Settling Sovereign Debt's 'Trial of the Century'

Abstract

NML v. Argentina, the “trial of the century” in sovereign debt, is finally poised for settlement negotiations. International experience, advantages for the parties themselves, and even statements by the presiding federal judge, all suggest that it is high time for a settlement between Argentina and its holdout creditors. But major challenges remain.While not addressing all of them, we analyze key economic and legal factors underlying the NML litigation, with a particular emphasis on issues relevant to a potential settlement. We document the wide heterogeneity of holdout rates across Argentina’s 150 defaulted bonds (of which 74 still have holdout rates greater than 5 percent) and focus the subsequent analysis on the seven most held-out bonds. The bonds in our sample have holdout rates between 20 and 82 percent and account for about 30 percent of total holdout principal. We show that New York’s statutory real rate of interest on overdue interest has been 6.6 percent on average during the years affecting this suit compared to 3.1 percent during the previous forty years. As such, the New York statutory rate has become more punitive than compensatory.We also illustrate the growth of the value of holdout claims for the seven bonds from their initial $1.7 billion in principal up to $4.3 to $7 billion in current value, depending on when holdouts obtained judgments. We analyze the sensitivity of holdout claims to different approaches to overdue interest—an issue that has become increasingly controversial in New York state law in recent years. We next assess the returns that investors would have obtained by purchasing the seven-bond basket at different times since 2002. We find that investors would have multiplied their money an average of 8 times if they obtained judgments in 2008 or 13 times in 2015. Finally, we compute the current value of Argentina’s 2005 exchange offer and find that is worth about one-half of the litigants’ claims for judgments obtained in 2008.Our analysis offers a framework for potential settlement negotiations. However, with so many holdouts unaccounted for, a settlement with the NML litigants exposes Argentina to the tyranny of the next litigant as long as the current injunctions remain in place. We close by underscoring the benefit of modifying or lifting these injunctions as Argentina begins negotiating in good faith to reach a reasonable settlement with its holdout creditors.