Sovereign Debt Update

Sovereign Debt Update


The long-running dispute continues between Argentina, which defaulted on its sovereign debt for the second time in July 2014, and holdout bondholders from two previous debt restructurings.

On August 10, 2015, the U.S. Court of Appeals for the Second Circuit overturned for the third time U.S. district court judge Thomas Griesa's certification of bondholder classes in eight lawsuits stemming from Argentina's 2001 default on as much as $100 billion in bonds. See Puricelli v. Republic of Argentina, 2015 BL 255625 (2d Cir. Aug. 10, 2015). Judge Griesa had certified classes in the suits beginning in 2004. As part of the class certification process, he drew up a damages estimate, which the Second Circuit deemed to be inflated and struck down, for the first time in 2010.

The Second Circuit invalidated a revised damages estimate in 2012, remanding the case to Judge Griesa with explicit, detailed instructions for calculating damages anew after conducting an evidentiary hearing. Judge Griesa later entered an order amending the class certification but never conducted an evidentiary hearing.

The Second Circuit vacated the order on August 10, 2015. Noting that "[o]ur directive . . . was clear," the Second Circuit wrote that "[e]ven though it did not expressly preclude recertification, it cannot be read to have permitted the district court to disregard our instructions and expand the plaintiff classes as a solution to a problem for which we had already prescribed a specific response."

On August 12, 2015, Judge Griesa granted motions filed by NML Capital Ltd. and certain other holdout bondholders seeking the imposition of sanctions on Argentina for "willfully and resolutely" refusing to comply with a September 25, 2013, discovery order directing disclosure of, among other things, information concerning Argentina's U.S. assets. The sanctions include a finding that any property of Argentina in the U.S., with the exception of military or diplomatic property, is deemed to be used for commercial purposes (and consequently may be subject to attachment). Judge Griesa directed Argentina to identify privileged documents within 10 days, failing which any privilege would be deemed waived. He declined to impose sanctions on U.S. entities alleged by holdout bondholders to be alter egos of Argentina.

The U.S. Court of Appeals for the Second Circuit on August 31, 2015, reversed a 2013 ruling by Judge Griesa that allowed holdout bondholders seeking to collect debt from Argentina to proceed against the country's central bank, finding that the bondholders failed to show that the bank is Argentina's alter ego. The three-judge Second Circuit panel reversed a 2013 Griesa decision that denied Banco Central de la República Argentina's motion to dismiss the case. The court of appeals remanded the case with instructions to dismiss the suit on sovereign immunity grounds. In its ruling, the court wrote that an alter ego argument requires a showing that either a principal-agent relationship exists between the entities or treating them as separate would result in fraud. The bondholders failed to demonstrate either, the court ruled. They filed a petition on September 14, 2015, asking the Second Circuit to reconsider its decision en banc.

On September 15, 2015, the Second Circuit vacated a 2014 ruling by Judge Griesa that expanded the scope of a class of plaintiffs in litigation brought by bondholders against Argentina to collect on defaulted debt. In litigation commenced by lead plaintiff Henry Brecher, who holds a beneficial interest of €52,000 ($58,700) in Argentine bonds, Judge Griesa initially defined the class to consist of "all persons who continuously held beneficial interests" in the bonds as of 2009. Following a series of appellate decisions in related class actions, however, Judge Griesa directed in 2014 that the definition of the class must be altered to remove the continuous holder requirement and include bondholders who acquired the bonds in the secondary market.

The Second Circuit vacated that ruling in Brecher v. Republic of Argentina, 2015 BL 298783 (2d Cir. Sept. 16, 2015). According to the court of appeals, the expanded definition would make it impossible for Argentina to ascertain which bondholders would be members of the class and therefore violates a federal rule that requires a class definition to be "sufficiently definite so that it is administratively feasible for the court to determine whether a particular individual is a member."


On September 10, 2015, the United Nations General Assembly, in an initiative prompted by Argentina's sovereign debt crisis, approved "basic principles" for sovereign debt restructuring processes to improve the global financial system. One hundred thirty-six countries voted in favor of the resolution, six (including the U.S.) voted against it, and 41 member nations abstained. The resolution, which is nonbinding but carries political weight, was submitted to the 193-nation General Assembly by South Africa. The vote came little more than a year after the General Assembly agreed to negotiate and adopt a multilateral legal framework for sovereign debt restructurings.

The resolution urges debtors and creditors to, among other things, "act in good faith and with a cooperative spirit to reach a consensual rearrangement" of sovereign debt. It also states that "[a] sovereign state has the right . . . to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures."

The resolution states that nations should be immune from domestic court decisions related to sovereign debt restructuring, adding that any exceptions should be limited. It further provides that debt restructurings should lead to stable debt situations which preserve creditors' rights while supporting economic growth.

Argentina applauded the adoption of the resolution. The U.S. and the other countries which voted against it claim that a statutory mechanism for debt restructurings would create uncertainty and instability in financial markets. They also maintain that the United Nations is not the appropriate venue to resolve sovereign debt issues.


On August 14, 2015, eurozone finance ministers approved €86 billion ($96 billion) in new bailout loans for Greece. This third round of bailout financing in five years capped six months of turbulent negotiations between Greece's left-wing government, led by Prime Minister Alexis Tsipras, and Greece's creditors, including the European Central Bank and the International Monetary Fund. Without a deal, Greece and the 19-nation eurozone confronted the prospect of "Grexit," or Greece's forced departure from the currency union.

Although Greece's parliament approved the terms of the preliminary agreement, the aid deal still faces major obstacles. On August 20, 2015, embattled Prime Minister Tsipras, in a gamble aimed at bolstering his power and ability to implement the bailout deal, resigned to clear the way for early elections slated for September 20. He was forced to call snap elections due to the large-scale defection of Syriza party lawmakers during the parliamentary vote on August 14.

On September 20, 2015, Tsipras was returned to power by Greek voters, many of whom stated that Tsipras had fought hard to get them a better deal from the nation's creditors and deserved a second chance at governing. The new government now faces the challenges of implementing unpopular austerity measures mandated by the bailout deal, including implementing steep budget cuts, lobbying for action by other eurozone countries to ease Greece's debt load, and dealing with the added financial strain of Europe's refugee crisis.


Credit-rating agency Standard & Poor's ("S&P") declared Ukraine's sovereign debt to be in "selective default" on September 25, 2015, due to the debt crisis and deep economic depression precipitated by the war with pro-Russian insurgents in Ukraine's eastern industrial heartland. The default means that S&P believes that Ukraine will not repay its debt to all commercial bondholders in full.

On August 27, 2015, Ukraine announced that it had reached an agreement with creditors to restructure approximately $19 billion in bond debt. According to the Ukrainian Finance Ministry, private creditors, including the U.S.-based mutual fund Franklin Templeton Investments, agreed to a 20 percent haircut on their bond holdings as well as a four-year extension of the maturity of the debt.

The deal is a condition to Ukraine's ability to access billions of dollars in emergency financing and follows months of stalemate that threatened to derail the country's $40 billion international bailout. The agreement must be approved by Ukraine's parliament. It represents a major victory for the pro-Western government of President Petro Poroshenko, which is attempting to push through a package of politically tough economic overhauls, including increased taxes, pension overhauls, and privatization of state assets, and to revive Ukraine's fragile economy.

However, the smoldering conflict with Russian-backed separatists in eastern Ukraine continues to exact a heavy toll on government finances, and the debt relief deal does not ensure economic viability for a nation that has long struggled to stay afloat.

To encourage Ukraine's efforts, the U.S. recently indicated that it is prepared to offer a third round of billion-dollar loan guarantees if the bailout program remains on track.

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