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Roubini warns about negative consequences from the Argentine case

Thursday, July 3rd 2014 - 06:26 UTC
Full article 68 comments
”Holdouts must not be permitted to block orderly restructurings that benefit debtors and creditors”, said the renowned economist ”Holdouts must not be permitted to block orderly restructurings that benefit debtors and creditors”, said the renowned economist

The economist famous for predicting the 2008 financial crisis has analyzed Argentina’s current dispute against vulture funds warning “holdouts must not be permitted to block orderly restructurings that benefit debtors and creditors.”

 In an article published on Project Syndicate, Nouriel Roubini considered “the legal saga of Argentina’s fight with holdout creditors shows that the international system for orderly sovereign-debt restructuring may be broken” and questions a recent ruling by the United States Supreme Court refusing to hear the case.

The decision by the US maximum tribunal is “dangerous”, Roubini affirms, for “two reasons.”

“First, the court ruled for the first time that a country cannot continue to pay those creditors who accepted a big reduction (or “haircut”) on their claims until the holdouts are paid in full. So, why would any future creditor who benefits from an orderly restructuring vote for it if its new claims can be blocked by even a single holdout creditor?” the also ex economic adviser for the White House during the Bill Clinton administration wonders to point out a second reason that could prompt even more “dangerous” consequences for Buenos Aires

“Second, if the holdouts are paid in full, the majority of creditors who accepted a haircut can request to be paid in full, too. If that happens, the country’s debt burden will surge again, become unsustainable, and force the government – in this case Argentina, which is servicing most of its debt – to default again on all creditors.”

Meanwhile, negotiations between the federal government and holdouts in New York are expected to be launched on Monday.

Last week, Argentina deposited 539 million dollars in BNY Mellon's account at the Central Bank of Argentina intended only for bondholders who participated in two sovereign debt exchanges in 2005 and 2010, in a move to meet a June 30 coupon payment deadline. In total the government transferred 832 million for payment to various bondholders.

However, one day after the payment was made, on Friday, US Court District Judge Thomas Griesa ruled the decision to make a sovereign debt payment in defiance of a court order an “explosive action” and told Bank of New York Mellon to return the money to the government.

Griesa's order says Argentina cannot pay restructured bondholders without also paying the holdouts at the same time under the pari passu, or equal treatment, clause in the original bond contract.

Top Comments

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  • ChrisR

    He is missing the point as all economists tend to do and it is simply this: don't borrow more than you can pay back!

    Any member of the public who borrows more riskd severe financial hardship and so should 'sovereign' nations especially those know to have thieves in the government.

    He should also consider the mutual clauses that have been in place for several years now. It seems to me he is out of touch with reality but as an ex-advisor the Peanut Brain Clinton is anyone surprised?

    Jul 03rd, 2014 - 10:39 am 0
  • GeoffWard2

    “Second, if the holdouts are paid in full, the majority of creditors who accepted a haircut can request to be paid in full, too. If that happens, the country’s debt burden will surge again, become unsustainable, and force the government – in this case Argentina, which is servicing most of its debt – to default again on all creditors.”

    This is the opinion of an economist, not a lawyer.
    If creditors accept a %reduced payback, why should THIS be subject to re-negotiation if the 'holdouts' holdout for - and get - a larger/full payback?

    Very little of these matters makes much sense to me.

    Jul 03rd, 2014 - 10:40 am 0
  • Idlehands

    The problem is that Argentina is a special case. It is a scofflaw and never acts in good faith.

    Jul 03rd, 2014 - 10:44 am 0
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