November 23, 2014
After Argentina row with vultures, ICMA revises rules for sovereign defaults
Banks, investors and other users of bond markets have agreed to change how they would deal with defaulting government debt, removing the right of veto from holdouts to avoid a repetition of the fracas over Argentina.
The International Capital Market Association (ICMA) published the revised framework today that allows a majority of investors holding sovereign bonds that default to make changes to the terms, such as extending maturities or reducing the principal.
These changes would then be made legally binding on all holders of the bonds, including those who vote against the restructuring.
The ICMA move comes a month after Argentina was pushed into default when a small group of US hedge funds rejected the country's 2005 and 2010 debt restructurings.
"Our analysis is that this takes out a lot of the uncertainty surrounding sovereign default," said Louis Gargour, chief investment officer at London-based hedge fund LNG Capital.
ICMA said revisions to so-called collective action clauses and a new standard pari passu clause, which refers to all creditors being treated the same, would provide a practical solution to the problem of blocking minorities.
"The potential adverse fallout globally from the default and restructuring of Argentina's debt demonstrates the importance of having clear, unambiguous contract terms for sovereign bonds," said Leland Goss, ICMA's general counsel.
"In-depth consultations with our members and other interested public and private sector representatives have led to the development of enhanced legal technology that will make more orderly and efficient sovereign debt restructurings achievable in the future," Goss added.
However, it could take many years for the changes to take full effect as the market participants cannot force governments to apply them in practice.
"The new pari passu clause overcomes a ruling in the New York court for future issuance, but governments have to take up these changes. However, they have been slow to change the status quo historically and tend to be conservative," Goss told reporters.
"You have a lot of sovereign bonds outstanding and they can't be changed retroactively. It's a bit like planting an oak tree. You are looking at a 10-year horizon when this will take hold," he added.
Collective action clauses are already legally binding on euro zone government bonds in the euro area countries, a result of the debt crisis in the region where Greece, Portugal and Ireland had to be rescued.
ICMA represents 450 members such as banks, debt issuers and investors from 52 countries.