November 24, 2014
After United States justice ruling on vulture fundsSaturday, June 21, 2014
IMF warns of ‘more complicated’ debt restructuring processes
The United States Supreme Court decision not to hear the case between Argentina and the hedge funds “will give holdout creditors greater leverage and make the debt restructuring process more complicated,” the International Monetary Fund (IMF) said in a report released yesterday.
The IMF reached such conclusion based for two main reasons. On one hand, the IMF said, by allowing holdouts to interrupt the flow of payments to creditors who have participated in the restructuring, the decisions would likely discourage creditors from participating in a voluntary restructuring.
On the other hand, the IMF considered that by offering holdouts a mechanism to extract recovery outside a voluntary debt exchange, the decisions would increase the risk that holdouts will multiply and creditors who are otherwise inclined to agree to a restructuring may be less likely to do so due to inter-creditor equity concerns.
“There is a growing consensus that the pari passu provision should be amended to preclude the type of interpretation that was reached by the US Courts. There are also ongoing discussions on the feasibility and desirability of designing clauses that would include a form of aggregation clause that is more robust from a collective action perspective than those currently in existence,” the IMF said in its report regarding pari passu clauses.
However, the IMF said, even if these amended provisions are introduced into new bonds, it would take approximately 10 years for this stock to be replaced. Now with the Supreme Court’s de cision regarding Argentina already taken, “a broader review of the implications of these decisions on the restructuring process in the near to medium term will be needed.”
This is not the first time the IMF backs Argentina over its long-term legal battle with hedge funds. The agency headed by Christine Lagarde has repeatedly said that the result would have major implications for how future sovereign debt is restructured.
Herald with Télam