The most recent Argentine great depression began in 1998 and caused widespread unemployment, riots, the fall of a government and, in 2001, a default on almost $100bn of sovereign debt instruments. The economic recovery started just one year later, encouraging a number of ‘holdout’ investors to refuse to accept Argentina’s restructuring proposals (requiring a haircut of approximately 70%) and to pursue the South American state for the full amounts due.

The investors and the state have been locked in legal proceedings, stretching from the US to London, Italy and Ghana, ever since.

This article considers the lessons that this story has to offer about the legal recourse that investors have against recalcitrant sovereign debtors, and the changes that the Argentine experience might wreak to sovereign debt restructuring in future.

Since 2001, two key categories of proceedings have been pursued by holdout investors: Court proceedings in the US brought by NML Capital Ltd, a Cayman-based fund which purchased bonds at a deep discount following the default; and investment treaty arbitrations being pursued by a large number of Italian bondholders.

US proceedings

The relevant bonds are governed by New York Law and include an express submission by Argentina to New York jurisdiction. The New York proceedings have established that holdout bondholders are entitled to be paid pari passu with bondholders who accepted Argentina’s restructuring proposal and were issued with ‘exchange bonds’. An injunction that would restrain Argentina from making payment to exchange bondholders without also making payment to holdout investors is currently stayed pending an appeal to the US Supreme Court.

The US Supreme Court will also consider the scope of post-judgment discovery that must be provided by Argentina’s bankers to NML Capital to assist the fund in locating Argentina’s assets around the world and pursuing enforcement actions. To date, enforcement actions have included attempts to seize funds held by the US Federal Reserve Bank and the Bank for International Settlements, as well as an Argentine Navy training vessel which was detained while in port in Ghana.

One such action – NML Capital Limited v Republic of Argentina [2011] UKSC 31 – has resulted in clarification of whether the enforcement of a foreign judgment against a sovereign entity in England is precluded under the principle of sovereign immunity. The Supreme Court found that a foreign judgment against a state will be capable of enforcement in England if the state submitted to the jurisdiction of the English court or the proceedings relate to a commercial transaction, and execution against the sovereign property is with the consent of the sovereign or the property is used for commercial purposes.

Investment treaty arbitrations

Three significant arbitrations are ongoing between Italian investors and Argentina: Abaclat and Others v Argentine Republic (ARB/07/5); Ambiente Ufficio SpA and others v Argentine Republic (ARB/08/9); and Giovanni Alemanni and others v Argentine Republic (ARB/07/8). These have been commenced under the jurisdiction provided by the ICSID convention, to which both Italy and Argentina are signatories, and a bilateral investment treaty (BIT) between the two countries.

The first of these arbitrations involves around 60,000 claimants. Argentina contested the jurisdiction of the ICSID tribunal on the grounds that, among other things, the dispute did not arise out of an “investment” for the purposes of the BIT, and sufficient specific consent had not been given by Argentina under the BIT to collective arbitration proceedings. At the time there had not been a collective arbitration under the ICSID rules on this scale. The tribunal found that the claims were capable of establishing a breach of the BIT and consequently, that Argentina had submitted to the tribunal’s jurisdiction in relation to any one claimant. The Tribunal could see no reason why it should decline jurisdiction purely due to the number of claimants and considered that there was sufficient flexibility in the ICSID rules to allow the tribunal to deal effectively with such claims. This approach was broadly endorsed by the tribunal in the second arbitration, Ambiente Ufficio, while a decision on this issue in relation to the third arbitration is awaited.

The Abaclat tribunal also found that the bonds were an “investment” for the purpose of Article 25 of the ICSID convention, on the basis that the contribution made by the investors led to the creation of a value that Argentina and Italy intended to protect under the BIT. The tribunal’s approach appears to pave the way for a broader range of financial instruments to be treated as “investments” under the convention, with implications for other areas such as the financing of public infrastructure projects.


The Argentinean experience is an interesting story, creating case law that is likely to have lasting consequences for the future of sovereign bond issues and debt restructuring. There is no peculiarity of the Argentinean experience that renders it unique or means that the precedents set would not be applied to future sovereign defaults, including potential euro-zone defaults.

It is foreseeable that, in light of these developments, bondholders’ reluctance to accept haircuts will be more widespread, if it appears that their more obstinate peers will obtain a fuller recovery through legal proceedings. The decision in Abaclat also provides a path to recovery with more appeal to investors who do not have the individual resources of investors such as NML Capital and who would be unwilling to hold out alone.

Each case will, of course, be dependent on the precise terms of the bonds and the jurisdictions in which it is possible for the bondholder to pursue its claim. Early consideration of any bilateral investment treaties, and the jurisdiction to which the state has submitted under the terms of the bond, is an essential step for a bondholder faced with a likely default.

The holdout predicament from a sovereign’s perspective has been partially addressed by the introduction of collective action clauses (CACs) in an increasing number of sovereign bond issues. These clauses enable creditors to accept

a proposed debt restructuring by qualified majority (commonly 66.6% or 75%). CACs have been common in sovereign bonds issued under English law for some time, but relatively rare

in sovereign bonds issued under New York law prior to 2003. The European Stability Mechanism provided for CACs to be included in the terms of euro-zone sovereign bonds issued from January 2013.

However, there remains a long tail of bonds that do not include CACs. There are also fears that, even with a CAC, defaulting sovereigns may find that improved terms are needed to secure the necessary majority, if investors know that they could get a better deal by holding out. These fears may prove unfounded since CACs proved effective in the most recent high-profile example. When Greece completed its debt restructuring of around €200bn in 2012, it was successful in imposing a haircut of nearly 75% on bondholders with a dissenting majority dragged along due to a CAC. By contrast, a further €29bn of Greek bonds did not contain a CAC. The holders of €8bn worth of these bonds refused to accept the swap and the Greek government has continued to pay these holdouts in accordance with their full entitlement.

With the end of the Argentine story yet to be written, the extent to which changes will be wrought will come down to the numbers. The bottom line for investors will be a cost/benefit analysis between the costs and potential benefits of holding out and the relative attractiveness of accepting the offer on the table.


Rani Mina is a partner and Mark Stefanini is a senior associate in Mayer Brown’s international arbitration group