I'm still trying to sort out what I think should happen in the Argentina debt crisis case. I gather that a lot of people are mad at the U.S. judge who prevented Argentina from making payments to those creditors who had agreed to restructure the debt, allowing a few holdouts to push Argentina into default. The particular point at issue is the “equal treatment” guarantee in the contract, set out in a pari passu clause. This basically means that everybody gets treated the same when it comes to investors’ rights. Here, the U.S. judge said it means Argentina can't pay some bondholders (those who agreed to the restructuring) without paying others (the holdouts). Because Argentina didn't want to pay the holdouts, it saw default as its only option.
The judge's ruling does seem to be the act that started the crisis. But if the judge was just interpreting the contract as written, as I assume he was, I'm not sure what else he could have done. I guess the argument is that he could have intepreted the contract terms differently, so that payments could go forward on the restructured debt without going to the holdouts as well.
But was there precedent that would have allowed him to do so? I asked Todd Tucker, who has written about the case, this question, and he responded here. He noted that:
The rival interpretations could be recast as to whether pari passu clauses guarantee equality of outcome (payment) or equality of opportunity (everyone given same procedural rights to make a deal).
He then referred to a couple non-U.S. court decisions that have addressed the matter, but it seems clear there isn't much precedent out there to guide the interpretation of these issues.
From what I can see, we are breaking new ground here, and the judge's interpretation was a reasonable one, even if it was not necessarily the best one. The solution going forward, I think, is to take all of this into account in writing new bond contracts; and, for jurisdictions who are likely to hear such cases, legislate some contract law that deals with this situation in an appropriate way.
It's a shame that the current Argentina debt situation is such a mess, but I'm not sure the judge deserves all the blame. When courts are faced with new situations and have little guidance, they are flying blind to some extent. He may have bitten off more than he could chew in trying to force a sovereign government to make payments on its foreign debt, and I'm not convinced he will have much success, but the larger problem is that others put him in this situation.
