Generación de modelos

The current sovereign bond market is a direct heir of the Brady plan. The transferability of sovereign bonds, allowing for the creation of a secondary market, has opened up the sovereign debt market to a broader range of creditors, ranging from institutional investors to hedge funds and retail investors298.

From a systemic risk perspective299, this broadening of the creditor-base prevents the concentration of the default risk of sovereigns in one single sector of international finance. However, this heterogeneity of creditors shatters the club-like mentality that was reigning during the syndicated loan era, making restructurings more difficult300.

From a contract law perspective, while syndicated loans feature ad hoc provisions enabling creditors to restructure a sovereign’s debt via majority votes, historically, bonds did not benefit from such clauses301_{. The lack of mechanisms designed to facilitate restructuring}

294 _{Gathii (n 97), 256-259.} 295 _ibid.

296 _{Wood, Law and Practice of International Finance (n 253) 160.}

297 _{Ghosal and Miller (n 158); Harris Dellas and Dirk Niepelt, ‘Sovereign Debt with Heterogeneous Creditors’}

(2016) 99 Journal of International Economics S16.

298 _{Dellas and Niepelt (n 297); Ghosal and Miller (n 158); Krueger (n 76); Allegaert (n 77); Fisch and Gentile}

(n 73).

299 _{On systemic risk see. Damiano Sandri, Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation,}

Bail-Ins or Official Transfers? (International Monetary Fund 2015).

300 _{Ghosal and Miller (n 158); Dellas and Niepelt (n 297); Buchheit and Gulati, ‘Sovereign Bonds and the}

Collective Will’ (n 89).

301 _{At today’s date, bonds feature collective action clauses designed to bring majoritarian restructuring to the}

Understanding Sovereign debt 72 created a complex game of cooperation between States and their creditors when restructurings were needed302.

By default, sovereign bonds being contracts, they cannot be modified unilaterally by either party. Restructuring of bonded debt therefore requires changes to be made to each separate bond, with both the debtor and bondholders agreeing to said changes. In practice, the consent of all parties is collected via a bond exchange. During a restructuring, the bonds issued by the sovereign, and that the sovereign wants to be restructured, are offered for a swap against other bonds designed to facilitate repayment303_.

Each individual bondholder during such a process can decide whether to participate in the restructuring, and if they hold out, the original bonds they hold remain completely untouched by the process and are thus enforceable. This means that, in the bond market, for restructurings to be successful, States need to provide an offer that will garner the approval of a critical mass of creditors304.

Against that background, the heterogeneity of creditors and their investing strategies became from the 1990s onwards, a source of collective action issues. Indeed, some bondholders have no economic incentives towards a quick return of the State to capital markets305. To come back to the prisoner’s dilemma analogy, while large banks or institutional creditors are playing a repeated version of the game, some bondholders are playing a single round version. Therefore, they are incentivised towards refusing restructuring proposals from the sovereign, and use any available remedy in order to obtain payment knowing that they cannot be punished in subsequent rounds.

Two main categories of bondholders fit this description: retail investors and vulture funds. Retail investors generally invest in sovereign bonds for savings purposes. Their positions

302 _{Ghosal and Miller (n 158); Dellas and Niepelt (n 297); Buchheit and Gulati, ‘Sovereign Bonds and the}

Collective Will’ (n 89); Anna Gelpern, ‘How Collective Action Is Changing Sovereign Debt Cover Story’ (2003) 22 International Financial Law Review 19.

303 _{Das, Papaioannou and Trebesch (n 4) 7; Steven L Schwarcz, ‘Idiot’s Guide to Sovereign Debt Restructuring}

Conference on Sovereign Debt Restructuring: The View from the Legal Academy’ (2004) 53 Emory Law Journal 1189, 1193. Alternatively, debt restructurings can involve debt buy-backs, via which a sovereign repurchases its own bonds, thus cancelling the debt.

304 _{Dellas and Niepelt (n 297); Ghosal and Miller (n 158); Gelpern, ‘How Collective Action Is Changing}

Sovereign Debt Cover Story’ (n 302).

305 _{Buchheit and Gulati, ‘Sovereign Bonds and the Collective Will’ (n 89); Gelpern, ‘How Collective Action}

Is Changing Sovereign Debt Cover Story’ (n 89); Kaplan (n 89); Krueger (n 76); Lee Buchheit and Elena Daly, ‘Minimizing Holdout Creditors: Carrots’, Sovereign debt management. R. Lastra, L. Buchheit (eds.) (Oxford University Press) 4–5.

Understanding Sovereign debt 73 are usually less diversified than their institutional counterparts’306, meaning that they are more exposed to the default risk of specific sovereigns. Individuals do not benefit from a return of the debtor to the capital market. The debtor is not one of their clients, future interest payment will not flow in their directions and they are not in a position where future bond issuance will yield to the payment of fees. Thus, it is hardly surprising to notice that litigation of sovereign debt restructurings by retail investors is a growing phenomenon307_.

Vulture funds, on the other hand, have developed their trading strategies based on the legal remedies available to them under the creditor protection model. These funds rely on a risky, but potentially highly rewarding investment strategy: buying debt instruments from distressed sovereigns at a steep discount and either pressuring the creditor’s government or suing in order to be paid on the full value of the debt308.

Economically, this strategy can be read as a form of arbitrage. Arbitrage is usually defined as “the simultaneous purchase and sale of the same, or essentially similar, security in two different markets for advantageously different prices”309. Sovereign bonds, effectively trade at two different prices: their market price, at which they are bought and sold on the secondary market, and their judicial price, the value that can obtained before courts and tribunals310. Effectively, vulture funds purchase their bonds at a discounted market price and realise them at their judicial price.

306 _{William N Goetzmann and Alok Kumar, ‘Diversification Decisions of Individual Investors and Asset Prices’}

64; Brad M Barber and Terrance Odean, ‘Chapter 22 - The Behavior of Individual Investors’ in George M Constantinides, Milton Harris and Rene M Stulz (eds), Handbook of the Economics of Finance, vol 2 (Elsevier 2013) <http://www.sciencedirect.com/science/article/pii/B9780444594068000226> accessed 1 March 2019. The data mentioned in both studies focuses on stock holding by retail investors. It seems however fitting to extrapolate from these conclusions and apply them to the bond market as it seems unlikely that retail investors failing to diversify on stocks would diversify on bonds. Indeed, on average sovereign bonds are less volatile, and traditionally perceived as less risky than corporate equity.

307 _{See e.g. Abaclat and Others v. Argentine Republic (n 17); Giovanni Alemanni and Others v. The Argentine}

Republic (Decision on Jurisdiction and Admissibility) (n 17); Mamatas et autres v. Greece (n 18); Alessandro Accorinti and others v. European Central Bank (n 19); Stefan Fahnenbrock et al C Hellenische Republic [2015] Cour de Justice de l’Union Europeene C 226/13, C 245/13, C 247/13 et C 578/13.

308 _{Fisch and Gentile (n 73).}

309 _{William F Sharpe, Investments, William F. Sharpe, Gordon J. Alexander, Fourth Edition: Instructor’s}

Manual (Prentice Hall 1990); Andrei Shleifer and Robert W Vishny, ‘The Limits of Arbitrage’ (1997) 52 The

Journal of Finance 35.

310 _{The legal value of the bonds differs from their facial value. The facial value of the bonds is simply the}

amount that the debtor has agreed to repay. The legal value of the bonds is the amount that a creditor could obtain though judicial means, and therefore could include an out of court settlement under the facial value, but also potentially the payment of late interests, punitive damages etc. On the idea that bonds trade at two values

see CIBC bank and Trust Company (Cayman) v Banco Central do Brasil, Banco Central do Brasil SA, and

Citibank NA United States District Court Southern District New-York 94 Civ. 4733 (LAP), 886 Database Fed

Understanding Sovereign debt 74 Under usual circumstances, arbitrage opportunities tend to be closed by market actors311. If a share of Apple Inc. is trading at $100 on the New-York Stock Exchange and $101 on the Chicago Stock Exchange, investors will flock to the NYSE, raising the demand on shares of Apple and sell in Chicago, bringing prices in line in both exchanges. However, the judicial value of the bonds rests entirely on the efficiency of the remedies designed to protect creditors. Hence, other market actors cannot by themselves, close the window for arbitrage.

The first major case involving such manoeuvres involved the Dart family and Brazil312. The Darts purchased Brazilian debt on the secondary market between 1991 and 1993, at a discount between 75% and 60%313_{, and stored it in a Cayman based bank, specially created}

for that purpose: CIBC314. In 1993, Brazil negotiated a restructuring with major US banks leading to a swap between its outstanding loans and new bonds with a reduced face value315, in the context of a Brady deal316. All creditors agreed to the restructuring, except the Dart who in the meantime had amassed Brazilian debt for a total face-value of $1.4 billion, making them Brazil’s largest creditor317_{. The original debt instruments, however, required a}

majority of creditors to agree in order to trigger an acceleration clause318. Thus, aware of the Darts attempts and fearing a lawsuit, Brazil instructed Banco da Brazil to repurchase debt to ensure that the Dart would not own securities over the 49% threshold319.

This lead CIBS to sue Brazil, Banco Central and Citibank (acting as an agent bank in the original instruments) in order to seek payment acceleration320. The Court denied summary judgments, and the parties later settled out of court with Brazil granting the Darts $25 millions in cash and $52.3 million in bonds321.

More recently, NML and Elliott relied on the pari passu322 clause against Argentina and Peru in order to attempt to coerce both sovereigns into settling out of court323. These judicial

311 _{Shleifer and Vishny (n 309).} 312 _{See Allegaert (n 44), 447.} 313 _{ibid 447-448.} 314 _{ibid; Power (n 44), 2747.} 315 _{Power (n 44) 2747; Allegaert (n 44) 447.} 316 _{Power (n 44) 2748.} 317 _ibid. 318 _ibid. 319 _{ibid; Allegaert (n 44), 447.}

320_{CIBC bank and Trust Company (Cayman) v. Banco Central do Brasil, Banco Central do Brasil S.A., and}

Citibank N.A. (n 310).

321 _{Power (n 77); Allegaert (n 77).}

322 _{The pari passu clause will be studied in more details in the next part of this thesis.}

323_{NML Capital, LTD., et al. v The Republic of Argentina (n 28); Elliott Associates LP v Banco de la Nacion}

[1999] United States Court of Appeal for the Second Circuit 98–9268, 98–9319, 194 Fed Report 3rd Ed 363;

Understanding Sovereign debt 75 means are particularly disruptive to the restructuring process. Reliance on the pari passu

clause, notably, can disrupt entire restructuring processes324. Similarly, retail investor’s use of investment arbitration threatens to disrupt restructuring processes by enabling creditors to challenge regulatory measures designed to facilitate restructurings325.

The effect of these delays and inefficiencies are not purely financial. Restructuring processes have dire effects on the debtor’s population326_{. Lengthening them unnecessarily prolong}

these sufferings. Because these inefficiencies were rooted in the efficient remedies granted to creditors under the creditor protection model, a change of model, a different way to regulate the sovereign debt market was necessary, leading to the advent of the anti-holdout model.

324 _{Kaplan (n 89); Gelpern, ‘How Collective Action Is Changing Sovereign Debt Cover Story’ (n 89); Fisch}

and Gentile (n 73); Christopher Wheeler and Amir Attaran, ‘Declawing the Vulture Funds: Rehabilitation of a Comity Defense in Sovereign Debt Litigation’ (Social Science Research Network 2003) SSRN Scholarly Paper ID 1575301 <http://papers.ssrn.com/abstract=1575301> accessed 6 November 2015; Krueger (n 76).

325 _{Waibel, ‘Opening Pandora’s Box’ (n 81); Julien Cazala, ‘- « Crise de La Dette Souveraine Grecque et}

Arbitrage En Matière d’investissement », Cahiers de l’arbitrage - Paris Journal of International Arbitration,

2015, N° 4, Pp. 722-729.’

<https://www.academia.edu/32784883/_Crise_de_la_dette_souveraine_grecque_et_arbitrage_en_mati%C3% A8re_d_investissement_Cahiers_de_l_arbitrage_-

_Paris_Journal_of_International_Arbitration_2015_n_4_pp._722-729> accessed 6 March 2019.

326 _{Lumina, ‘Report of the Independent Expert on the Effects of Foreign Debt and Other Related International}

Financial Obligations of States on the Full Enjoyment of All Human Rights, Particularly Economic, Social and Cultural Rights (Mission to Argentina)’ (n 6); Lumina, ‘Report of the Independent Expert on the Effects of Foreign Debt and Other Related International Financial Obligations of States on the Full Enjoyment of All Human Rights, Particularly Economic, Social and Cultural Rights (Mission to Greece )’ (n 6).

The Creditor Protection Model 76