Fund file: EM debt lessons from Argentina

Institutions wondering about the safety of piling into emerging market debt might be cheered by some regulatory developments, outlined in a report in Monday’s FTfm.

The International Centre for the Settlement of Investment Disputes at the World Bank, with its recent ruling that a group of Italian bondholders could bring a group action against Argentina to the tribunal, has changed the whole ball game, experts say.

Whereas defaulting governments have always, in theory, been able to ignore unhappy creditors if need be the new ruling could give them pause for thought.

“It changes the balance of power in those negotiations,” says Philippa Charles, partner specialising in international arbitration in the litigation team at law firm Mayer Brown. “The position has become much tougher for governments.”

“The recent ruling leads one to wonder what are the implications for other countries,” says Jill Dauchy of Newstate Partners, who advises governments contemplating default and debt restructuring. “Any sovereign faced with the possible event of a default would have to consider this.”

Nonetheless, it seems emerging market sovereign debt issuers need not worry about future creditors being an immediate problem once things turn nasty. Speed is certainly not an issue at present. Argentina restructured its debt in 2005, the claim by Italian bondholders was lodged with ICSID in 2007, and while it has recently ruled that it can consider it, a decision is not expected for another couple of years.

In addition, this legal route is only open to investors from countries that have bilateral investment treaties with the defaulting nation.

But, despite all those provisos, it “brings international investors onto the same playing field as domestic investors, and it is enforceable”, Dauchy says.

This is not good news for Argentina, obviously. Argentina is already facing difficulties in the US where a number of hedge funds are pursuing claims against it with regard to the restructuring.

And earlier this year the Supreme Court in London ruled that NML Capital could pursue its claim as a bondholder against Argentina in the English courts. NML had previously won its case in New York and was attempting to enforce the judgement and recover assets through the English courts.

But it is good news for patient investors looking for alternatives to long-dated sovereign debt issued by peripheral European nations.

Related reading:
Argentina: ghosts of 2001 default linger, beyondbrics
Fund file, beyondbrics