Want to avoid Argentine-style debt stand-offs? Buy Kazakhstan’s new bonds

“Enough vultures.”
“Enough vultures.”
Image: Reuters/Enrique Marcarian
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Kazakhstan is selling government bonds for the first time in 14 years, and they are the first to include new clauses meant to avoid long, expensive battles over a debt restructuring like the one that has haunted Argentina since it defaulted on $93 billion of its debt in 2001.

A quick recap: Most of Argentina’s creditors agreed to exchange their bonds for new ones worth far less—but some investors acquired Argentina’s old debt at a deep discount and refused to negotiate. Instead, they used something called a pari passu clause, which states that all bondholders must be treated equally, to convince a New York judge to rule they deserve the full repayment.

After US courts sided with the hold-outs, Argentina refused to pay them, and has technically defaulted for second time in 13 years—and the fight is still rolling on.

To prevent another messy decade of litigation happening because of a small minority of investors in the event of a future restructuring, the International Capital Market Association this summer created a new set of voluntary alterations to future sovereign debt contracts, including a narrower definition of pari passu and reformed Collective Action Clauses that are legally binding on all holders of the bond, including those who vote against a restructuring.

The IMF’s endorsement of these rules (paywall) this week has cleared the way for them to become the global standard.

“The potential adverse fallout globally from the default and restructuring of Argentina’s debt demonstrates the importance of having clear, unambiguous contract terms for sovereign bonds,” the ICMA’s lawyer said at the time.

Kazakhstan is the first to have adopted all of the ICMA’s recommendations into its bonds. “It is extraordinary that it is Kazakhstan,” Mitu Gulati, a law professor at Duke University, told the Financial Times. “But I think it’s a little early to do victory laps. The question is still when will a large issuer like Mexico make the changes and what will happen then?”