PhD – Exposé

Word Count: 4.812 (excl. preliminary bibliography)

Dissertation Title:

“The Holdout Problem in International Financial Law – Sovereign Debt

Restructuring after NML Capital v Republic Argentina”

Doctoral Candidate

Mag. iur. Sebastian Grund (a0908819)

Supervisor

o. Univ.-Prof. MMag. Dr. August Reinisch, LL.M. (NYU)

Research Field

Public International Law and International Financial Law

1. Outline – Sovereign financing and debt crises

Walter Wriston, CEO of Citicorp between 1967 and 1984, became famous for his frequent

statement that “states don’t go bust”. While Wriston was clearly familiar with the difficulties

and peculiarities of sovereign financing, he was reluctant to accept the vulnerability of states

operating within capital markets and the political short sightedness of officials. In fact,

between 1980 and 2010 more than fifty per cent of all sovereign nations were unable to fulfil

their repayment obligations towards their creditors.1 According to the IMF, 28 of the poorest

nations have a high risk of debt crises due to their over-exposure to financial markets.2

Moreover, in the aftermath of an unprecedented international financial crisis, excessive

indebtedness even struck member states of the European Union, which is typically regarded

as one of the wealthiest regions and the most advanced supranational organisation. Hence,

amid the Greece sovereign debt crisis in 2009, the German Chancellor, Angela Merkel, was

eager to stress that it is contrary to Wriston’s opinion what depicts the modern reality of the

International Financial system. She humourlessly noted: “There’s a rumour going around that

states cannot go bankrupt, this rumour is not true”.3

Despite the dismaying political and economic implications of such crises, sovereign debt

plays a vital and fundamental role to promote development and prosperity. Sovereign debt

financing has firmly accelerated within the last decade, surpassing $40 trillion in 2010. 4

Essentially states issue debt for four reasons: to finance investment in physical or human

capital, smooth business cycles, affect intertemporal distribution of wealth and respond to

exceptional events such as wars or natural crises. 5 If used well, sovereign debt can

1 Allen & Overy, State insolvency – what bondholders and other creditors should know (2010), 2

<https://www.aohub.com/aoos/attachment_dw.action?key=Ec8teaJ9VaqwHSvmnlS0msxgHJMKLFEppVpbbVX+3OXcP3PYxlq7sZUjdbSm5FIetvAtgf1eVU8=&attkey=FRbANEucS95NMLRN47z+eeOgEFCt8EGQJsWJiCH2WAVISQAykZ42j0s8pmSAXv+7&fromContentView=1&fromDispatchContent=true&nav> (accessed on 29

th October 14).

2 International Monetary Fund, World Economic Outlook Database, April 2009. Washington, D.C.: International

Monetary Fund < http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf> (accessed on 4th

November 14). 3 <http://www.spiegel.de/international/world/iceland-on-the-thames-can-countries-really-go-bankrupt-a-

604523.html> (accessed on 17th

November 14), from a technical point of view the lack of an international bankruptcy regime makes bankruptcy per-definitionem impossible. However, currently sovereign debt restructuring, which is characterized by ad-hoc solutions rather than a multilateral framework, (insufficiently) substitutes a bankruptcy regime for states. 4

Committee on International Economic Policy and Reform, Revisiting Sovereign Bankruptcy (2013) <http://www.brookings.edu/~/media/research/files/reports/2013/10/sovereign%20bankruptcy/ciepr_2013_revisitingsovereignbankruptcyreport.pdf> (accessed on 19

th October 14).

5 Espósito C./Li Y./Bohoslavsky J.P., Sovereign Financing and International Law: The UNCTAD Principles on

Responsible Sovereign Lending and Borrowing, 15.

contribute to consistent economic growth and help stabilizing fluctuations.6 It is a powerful

tool to bolster sustainable development and positively affect the democratisation process.

Sovereign financing however, is adjunct to a high level of uncertainty, most notably if the

degree of indebtedness is substantially high. From hyper-inflation to increasing interest rates,

state insolvency frequently prompts manifold domestic repercussions as well as massive

socio-economic ramifications.

From a legal point of view however, the inexistence of a stringent framework to prevent and

resolve international sovereign debt crises appears appalling. Although sovereign insolvency

in the sense of liquidating state owned property was never considered a viable option, it is

first and foremost the paucity of an orderly and predictable process for debt restructuring

which caused enormous repercussions in international finance. 7 International financial

institutions – pressured by political leaders of their member states – were alarmingly

reluctant to mitigate the risks of over-indebtedness and enormous leverage ratios

accumulated in the private sector in the 1990’s and 2000’s.8 Although sovereign debt has

continually been subject of international restructuring procedures, such restructurings are

neither based upon a predictable international rule of law nor can they always provide

equitable solutions.9

In fact – due to the lack of international legal instruments – sovereign debt crises and their

outcome seem to increasingly depend on the discretion of domestic courts and the drafting of

sovereign bond contracts. A very recent U.S. Supreme Court ruling10 against Argentina in

July 2014 underlines the legal uncertainty in the field of sovereign financing and has given

rise to a whole new situation, which will potentially enable bondholders to interfere with other

creditors in the due course of a restructuring process.11 The next section shall inter alia

outline the verdict’s line of argumentation and its relevance to the future of sovereign debt

restructuring.12

6 Gallagher K., Financial Crisis and International Investment Agreements: The Case of Sovereign Debt

Restructuring, Global Policy Volume 3 (3), 2012, 363. 7 The Hague Conference Sovereign Insolvency Study Group, State Insolvency: Options or the Way Forward (The Hague: International Law Association, 2010), 6. The imminent reasons for this approach shall be discussed in the course of this doctoral thesis. 8 Schaefer H.-B., The Sovereign Debt Crisis in Europe, Save Banks Not States, The European Journal of

Comparative Economics, Vol. 9, n.2, p, 181. 9

<http://www.emergingmarkets.org/Article/3389531/JOSEPH-STIGLITZ-The-world-needs-a-sovereign-debt-restructuring-mechanism.html> (accessed on 11

th January 2015).

10 NML Capital, Ltd v Republic of Argentina, U.S. No. 12-842 (2014).

11 See 2.

12 Sovereign debt restructuring is usually referred to as the process of bond exchange after a take-it-or-leave-it

offer. The sovereign, after informing its creditors about its deteriorated financial situation, develops a new issue of bonds with modified payment terms. The lacking bankruptcy framework for states makes restructuring the

2. Current State of research – relevance of the topic

The acceleration of external lending and the global community’s increasing interest in

promoting financial stability have led to a broad and considerably fruitful academic debate on

comprehensive international bankruptcy or restructuring regimes. 13 The same is true for

proposals regarding the modification of sovereign bond contracts in order to enhance legal

certainty in sovereign debt litigation.14 While several attempts to establish a multilateral

framework for sovereign insolvency failed miserably in the recent decades, the quest for

robust and potent clauses to avoid sovereign default appears promising in the wake of the

unprecedented ruling in NML v Argentina.15

2.1. The holdout problem and NML Capital v Republic of Argentina

Amid summer 2014, the US Supreme Court severely shook the foundations of sovereign

financing with their decision in NML Capital v Republic of Argentina.16 The litigation stemmed

from Argentina’s default in 2001 over $80 billion of its bonds17 and the ensuing restructuring

negotiations with its creditors.18 The bonds – alike a majority of sovereign debt instruments

issued – were governed by the law of New York endowing N.Y. courts with a broad

jurisdiction in the event of legal remedies against sovereigns.

cutting edge of measures to resolve sovereign debt crises. See Hague Conference Sovereign Insolvency Study Group, above no. 7, 13. 13

<http://www.nytimes.com/roomfordebate/2014/08/01/the-justice-of-argentinas-default/a-global-system-is-needed-for-debt-restructuring> (accessed on 15th October 14). For an overview on the academic debate so far see Rogoff K./Zettelmeyer J., Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2002, IMF Working Paper No 02-133 <https://www.imf.org/external/pubs/ft/wp/2002/wp02133.pdf> (accessed 21

st November 14)

and Sedlak J., above no. 50, 1483; Bogdandy A./Goldmann M. in Espósito C./Li Y./Bohoslavsky J.P., above no. 5, 41; Malaguti M.C., above no. 23, 308; Mody A., Sovereign Debt and Its Restructuring Framework in the Eurozone, Oxford Review of Economic Policy, Volume 29, No. 4, 2013, 725 et. seq. 14

Compare e.g. Wright M., Interpreting the Pari Passu Clause in Sovereign Bond Contracts: It’s All Hebrew (and Aramaic) to Me, Federal Reserve Bank of Chicago, and National Bureau of Economic Research <https://www.chicagofed.org/publications/working-papers/2014/wp-06> (accessed on 26

th December 14).

15 Weidemaier W.M.C., Sovereign Debt After NML v Argentina, Capital Markets Law Journal, Vol. 8, No. 2, 2013,

123. 16

NML Capital, Ltd v Republic of Argentina, above no. 10. 17

Sovereign bonds are referred to as a written promise to pay money after a certain time elapses. Although such obligations are not collateralized they are typically traded on international capital markets. Compare Auray R., In Bonds We Trustee: A New Contractual Mechanism to Improve Sovereign Bond Restructurings, Fordham Law Review, Volume 82 (2), 902. 18

<http://www.cliffordchance.com/briefings/2014/06/sovereign_pari_passuclausesnmlcapital20.html> (accessed on 25th December 14).

After Argentina’s failure to pay in 2001 93% of all investors had accepted an exchange of

their bonds against new, less favourable, bonds.19 NML Capital though, the lead plaintiff and

part of the remaining 7%, refused to accept the terms of reorganisation and claimed full

compensation for the pending bond value. This strategy is usually referred to as “holding

out”, implying that such investors are not willing to reschedule their debt under the debtor

country’s terms and conditions. 20

Following NML Capital’s submissions the Southern District Court of Manhattan for the first

time issued injunctions against Argentina after NML and other holdouts have been pursuing

Argentina through courts around the world ever since.21 However, it is crucial to mention

here, that NML Capital is a highly specialized hedge fund, which acquires distressed bonds

at heavy discounts and must be clearly distinguished from “typical” bondholders, such as

banks subscribing sovereign bonds after their first issuance.22 The strategy of such holdout

investors is typically intertwined with a priori refusal to restructure the bond as well as

subsequent litigation. Whilst such legal procedures may last for years the economic

attractiveness of such operations is staggering, providing for astronomical profit margins of

over 1000%.23

Until 2014 the greatest triumph of holdouts resulted in a settlement with Peru in 1996, which

shirked litigation fearing that multitudinous repercussions could harm Peru’s ability to further

utilize capital markets for its financial needs.24 The fund had obtained an ex parte restraining

order against Peru from a court in Brussels arguing that it ranked equally (pari passu) with

restructured investors.25 Afraid of defaulting on its obligations Peru – contrary to Argentina –

settled and paid a sizable return to Elliott Associates, a fund closely linked to the plaintiff in

NML v Argentina26.

Two central reasons are to be emphasised to point out the exceptionality of NML v

Argentina 27 , which led to a remarkable victory of holdouts. Firstly, due to the lack of

19

Ibid. Compare above no. 12. 20

Ibid. 21

Auray R., above no. 17, 912. 22

NML Capital, Ltd v Republic of Argentina, above no. 10. 23

NML Capital’s success before U.S. courts was both, a legal triumph and the rewarding outcome of a risky business transaction. <http://www.usatoday.com/story/money/business/2013/03/30/argentina-offers-to-pay-debts-with-cash--bonds/2038349/> (accessed on 11

th January 2015).

24 Weidemaier M./Scott R./Gulati M., Origin Myths, Contracts, and the Hunt for Pari Passu, Law & Social Inquiry, Vol. 38, Issue 1, 74. 25

Elliot Associates, L.P. v Banco de la Nacion, 12 F. Supp. 2d 328 (S.D.N.Y. 1998). 26 NML Capital, Ltd v Republic of Argentina, above no. 10. 27 Ibid.

aggregated Collective Action Clauses28 in the bond contract, investors could not be legally

forced to accept restructuring by a super majority of bondholders. 29 Hence, certain

bondholders, such as the holdout NML Capital, were able to refuse debt rescheduling and

sought for relief by the means of litigation. Secondly and even more appallingly, the court

established a new and unconventional interpretation of parri passu clauses 30 within

sovereign debt bonds. According to judge Thomas Griesa Argentina must rateably and

equally repay every creditor, regardless of prior refusal to restructure debt.31

Many authors argue that this novelty of pari passu interpretation32 in U.S. case law, namely

that holdouts as well as restructured creditors have to be paid pro rata, will alter the practice

of sovereign debt restructuring and demands a new assessment of the practicality and

reasonableness of the current legal system of sovereign financing.33 To name one amongst

many, Wright 34 tries to outline the potential positive and negative implications of this

interpretation of the pari passu clause. On the one hand the U.S. court may act as a saviour

by strengthening creditor rights and allowing for less risky sovereign borrowing at lower

interest rates. On the other hand judge Griesa could wreak havoc in the market for sovereign

debt – by causing Argentina to default, leading bondholders to abandon New York court

jurisdiction and eventually hindering future sovereign debt restructuring operations.35

Due to the lack of an international legal system for sovereign insolvency and sovereign debt

restructuring the arbitrary interpretation of sovereign bonds by domestic courts became and

will remain crucial. In order to prevent and mitigate both, implications of sovereign debt crises

in general and the holdout problem in particular, it is key to understand the different ways

28

Such CAC’s typically enable a (super-)majority of bondholders to cram holdouts down in the debt restructuring agreements, compare Miller M./Thomas D., Eurozone Sovereign Debt Restructuring: Keeping the Vultures at Bay, Oxford Review of Economic Policy, Vol. 29 (4), 2013, p. 760. 29

Weidemaier W.M.C., above no. 15, 123. Undoubtedly CACs could have avoided certain implications of this ruling but as outlined below CAC’s may not offer full relief to the holdout problem and appear to be an arguably unnecessary compromise. 30

Usually the pari passu clause provides something such as the follow: “These Notes rank, and will rank, equally (or Pari Passu) in right of payment with all other present and future unsecured and unsubordinated External Indebtedness of the issuer.“ Weidemaier M./Scott R./Gulati M., above no. 23, 74. 31

NML Capital, Ltd v Republic of Argentina, above no. 9.; <http://online.wsj.com/articles/argentine-debt-crunch-puts-u-s-judge-in-focus-1406660549> (accessed on the 15th October 14); <http://dealbook.nytimes.com/2014/09/03/argentine-economic-figure-urges-payments-to-bond-holdouts/>(accessed on 29

th September 14); Weidemaier, above no. 15; IMF Policy Paper, Strengthening the

Contractual Framework to address Collctive Actions Problems in Sovereign Debt Restructuring, October 2014, <http://www.imf.org/external/np/pp/eng/2014/090214.pdf>. 32

Compare below 2.2. 33

<http://www.nytimes.com/roomfordebate/2014/08/01/the-justice-of-argentinas-default/a-global-system-is-needed-for-debt-restructuring> (accessed on 15th October 14). 34

Wright M., above no. 14. 35

Ibid.

national courts interpret sovereign debt provisions such as the pari passu clause with

regards to sovereign bond litigation.

According to many, the holdout problem must not be understood as a consequence of

reckless sovereign financing but rather as a result of national judges misinterpreting

sovereign bond contracts.36 To this extent, following Chabot and Gulati37, two facts render

the pari passu clause central: Its controversy amongst practitioners as well as its ubiquitous

usage in virtually every modern sovereign debt contract.38

2.2. The Pari Passu Clause

Despite their almost universal utilization in sovereign debt bonds, pari passu clauses are not

only ambiguous but remain debatable even amongst those lawyers, who regularly draft

sovereign debt contracts.39 Essentially such clauses ought to provide equal treatment of

holders of identical claims as pari passu translates “equal footing”. Undoubtedly this clause

became an indispensable part of unsecured debt transactions – be it on the private level or

within sovereign finance.40 Such clauses’ chief objective is to substitute inexistent insolvency

laws on the international level by providing “intercreditor equity” – a social norm inherited by

almost every domestic legal culture.41 Zamour however argues that the judge in NML v

Argentina attempted to revive the long-dead doctrine of ratable payment, in order to thwart

preferential treatment of restructured bondholders and selective resumption of payment.42

But the deeply international character of sovereign finance43 requires a broader and more

sophisticated view on the interpretation of sovereign financing than the N.Y. judgment

implies. For instance Burn, an English lawyer, argues that pari passu embodies at least two

different meanings according to English case law and academic literature.44 Firstly, it is a

ranking clause, affirming that the obligations rank and will rank pari passu with all other

36

Ibid. 37

Chabot B./Gulati M., Santa Anna and his Black Eagle: the origins of pari passu?, Capital Markets Law Journal, Vol. 9, No. 3, 216. 38

Weidemaier M./Scott R./Gulati M., above no. 23, 74. Usually the pari passu clause provides something such as the follow: “These Notes rank, and will rank, equally (or Pari Passu) in right of payment with all other present and future unsecured and unsubordinated External Indebtedness of the issuer.“ 39

Ibid, 216. 40

Wright M., above no. 14, 2. 41

Ibid, 2. 42

Zamour R., NML v Argentina and the Ratable Payment Interpretation of the Pari Passu Clause, The Yale Journal of International Law Online, Volume 38 (2013), 55. 43

See above 1. 44

Burn, Pari Passu clauses: English law after NML v Argentina, Capital Markets Law Journal, Vol. 9, No. 1, 4.

unsecured debt as a matter of mandatory law. This interpretation is also referred to as the

narrow interpretation and holds that only subordination of the protected debt by some legal or

mandatory measures shall allow legal remedies against the debtor.45 Secondly, pari passu

indicates, that the borrower has undertaken that it will in fact pay its obligations pro rata

(ratable) when it is unable to pay all of them in full.46 Due to the paucity of an international

bankruptcy regime equal payment of creditors must in fact be ensured by the means of

contractual provisions.

However, this second – wider – interpretation has proven questionable, as it appears to

contradict not only the sovereign’s interests to sustain governmental control but also the

creditor’s interest to avoid a collapse into anarchy and a subsequent halt to repayment.47

Despite a commercial perspective reveals the unreasonableness of such an interpretation of

the parties’ intentions, judge Griesa ostensibly chose to establish this view in the most

important market place for sovereign bonds.

But why did reactions amongst journalists and academic authors include a language that

harshly condemned this ruling? According to Weidemaier, the new interpretation of pari

passu clauses and its confirmation by the U.S. Supreme Court rendered restructuring a

repugnant undertaking.48 If holdout creditors have a significant chance of recovering their

claims in full, creditors who would otherwise have agreed to participate in the restructuring

will become less inclined to do so. 49 As mentioned above, according to U.S. courts

intercreditor equality in the sense of pari passu treatment shall only apply ex ante to

restructuring. In the case of Argentina 93% of bondholders have reduced their claims to less

than 70% of the bond value whilst holdouts retained all rights regarding their bonds before

litigation was initiated.50 The interpretation ex post restructuring by the N.Y. court however,

did not recognise this difference between the restructured and un-restructured debts,

throwing the gates wide open for holdout investors. Contrary to the initial aim of pari passu

provision, namely to ensure just equality between the creditors51, the N.Y. court enabled

holdout creditors to extract considerably higher payments on their bonds than restructured

bondholders.

45

Allen & Overy, The pari passu clause and the Argentine case, Global Intelligence Unit, 27th

December 12, 2. 46

Burn, above no. 41, 4. Also compare Financial Markets Law Comittee: Issue 79 – Pari Passu Clauses. 47

Burn, above no. 41, 5. 48

Weidemaier, above no. 15, 123. 49

<http://www.imf.org/external/pubs/ft/survey/so/2014/new100614a.htm> (accessed 30th October 14). 50 Wright M., above no. 14, 6. 51

Chabot B./Gulati M., above no. 34, 233.

As Burn and Wright, two practitioners, argue, the academic world has not provided a sound

analysis regarding the meaning of pari passu and ways to prospectively avoid an

interpretation by domestic courts favouring holdout investors and their trading scheme.52

According to the academics Weidemaier, Scott and Gulati no one really knows what the pari

passu clause means, arguing that eminent practitioners have acknowledged this fact for a

long time.53 Raffer on the contrary contends that the pari passu interpretation as in NML v

Argentina only guarantees the rule of law and enables the creditors to assert justified claims

against a distressed sovereign.54 These and other expert opinions will receive due attention

in the course of this doctoral research and shall be scrutinised in the context of legal

rationales as well as economic necessities inherent to the issue of sovereign financing.

2.3. Enforcement of sovereign debt obligations by the means of litigation

Another issue closely linked to and supposedly resulting from the new interpretation of pari

passu terms is the broad injunction against payment facilitators on U.S. soil issued by the

Southern District Court. This injunctive order entitles holdout creditors to effectively interfere

with payments of bondholders who assented to a government’s restructuring proposal.55

Argentina loudly claimed that this ruling violates its sovereignty as the court order restricts

any Argentinean payment towards any of its other creditors as long as the country hasn’t

fulfilled its financial obligations towards the holdout investors.56

Cotterill supports the Argentinean view and acknowledges that holdouts have been able to

gain expansive powers of enforcement through judicial discretion. 57 The enforcement of

sovereign bonds by the means of injunctive orders is a particularly new phenomenon, which

must not be left aside in the discussion on holdout investors and sovereign debt

restructuring. In fact, according to academic literature, the option to enforce sovereign debt

obligations rendered the future implications of NML v Argentina58 sweeping and dangerous –

especially from an international legal point of view.

52

Burn, above no. 41, 5; Wright, above no. 14, 6. 53

Weidemaier M./Scott R./Gulati M., above no. 23, 74. 54

Raffer K. in Espósito C./Li Y./Bohoslavsky J.P., above no. 5, 185. 55

Kim S.H., Parri Passu: The Nazi Gambit, Capital Markets Law Journal, Vol. 9, No. 3, 250. 56

http://blogs.wsj.com/law/2014/08/07/argentina-sues-u-s-in-international-court-of-justice-over-debt-dispute/ (accessed on 4th January 2014). 57

Coterrill, The injunction has landed: the “Black Eagle”, pari passu and sovereign debt enforcement, Capital Markets Law Journal, Vol. 9, No. 3, 278. 58

NML Capital v Republic of Argentina, above no. 10.

According to Steel, Zarrini and Goldinstein on the contrary the ruling in NML v Argentina59

may provide for greater certainty that contractual terms can in fact be enforced and will

encourage participation in the debt markets by lenders and borrowers.60 A legal regime that

mitigates their financial risk by offering a powerful injunction for investors against the debtor

state may mark a step towards a more predictable system of sovereign finance.61 As judge

Griesa argues in his ruling, the contextual interpretation of the pari passu clause – regardless

of other factors intertwined with particularities of the Argentinean case – was necessary to

uphold the rule of law. The issuance of a court order against all payment facilitators was

inevitable in order to ensure an equal treatment between sovereigns and private corporations

when they enter into a commercial transaction.62

Those evidently different views within academic literature regarding both, the interpretation of

pari passu and subsequent enforcement measures against sovereign nations shall be

subject to critical analysis within my thesis. On the one hand it is beyond any doubt that the

rule of law must prevail in domestic jurisdictions as well as on the international level. On the

other hand the concept of sovereignty makes a clear distinction between countries and

private actors necessary and must too be carefully considered in the law of international

finance.

2.4. Response by international actors

Following the first ruling in NML v Argentina 63 Eurozone has committed to introduce

aggregation clauses into all Euro area bonds starting in 2013 as well as into the framework of

the European Stability Mechanism in order to allow a supermajority of bondholders to impose

restructuring on a minority.64 However, this strategy may not solve problems of different

interpretations of pari passu clauses around the world. Collective action does not necessarily

provide for equitable treatment of creditors and can lead to higher refinancing costs on the

sovereign’s balance sheet. In fact when Greece restructured its debt by ex post

implementing Collective Action Clauses, bondholders with similar claims were treated

extremely different leading to an unprecedented degree of discrimination.65

59

Ibid. 60 Steel H./Zarrini E./Goldinstein A., NML Capital v Argentina: a lesson in indenture interpretation, Insolvency and

Restructuring International, Vol. 8, No. 2, September 2014, 33. 61

Ibid, 34. 62

See NML Capital, Ltd v Republic of Argentina, 727 F.3d 230, 247 (2d Cir 2013). 63

Ibid. 64

Zettelmayer J./ Trebesch C./Gulati M., The Greek Debt Restructuring: An Autopsy, Petersen Institute for International Economics Working Paper, WP 13-8. 65

Ibid.

The IMF too has not held back in openly criticising the amplification of the holdout problem

by the ruling in NML v Argentina66 and has announced its intentions to firmly fight the overt

vulnerability towards holdouts by advancing the robustness of sovereign bonds.67 According

to the Fund “Copycat” litigation is relatively certain and has already commenced when a

Taiwanese bank sought specific performance of the pari passu clause contained in defaulted

loans made to Grenada in March 2013.68 The IMF policy paper published in September 2014

reveals the funds severe concerns and not only stresses the importance and imminence of

modifying sovereign debt contracts but offers compelling ideas.69

Moreover the United Nations General Assembly has detected potentially adverse

implications of NML v Argentina and passed a resolution, which aims to adopt a multilateral

framework for countries to emerge from financial commitments.70 The U.N. acknowledges

the risk the so-called “vulture funds” (i.e. holdout investors) pose to all future debt

restructuring processes following recent U.S. litigation. In addition it criticises the vast

resources sovereigns need to divert to handle such litigation as a result of legal uncertainty.

According to the U.N. a legal framework shall be created capable of facilitating orderly

restructuring of sovereign debt and acting as a deterrent to disruptive litigation that creditors

could engage in during restructuring negotiations.71

3. Research Questions

What are the legal implications of NML Capital v Republic of Argentina72 for the

future of sovereign debt restructuring?

Why do holdout investors pose a vital threat to sovereign debt restructuring efforts?

o Why are holdouts presumed “vulture funds” and what legal argumentation is

their business strategy intertwined with?

o Why are current ad-hoc solutions to reschedule sovereign debt in

international law vulnerable to holdout litigation?

o How do different capital markets address the holdout issue and why does

New York attract holdout litigation?

66

NML Capital v Republic of Argentina, above no. 10. 67

See <http://www.imf.org/external/pubs/ft/survey/so/2014/new100614a.htm> (accessed 30th October 14). 68

Ibid. 69

Ibid. 70

<http://www.un.org/en/ga/search/view_doc.asp?symbol=A/RES/68/304> (accessed on 26th December 14). 71

Ibid. 72

NML Capital, Ltd v Republic of Argentina, above no. 10.

Why and how does the new interpretation of sovereign debt bonds by U.S. courts

affect sovereign debt restructuring?

o Why does NML v Argentina 73 mark a caesura regarding the legal

underpinnings of sovereign debt restructuring operations?

o How do U.S and other domestic courts balance the rule of law and the

necessity of debt restructuring in the light of a lacking international

bankruptcy procedure and what instruments do judges have at hand?

o What is the role of pari passu clauses in sovereign debt contracts and why

does U.S. case law amplify their danger for sovereign debt restructuring

procedures?

o How may pari passu clauses render sovereign debt obligations enforceable

– even if restructuring took place?

o How do pari passu terms interplay with collective action clauses?

How can the holdout problem be effectively tackled after NML Capital v Republic of

Argentina74?

o What contractual framework may be capable to ensure predictable and

equitable sovereign debt restructuring procedures in the future?

How can the rule of law and the interest of sovereigns to restructure

their debt be balanced in the light of the line of argumentation

established in NML v Argentina75?

What modifications to sovereign debt bonds are necessary to reduce

the attractiveness of holdout litigation?

Which interpretation of the pari passu clause could mitigate legal

uncertainty triggered by recent U.S. case law?

What role may collective action provisions assume and what are their

advantages and disadvantages?

Could sovereign contingent convertible bonds (“sovereign cocos”)76

offer relief to holdout issues whilst enhancing predictability of

sovereign debt restructuring?

What central issues and suggestions will modern debt restructuring

after NML v Argentina77 inevitably have to seize?

73

Ibid. 74

Ibid. 75

Ibid. 76

Compare Barkbu/Eichengreen/Mody, Financial crises and the multilateral response: What the historical record shows, Journal of International Economics 88 (2012), 433. 77

Ibid.

o How do recent IMF and UNGA proposals – in response to NML v Argentina78

– tackle the holdout problem in particular and what would it mean to the

future sovereign debt restructuring in general?

What role will international financial institutions play in the future of

sovereign debt crises?

How could they address the issue of holdout litigation?

4. Research Aims and intended course of the analysis

Academics and practitioners agree that the current situation within the international financial

order following the ruling in NML v Argentina79 will harm financial markets as it caused

considerable legal uncertainty, not only for sovereign debtors, but for any bank or

cooperation concerned with sovereign financing.80 It appears vital to analyse the ambiguous

and controversial findings in the recent ruling, which some consider crucial to ensure the rule

of law 81 and others deem unequitable and illegitimate. 82 The exceptionality of NML v

Argentina83 for the international financial legal order – especially with regards to potential

enforceability of sovereign debt obligations – made it necessary to provide a comprehensive

reassessment of the status quo by conducting this research.

My preliminary research rendered the pari passu clause – besides Collective Action Clauses

– the most prominent as well as the most ambiguous piece in the puzzle of holdout litigation

and sovereign debt restructuring. The unconventional interpretation of pari passu provisions

by N.Y. courts has certainly transformed sovereign debt obligations, previously deemed de-

facto unenforceable, into strong claims of investors, capable of severely hampering

restructuring efforts. Through analysing this provision as well as critically discussing its

interpretation within literature and by courts around the globe, this thesis shall eventually try

to make a contribution to the academic discourse. By providing a comparative analysis of

how different interpretations of pari passu shape and will shape sovereign debt restructuring

as well as the enforcement of sovereign claims the research shall bring to light potential

solutions to this equivocal situation within the international financial architecture.

78

Ibid. 79

Ibid. 80

See for example Weidemaier, above no. 15, 123; Nguyen D., Too big to fail – Towards a Sovereign Bankruptcy Regime, Cornell International Law Journal, Vol. 45, No. 3, 2013, 697; Allen & Overy, above no 36, 6. 81

Raffer K. in Espósito C./Li Y./Bohoslavsky J.P., above no. 5, 185. 82

Weidemaier, above no. 15, 123; Coterrill, above no. 48, 278; Chabot B./Gulati M., above no. 34, 216. 83

NML Capital v Republic of Argentina, above no. 10.

In the first chapter my doctoral thesis will outline the law of sovereign financing and explore

the international financial system with a focus on sovereign debt crises and sovereign debt

restructuring. This will include a brief overview of the history of sovereign debt restructuring,

an introduction into the chief challenges and an assessment of international efforts to

balance legal certainty and economic necessities before, amid and after sovereign debt

crises.

Chapter two shall examine the problem of holdout investors for sovereign debt restructuring,

which will inter alia include an analysis of their emergence in the late 1980’s and an

assessment of the most prominent lawsuits concerning holdout litigation. This chapter will too

explore, why holdouts may pose a threat to the efficiency and predictability of sovereign debt

restructuring negotiations and what proposal have been made to avoid legal action following

repayment difficulties. Chapter two will function as an introduction to the broad academic

discourse surrounding the holdout issue, while chapter five will conduct an in-depth analysis

of contractual modifications that may offer relief.

In the third chapter my thesis will compare the most significant capital markets for sovereign

bonds, namely New York, London and Frankfurt, and assess their respective legal exposure

to the holdout problem. This chapter shall analyse the legislative measures taken in favour or

against holdouts and hence determine the foundations for a successful sovereign debt

rescheduling. Chapter three will not offer a detailed description of different capital markets

laws but approach this comparison with very broad brushstrokes in order not to go beyond

the scope of this research.

Chapter four will then come back to recent holdout litigation and will aim to provide a sound

and comprehensive analysis of the ruling in NML v Argentina84 as a case in point. The chief

goal of this chapter will be to thoroughly analyse the legal argumentation and the guiding

principles established in this case as well as possible consequences for the marketplace

New York. By applying an objective approach the thesis shall discuss both, potentially

positive and potentially negative implications of this ruling.

After having evaluated the principles and the chief implications of this domestic court

decision with regards to holdouts, the fifth chapter will focus on the interpretation of the pari

passu claus. As outlined above courts, academics as well as international organisations hold

remarkably different views on the meaning of this – at least for holdout investors – vital

provision in sovereign debt bonds. This chapter shall thus offer a comparative analysis of the

84

NML Capital v Argentina, above no. 10.

different interpretations of pari passu, not only focusing on the distinction between common

law and civil law traditions but also with regards to economic realities of the parties involved,

which are typically reflected by greater bargaining power. Eventually this section will attempt

to answer the question which interpretation of pari passu terms could successfully mitigate

holdout issues whilst achieving its original aim to provide intercreditor equality.

Chapter six will then try to assess the operational implications of the (new) pari passu

clause interpretation under New York law and will offer an analysis rather than actual

solutions. The potential enforceability of sovereign debt indentures through broad injunctions

as inaugurated in NML v Argentina85 demands for a re-evaluation of global sovereign debt

enforcement. The sixth chapter will therefore focus on these injunctions, which enable

holdouts to interfere with the payment of other creditors and will try to examine how courts,

academics and lawyers balance investor protection and sovereignty in the light of holdout

litigation.

In chapter seven the thesis will elaborate on solutions proposed by literature and

practitioners to prospectively avoid the holdout problem. The focal point of this research will

be centred on contractual solution to the holdout problem, as their practical implementation

appears – at least under the current circumstances – more feasible than a multilateral

restructuring framework. As chapters five and six concentrate on the pari passu clause

chapter seven will pay special attention to Collective Action Clauses as they are often

deemed to offer effective relief to unsolicited holdout practices. However, as academics

around the globe have extensively discussed CAC’s and their functioning this thesis will only

broach this subject. CAC’s will first and foremost be assessed with regards to their interplay

with pari passu clauses in sovereign debt bonds. They will be discussed in the light of

intercreditor equality and with regards to a potential power shift to sovereign debtors.

Moreover this chapter will review the academic proposal to introduce sovereign contingent

convertible bonds (“sovereign cocos”) as their concept might mitigate holdout risks and

enhance the certainty during restructuring operations.86

The eighth chapter will try to draw a conclusion informed and guided by the research results

in the prior sections. Although my thesis will not attempt to offer an exhaustive solution to the

issue of holdout investors, it shall deliver a comparative analysis of how – due to the absence

of international legal regulations – contractual terms and their interpretation shape sovereign

financing and debt restructuring. Furthermore the thesis will – infused by the findings – put

forward the author’s opinion on how the current situation may be enhanced by modifying

85

NML Capital v Argentina, above no. 10. 86

See Barkbu/Eichengreen/Mody, above no. 66, 431.

contractual terms whilst ensuring a fair and predictable process of debt restructuring and

mitigating the delay and risk holdouts constitute for future debt restructuring.

5. Methodology

This dissertation aims to provide a comprehensive analysis of the legal implications triggered

by the holdout problem, especially following NML Capital v Argentina.87 This thesis shall

primarily adopt a library-based research approach and will use the Internet as a material

source for pertinent legal documents and publications. In order to fully understand the

outlined questions, a thorough assessment of the history of sovereign insolvency and debt

restructuring is necessary. This will require an analysis of both, the relevant legal sources

and the global policies intertwined with sovereign financing and debt restructuring.

Furthermore the chief part of the research will involve an examination of current sovereign

debt restructuring mechanisms, their legal value and their interplay with international law.

This will especially require a consideration and interpretation of soft law instruments88 as well

as (legally binding) restructuring arrangements, which can be found on the Internet. To

inform this analysis, reliance will be placed on academic literature. Moreover IMF

publications as well as papers of leading private financial institutions, such as the American

Bankers Associations will serve as an integral source. The recent proposals by the IMF and

the UN General Assembly to effectively mitigate the risks of holdout investors can be found

on the Internet.

Further, research will review the solutions proposed by scholars and practitioners to enhance

the status quo by implementing a more practicable interpretation of sovereign debt contracts.

The underlying documents are mostly accessible on the Internet. The pertinent articles and

books cited in the preliminary bibliography can mostly be found in the libraries at University

of Vienna and will be extended by further research in the due course of this study. A planned

research semester at a University in an English speaking country shall too contribute to the

literature, which will be assessed and analysed in the due course of completing this thesis.

6. Schedule

87

NML Capital, Ltd v Republic of Argentina, above no. 10. 88

Such as the UNCTAD Principles on Sovereign Lending and Borrowing, <http://unctad.org/en/docs/gdsddf2011misc1_en.pdf> (accessed on 8

th November 14).

The proposed research shall progress as follows:

Time Span Research Objective Coursework

Winter term 2014/15 Submission of the exposé

Presentation of the research

proposal

Signing of the dissertation

agreement

VO Juristische

Methodenlehre (2 SWS)

KU zur Judikatur- und

Textanalyse (Spinoza’s Ethik

– 4 SWS)

Summer term 2015 Research semester at the

University of New South

Wales

Drafting chapter 1 to 2

Wahlfächer im International

(Financial) Law (<8 SWS)

Winter term 2015/16 Drafting and completion of

chapter 3 to 4

Summer term 2016 Drafting and completion of

chapter 5 to 7

Winter term 2016/2017 Revision in the light of new

developments and

submission of the doctoral

thesis after the completion of

chapter 8

6. Preliminary Bibliography

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