Daily Times

On April 22, a unique chapter in the history of the international bond market drew to a close when the Republic of Argentina settled with the largest remaining holders of the bonds unresolved from its 2001 default on more than $80 billion. Elliott Management, the firm I founded and manage, was one of these holders, having purchased bonds both before and after the default.

The 15-year saga has generated reams of articles about what lessons should be drawn to improve the sovereign-debt restructuring process. Now that the Argentina story is winding down, we would like to add our perspective to the debate.

When we first invested in these bonds in 2001, we believed that a negotiated restructuring could help Argentina avoid default. We also believed that if we participated in a negotiation, we could help achieve a good deal for all of the country’s bondholders.

As it turned out, Argentina chose to default, and its leaders refused to negotiate. Normally, sovereign restructurings are completed quickly-a 2013 study by the Moody’s rating agency put the average at around 10 months. But it was nearly three years before Argentina’s leaders even put an offer on the table.

When they finally did, bondholders-including many individual Argentines-were given a take-it-or-leave-it offer of new bonds worth just 30 cents for every dollar owed on the old bonds. Argentina’s leaders even took the extraordinary step of passing a law prohibiting payment to any bondholder that rejected the offer.

Despite these coercive tactics, more than half of Argentina’s foreign bondholders rejected Argentina’s unilateral terms. Five years later, in 2010, Argentina repeated the 30-cent offer. Many participants in this second exchange were bondholders who were worn down by the financial crisis or just tired of waiting.

At that point, Argentina’s leaders could have easily negotiated a settlement with the remaining bondholders and put the 2001 default behind them. We tried again, as we had in the past, to initiate a settlement discussion with Argentina.

Our entreaties were again refused. Instead, Argentina’s leaders chose to use us as scapegoats for the country’s mounting economic problems, insisting that bondholders like us would never be paid a single peso.

In 2012, the New York court charged with overseeing disputes over the bonds ordered Argentina to abide by the equal-treatment clause of its contract, meaning that it couldn’t continue making payments on the new, discounted bonds unless it settled matters with the old bondholders.

Argentina refused to comply with the court’s ruling or to negotiate with creditors. It chose instead to go into default on the new bonds and was held in contempt of court for evading court orders.

In late 2015, Argentines voted in a new government. By that time, the country was in default to multiple classes of bondholders and isolated from financial markets. With the economy suffering from rampant inflation and capital flight, it is little wonder that the people voted for a candidate whose slogan was “Let’s change.”

The new administration understood that the path to prosperity had to begin with re-engagement with the global economy and a quick resolution of the creditor dispute.

Our long-standing offer to negotiate was finally met with a positive response. In January, the first negotiation in 15 years commenced. As with any negotiation, there were strong differences on both sides. But the new administration recognized that this was simply a commercial dispute, and not an ideological war. That change of mind enabled talks to proceed with mutual respect and a shared commitment to solving the problem.

Once we had a willing negotiating partner, a solution was readily achievable. In February, we reached a deal that involved a meaningful but appropriate discount to our claim, which has been paid as part of Argentina’s record-breaking return to international capital markets.

Throughout this saga, certain commentators and policy makers have argued that the enforcement actions imposed by U.S. courts on Argentina have set a negative precedent for future sovereign-debt restructurings. They claim that bondholders now have little incentive to negotiate a resolution.

This line of thinking is wrong-and it risks crippling markets for sovereign debt.

In the absence of enforceability, the bonds of sovereigns with questionable credit quickly could drop to near-zero at the first sign of trouble. After all, who is going to want such bonds if holders can’t enforce their rights and sovereigns can pay whatever price, and to whichever creditors, they wish? Such a world would be far more chaotic than the imperfect but workable set of legal fallbacks that investors rely on today.

There must be a fair balance of power between sovereign debtors and their creditors, and the key to achieving that balance is the rule of law. If some sovereigns want to include clauses in their bonds which bind minority bondholders upon a certain vote by the majority, then they are certainly entitled to do that.

However, if other sovereigns bargain for lower interest rates by inserting creditor-friendly clauses in their contracts, then, to paraphrase an important U.S. federal appeals court ruling in our case, holding them to those terms is essential for the integrity of the capital markets.

Furthermore, Argentina was described by the same court as a “uniquely recalcitrant debtor,” and the court tailored its ruling to the specific facts of the Argentina case. We aren’t likely to see another restructuring as difficult and contentious as Argentina’s, because we aren’t likely to see another country emulate such a coercive and self-destructive approach.

If the official sector overreacts to this extreme outlier by devoting its energies to preventing the enforcement of sovereign-debt contracts, then the world will likely see a significant drying up of sovereign lending. The true recipe for market failure would be for courts to stop enforcing debt contracts, or to enforce them only selectively when it comes to sovereigns.

The lessons of this story are clear: The rule of law is not a liability for a country. It is an asset. Sovereign-debt restructurings can quickly and easily be achieved when both sides are willing to negotiate in good faith. And the key to ensuring timely and orderly restructurings lies not in vitiating the enforcement of contractual rights, but in encouraging sovereigns in need of restructuring to avoid Argentina’s costly and unnecessary mistakes. Courtesy – The Wall Street Journal