The lawyers who understand the issues much better than me are excited (here and here) by the latest order from the NY Court of Appeals in Argentina’s long-running battle with holdout creditors. After a hearing last Wednesday that by most accounts went extremely badly for Argentina (it’s probably not the best strategy to ask a court to overturn a ruling because you plan to ignore it, making it ineffectual), the Court issued an order giving Argentina a chance to propose alternative terms to its creditors. By March 29, Argentina is ordered to provide “the precise terms of any alternative payment formula and schedule to which it is prepared to commit.”
There is a good chance the offer from the Court will not lead to a breakthrough. The commentary from the Court in the order appears to suggest that Argentina must eventually “make current” the holdout’s bonds, which the government has long made it clear it is not prepared to do. So the window for a deal may be small. But it’s possible that the government’s response will open the door for an agreement brokered by the court.
There is a broader idea here. Is the court, in the face of a defiant debtor and in an environment where its rulings have limited force due to sovereign immunity, willing to entertain a counterproposal from Argentina? If so, it could be a step towards a principles-based approach to restructuring in the shadow of bankruptcy. In forming an offer, Argentina must weigh the cost of additional concessions against the improved odds that its offer is accepted. Can this lead to a mutually acceptable outcome?
Some evidence comes from baseball’s approach to arbitration. In arbitration, the player and the team each make an offer, and the arbitrator chooses one of the final offers. The idea of this approach was to encourage more negotiated settlements, because the cost of losing would be high. In fact, it seems the process works. This year, for the first time since arbitration was introduced in 1974, no baseball player went to arbitration! Though 133 players filed for arbitration, all subsequently reached agreement with their team before the hearing.
As I have discussed in the past, most of the time, market-based exchanges succeed in helping address a country’s debt problems, even if a few holdout creditors remain and subsequently make life difficult for the country. A concern in this case is that, in the effort to get Argentina to the table, the court would create a rigid precedent that swings the pendulum too far towards the creditor and makes it harder to do exchanges in the future. Baseball’s experience tells us deals can still be done.