CEPR

October 7, 2014

Contact: Dan Beeton, 202-239-1460

Washington, D.C.- The Executive Board of the International Monetary Fund (IMF) is supporting proposed reforms outlined in a recent IMF report that are intended to prevent disruptive and costly debt restructuring fights – like the one ongoing between the Argentine government and vulture funds – from occurring in the future. Noting that “the existing legal framework may not be sufficiently robust to prevent ‘holdout’ creditors from undermining the restructuring process,” the Fund has suggested that the Foreign Sovereign Immunities Act (FSIA) in the United States could be “clarif[ied]” to ensure that a foreign country’s overseas assets are immune from U.S. courts’ jurisdiction.

In describing how the FSIA could be amended, the IMF has cited an open letter to members of the U.S. Congress signed by over 100 economists who warned of harmful consequences for Argentina, the international financial system, and the U.S. as a financial center from the recent decision by U.S. District Court Judge Griesa against the government of Argentina. Griesa’s ruling effectively prevents Argentina from paying the majority of its creditors if it does not pay NML Capital and other vulture fund holdouts the full value of their bonds, plus interest (giving holdouts profits as high as over 1,600 percent).

“There are policy reforms here that are definitely worth considering,” Center for Economic and Policy Research (CEPR) Co-Director Mark Weisbrot said today. “If U.S. judges continue to be able to hold bondholders as well as whole countries hostage to the unreasonable demands of vulture funds, this will undermine debt restructuring in the future.”

In discussing the paper, IMF General Counsel Sean Hagan described the “collective action problem” that can result from the behavior of holdout creditors:

… there is a risk that individual creditors might decide not to participate in a restructuring in the hope that they will be able to recover the full value of their claims. If these so-called holdout creditors have a significant chance of recovering their claims in full, creditors who would otherwise have agreed to participate in the restructuring will become less willing to do so…

The IMF Executive Board is endorsing a collective action clause reform which would allow a majority of creditors to make decisions that would be binding on the minority. Hagan notes that while such clauses already exist, they are subject to limitations that can lead to restructuring agreements being blocked by minority holdouts who own a large enough quantity of bonds.

“Judge Griesa clearly overstepped his bounds when he effectively tried to extend his jurisdiction overseas and gave a small minority of vulture fund creditors veto power over the majority of Argentina’s bondholders,” Weisbrot said. “These signals from the IMF are a strong and important rebuke to the dangers these vulture funds pose to the international financial system.

“It's unfortunate that the U.S. Treasury department blocked the IMF from filing an amicus brief in support of Argentina's case at the U.S. Supreme Court,” Weisbrot added. “It is possible that they might have reviewed the case.”

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