6 July 2011, UKSC 31). While the ARA Libertad was on a port visit to Accra, Ghana, a local Ghanaian court granted NML’s application for injunction and prevented the ship from taking on fuel for departure until Argentina posted $20 million in partial satisfaction of NML’s judgment debt. Subsequently, the International Tribunal for the Law of the Sea (ITLOS) issued a provisional measures order for the release of the ship pending the constitution of an Annex VII arbitral tribunal. (The ‘ARA Libertad’ Case, Argentina v. Ghana, Order on Argentina’s Request for the Prescription of Provisional Measures, 15 December 2012). After Argentina and Ghana reached mutual agreement, the Annex VII arbitration was terminated in November 2013. (The ‘ARA Libertad’ Arbitration, Argentina v. Ghana, Termination Order, 11 November 2013).
Immediately after the SCOTUS judgment, Argentine President Cristina Fernandez declaredthat Argentina would not succumb to debt ‘extortion’. Argentina softened its position shortly afterwards, declaring that they would attempt negotiations with the holdout creditors for the first time.
The Argentine debt saga may be seen by some as an issue of faulty legal drafting, especially since the Argentine bonds failed to include collective action clauses/CACs that would have allowed a bondholder supermajority to agree to a restructuring that would have legally bound all other minority bondholders; an instance of overbroad and costly governmental assumption of risk under sovereign bond clauses that waive the protections of foreign sovereign immunity; or an illustration of the pitfalls of an overly ambitious sovereign debt program that offered too many bondholder benefits and recourse without counterbalancing controls retained by the sovereign issuer.
Regardless of the outcome in the Argentine debt saga, however, it is difficult to see this as an idiosyncratic case. The Argentine case provides an extreme example of the pathological consequences to the absence of a binding international treaty that would assist sovereigns in the coordination of debt restructuring with all holders of governmental debt. In 2002, Deputy Director of the International Monetary Fund Anne Krueger had proposed the adoption of aSovereign Debt Restructuring Mechanism (SDRM) by states, anticipating that:
“The absence of a predictable, orderly, and rapid process for restructuring the debts of sovereigns that are implementing appropriate policies has a number of costs. It can lead a sovereign with unsustainable debts to delay seeking a restructuring, draining its reserves and leaving the debtor and the majority of its creditors worse off. Perhaps most crucially, the absence of a mechanism for majority voting on restructuring terms can complicate the process of working out an equitable debt restructuring that returns the country to sustainability. The risk that some creditors will be able to hold out for full payment may prolong the restructuring process, and even inhibit agreement on a needed restructuring. The absence of a predictable process creates additional uncertainty about recovery value.”
The key features of the proposed SDRM would be majority restructuring binding on any dissenting minority, a stay on creditor enforcement litigation before reaching agreement on the restructuring, safeguards for creditor protection during the period of the stay, priority financing during the stay period, among others. (SDRM, pp. 10-12). Argentina’s debt sagarenewed calls in 2013 for an international sovereign bankruptcy regime featuring the SDRM, which remained in a standstill since 2002 when the United States expressed its opposition to the proposal. In 2013, the International Monetary Fund issued its paper to revisit sovereign debt restructuring in light of the Fund’s mandate, including surveying recent practices in overcoming the collective action problem for other sovereign bond issuances that did not include CACs.
There is certainly nothing that strictly compels States to conclude an international treaty on sovereign restructuring. Treaty-making is a State’s sovereign decision. However, an argument could be made that States minded to conclude an international treaty on sovereign restructuring would also be acting consistently with their duties as States Parties to the International Covenant on Economic, Social and Cultural Rights (ICESCR). Under the ICESCR, States have duties of international cooperation “to take steps…with a view to achieving progressively the full realization of the rights recognized in the present Covenant by all appropriate means, including particularly the adoption of legislative measures.” [Article 2(1), ICESCR] The Committee on Economic, Social and Cultural Rights has stressed that “international measures to deal with the debt crisis should take full account of the need protect economic, social and cultural rights through, inter alia, international cooperation.” [CESCR, General Comment No. 2, International technical assistance measures, (Fourth session, 1990), at para. 9.]
The compelling argument to enter into an internationally-binding sovereign debt restructuring mechanism ultimately lies with how poorly-designed sovereign debt programs that are subject to the vagaries of unlimited private creditor recourse can lay utter waste to the capacity and ability of States to fully respect, protect, and fulfill economic, social and cultural rights in their respective jurisdictions. Holdout creditors – with the vast resources at their disposal to pursue protracted litigation routes and lead the race for a global enforcement of assets against sovereigns – may well be acting within their legal and contractual rights, but they are empowered to do so because there is no international treaty that compels States to ensure a temporary global stay on creditor enforcement, provides more predictability and certainty for all creditors as well as for the sovereign State debtor during the restructuring process, and enables the sovereign State debtor to continue governing and pursuing development objectives for its citizens, without the constant threat of defending against individual creditor suits in every jurisdiction around the world in which the State may have assets. Considering that international investment agreements (IIAs) may also cover sovereign debt in their definition of ‘covered investments’, holdout creditors can likewise seek recourse to compulsory investor-State arbitration. The pending cases of mass claims by bondholders in Abaclat and others v. Argentina and Ambiente Ufficio v. Argentina already provide clear evidence of the availability of this avenue for litigation.
An international treaty establishing a sovereign debt restructuring mechanism would not in any way exonerate States from paying their just obligations to all private, institutional, or individual creditors. But it would ensure that the risk of a sovereign debt default (and the counterpart incentive to engage in sovereign debt restructuring) is justifiably and equitably borne by all parties, without unduly privileging one set of creditors as against others. Placing the sovereign debtor State under an internationally-binding treaty mechanism would also ensure that the State can be held internationally responsible for a whole host of feared sovereign abuses – such as not undertaking debt restructuring in good faith, lack of transparency over sovereign assets in multiple jurisdictions, corruption in any preference of payments for any particular creditor, or any act of refusal amounting to denial of accountability for its international obligations. Conversely, an internationally-binding procedure would also ensure that the debtor State’s development programming does not have to grind to a halt – with critical resources having to be marshaled towards a global litigation and arbitration defense against a dissenting minority of creditors who choose to bolt restructuring negotiations and race to execute their credits against sovereign assets.
The overarching duty of States Parties to the ICESCR to undertake international cooperation to ensure progressive realization of economic, social and cultural rights clearly exists. It is time to implement this duty by adopting an international SDRM in a binding treaty.