{"id":7646,"date":"2016-04-01T00:36:07","date_gmt":"2016-04-01T04:36:07","guid":{"rendered":"http:\/\/www.journals.law.harvard.edu\/ilj\/?p=7646"},"modified":"2016-10-03T13:40:19","modified_gmt":"2016-10-03T17:40:19","slug":"could-collective-action-clauses-have-saved-argentinas-presidential-plane","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/ilj\/2016\/04\/could-collective-action-clauses-have-saved-argentinas-presidential-plane\/","title":{"rendered":"Could Collective Action Clauses have saved Argentina\u2019s Presidential Plane?"},"content":{"rendered":"

By Josh Macfarlane<\/span><\/p>\n

 <\/p>\n

Tango 01\u2014Argentina\u2019s equivalent to Air Force One\u2014hasn\u2019t gotten much air time recently. The plane was grounded in 2013 by the country\u2019s former President Cristina Kirchner, who was allegedly afraid that foreign creditors\u00a0would seize the jet<\/a>. Ms. Kirchner\u2019s fears were not unfounded considering the country twice\u00a0defaulted on its sovereign debt repayments<\/a>\u00a0and had failed to settle with its holdout creditors. The turbulence over the Tango 01 is one of the many consequences of Argentina\u2019s prolonged debt crisis, a hallmark of Ms. Kirchner\u2019s presidency. Earlier this year Tango 01 was retired<\/a>\u00a0by President Mauricio Macri, Ms. Kirchner\u2019s successor, who has eschewed Ms. Kirchner\u2019s intransigence in dealing with foreign holdouts in favor of a more conciliatory approach. This change of tact has\u00a0largely paid off<\/a>. But considering it has taken 15 years to resolve, one must ask: Could this mess not have been sorted out earlier? Maybe, had Argentina\u2019s sovereign bonds included a novel contract provision known as a Collective Action Clause (CAC).<\/span><\/p>\n

CACs are\u00a0increasingly lauded<\/a>\u00a0as the ex-ante remedy to sovereigns on the precipice of default, as they facilitate meaningful debt restructuring. They are essentially contractual provisions that allow bond issuers to modify key terms of the bond at a later date, most commonly in the form of \u201chaircuts,\u201d which are reductions in the bond\u2019s original value. Assuming a supermajority of bondholders agrees to the modified terms (because something is better than nothing), they become binding on all bondholders. This overcomes holdout problems where\u00a0one recalcitrant bondholder<\/a>\u00a0is free to reject new terms and demand repayment in full (plus interest). In the case of Argentina\u2019s bonds, which, notably, did not include a CAC, a\u00a0U.S. federal judge ruled<\/a>\u00a0that the country could not pay interest on the restructured bonds until it settled with the holdouts; Ms. Kirchner\u2019s failure to do so led to perpetuating default. (Note: Argentina\u2019s bonds were issued under New York law, hence U.S. jurisdiction applied.) This legal precedent not only hurts the sovereign debtor by excluding it from international capital markets, but it also harms the supermajority of creditors who are enjoined from collecting interest and principal payments on their bonds. CACs are of particular importance in the aftermath of this ruling, as in their absence, a single bondholder can wreak havoc on debtors and fellow creditors.<\/span><\/p>\n

The world has taken note as Argentina, Greece, and others have defaulted on bond payments with severe consequences. CACs have readily been adopted as the preventative remedy, becoming must-have provisions in sovereign debt offerings. Mexico was an early harbinger when, in 2003, it included an early CAC iteration in its sovereign bond offering. More recently, the EU mandated in 2012 that all Eurozone sovereign bonds must include standardized CAC provisions, lest the leaders of Europe be forced to fly commercial like Ms. Kirchner.<\/span><\/p>\n

So, are CACs the panacea that debtors and creditors have been waiting for? Not necessarily. For debtors, CACs only offer a prospective benefit as they cannot be introduced retroactively. Hence, sovereigns with outstanding issuances remain liable to potential holdouts, e.g., Argentina. In future bond offerings, where CACs can be included, debtors on the verge of default must nevertheless persuade a supermajority of bondholders to assent to the restructured terms. This poses substantive and logistical problems. First, haircuts can\u2019t be too drastic otherwise creditors will not agree to them. Second, bonds are issued across borders and in different currencies, which can create communication problems \u2013 apathetic bondholders may simply not reply to a foreign debtor\u2019s solicitations. In such instances, bondholder silence may be misconstrued by the debtor as a demurral, which might result in the debtor either ignoring these bondholders or considering them to be holdouts and offering them unnecessarily favorable terms.<\/span><\/p>\n

As for bondholders, some undeniably feel that that CACs swing the pendulum too far in the opposite direction, stripping them of their right to demand payment in full and, assuming supermajority approval, foisting new terms on them. One might expect this to be offset by higher bond yields because of the heightened risk that creditors assume; however,\u00a0empirical evidence suggests otherwise<\/a>. Some creditors, notably those who already agreed to the restructured terms, will be pleased that fellow bondholders cannot secure a better deal by simply digging in their heels. Look at Argentina, where the absence of a CAC resulted in some creditors incurring haircuts of around\u00a070% compared to the holdouts\u2019 25%.<\/a>\u00a0Also, bondholders who are citizens of the issuing sovereign, and who are normally more inclined to agree to haircuts, like the fact that CACs prevent foreign holdouts from dragging their country into default.<\/span><\/p>\n

While CACs are not perfect, they provide the best solution in the absence of international law governing sovereign default (a much talked about topic, but a seemingly impossible endeavor). Granted, CACs are utilitarian in nature, and the greater good seems to be allowing a country to restructure its debt, subject to supermajority approval, by depriving would-be holdouts the ability to derail the process and instigate economic turmoil. Moreover, CACs give sovereigns the tools to resolve their own debt crises, , making them less reliant on the International Monetary Fund \u2013 which often provides bailout funds in exchange for the adoption of\u00a0damaging austerity measures<\/a>.<\/span><\/p>\n

Expect CACs to continue growing in popularity until they became integral provisions in all sovereign debt offerings. Perhaps Mr. Macri\u2019s successors will be able to bring Tango 01 out of retirement, but in the meantime, he\u2019s flying coach.<\/span><\/p>\n

 <\/p>\n

\n

Josh Macfarlane is a 2017 J.D. candidate at Harvard Law School and a Feature Editor of the\u00a0<\/span><\/em>Harvard International Law Journal<\/span>.<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

By Josh Macfarlane   Tango 01\u2014Argentina\u2019s equivalent to Air Force One\u2014hasn\u2019t gotten much air time recently. The plane was grounded 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