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ECLAC Refers to the Implications of the Holdouts for the International Financial System

The regional organization's Executive Secretary, Alicia Bárcena, makes a statement due to the ruling by the United States justice system in the legal dispute between the holdouts (so-called "vulture funds") and the Republic of Argentina.

26 June 2014 | Press Release


ECLAC Executive Secretary, Alicia Bárcena, on a file picture.
ECLAC Executive Secretary, Alicia Bárcena, on a file picture.
Photo: Carlos Vera/ECLAC.

(June 26, 2014) In the following statement, the Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), Alicia Bárcena, poses the need to establish an international mechanism that would allow for the resolution of conflicts of interest caused by sovereign defaults:

"In early 2013 ECLAC organized a seminar in Mexico City entitled "The debt crisis 30 years later," due to the thirtieth anniversary of Mexico's external debt moratorium in August 1982. That date marked the start of what would later be known as the "lost decade" for Latin American development, the period of greatest socioeconomic hardship the region had experienced in all its history.

Three decades later, the global financial crisis and its effects (2007-2009) and the crisis of the Euro zone (2008-2012) have highlighted once again several of the profound inconsistencies and inequities that were manifested at that time, both in relation to the organization of the international monetary system as well as the disproportionate power that the world of finance had acquired vis-à-vis work and production. In addition, these crises have demonstrated that to avoid profound and lasting economic and social costs, mechanisms for negotiation and resolution are needed on an international level that would facilitate payments and enable proper debt management over time.

The risk associated with the absence of a mechanism of this kind is precisely what has been brought to light again after the recent decision by the United States Supreme Court to refuse to review the legal dispute between Argentina and a minority of the so-called holdouts (also known as "vulture funds" due to their strategy to acquire defaulted sovereign debt issues at a very low price, only to later demand the totality of the payment via a judicial process).

This decision not only creates difficulties-or perhaps makes it impossible-for Argentina to continue servicing its restructured debt, it also strikes at the stability of the international financial system in as much as it constitutes a precedent that can hinder other sovereign debt restructuring processes in the future. Because, if during a voluntary negotiation such as the one Argentina carried out, in which more than 92% of its creditors agreed to swap their defaulted debt (for new bonds with a considerable haircut), any creditor can demand and charge the total owed on that debt, what are the incentives to enter into a similar restructuring in the future?

In addition, the decision can also have negative effects for those who participated in the renegotiation. On the one hand, if Argentine were forced to declare a default, no creditors would get paid. On the other hand, if Argentina opted to pay, it would have to do so to all creditors regardless of whether they participated in the 2005-2010 restructuring or not.

The introduction of collective action clauses (which obligate the minority unwilling to enter into a swap to accept the restructuring terms determined by the will of the majority) is necessary to give the system greater stability in the future, but their true juridical implications are still not known with certainty and can be subject to interpretation. The contentious interpretation of the pari passu clause that is at the origin of this controversy only serves to sow this kind of uncertainty. But also a mechanism for restructuring debt must be designed to take into account the debtors' conditions, including the requirement that debt servicing payments could depend, at least in part, on the macroeconomic conditions upon which the very ability to service debt depends.

It is in this sense that the need emerges to establish an international mechanism that allows for the resolution of conflicts of interest caused by sovereign defaults, as international organizations, including ECLAC, have been proposing. In the same way that national legislation contemplates mechanisms to keep minority creditors from blocking the will of the majority who are willing to reach an agreement to restructure liabilities stemming from a bankruptcy, states should have a similar juridical framework that makes these same mechanisms viable on an international level. In 2003 the IMF itself proposed-unsuccessfully, as we know-the creation of a mechanism for restructuring sovereign debt. At that time the advanced countries (or "central" ones, as Raúl Prebisch would have said) contended that voluntary negotiations through the market would be more efficient. Along the same lines, in September 2009 the so-called "Stiglitz Report"-which summed up the conclusions of a panel of 20 experts gathered by the president of the United Nations General Assembly to discuss the agenda of reforms needed in the international financial system after the subprime crisis-proposed the creation of an international tribunal to resolve these kinds of controversies (International Debt Restructuring Court).

As a result of this latest judicial ruling, the possibility exists that Argentina's public debt denominated in foreign currency could rise significantly, not only because the obligations coming from the litigating holdouts (holders of 1% of the bonds that were defaulted upon in 2001) could rapidly extend to the rest of the holdouts (holders of about 7%), but rather because complying with this ruling could trigger the RUFO clause (Rights Upon Future Offers). That clause prohibits Argentina from improving on the offers made in the 2005 and 2010 debt swaps until December 31, 2014, if it is not willing to extend the new payment conditions to the totality of holders of the restructured debt (that is to say, the remaining 92%). According to the most conservative estimates, the triggering of that clause could increase Argentina's external public debt by more than $100 billion U.S. dollars. As a point of comparison, Argentina's public debt denominated in foreign currency and owed to private creditors and international credit organizations amounts to $79 billion dollars (according to official data from September 2013). In this way, a minority (1% of the creditors) could destroy the debt restructuring process post-2001 crisis that was accepted by the majority (92% of creditors).

Without that restructuring, Argentina would have experienced another "lost decade" in the 2000s. With difficulties and over the course of nearly 10 years, the country reached majority acceptance of its proposal. The implicit extension of maturities and haircut in the resulting debt swap made it possible for the country to experience a significant growth cycle, taking advantage of good international conditions and at the same time making good on the commitments that stemmed from that restructuring. Just as the "bailouts" of banks in situations of financial crisis are justified by the systemic implications of a breakdown in the financial system for the economy, the restructuring of sovereign liabilities, when these are clearly unsustainable, protects the economy's positive performance later and, as a result, also regularizes the payments owed. And with that, naturally, the performance of its trade partners, making this a matter of global interest.

Therefore, this is a test case for the international community, as numerous governments and international organizations have let it be known, which reveals a legal vacuum that should lead to the reform of international norms that would allow the common good to be protected from a minority's zeal for extraordinary profits.


Any queries should be sent to ECLAC's Public Information Unit.

E-mail:; Telephone: (56 2) 2210 2040.

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