Winning isn't everything.

The Paradox of the Argentine Debt Drama

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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A small group of investors is nearing its goal of making Argentina pay up on bonds that the country failed to honor years ago. Paradoxically, that outcome could end up being bad for creditors of sovereign nations as a whole.

A New York federal judge has ordered Argentina to negotiate "continuously" for the next week and until it reaches an agreement with creditors who are demanding full payment on bonds that weren't included in Argentine debt restructurings in 2005 and 2010. Under previous court rulings, Argentina can't make any further payments to other bondholders until it has paid the holdouts. If it doesn't find a solution by July 30, it will be in default.

After a long and colorful battle that has included full-page advertisements in newspapers and emotional pleas to the United Nations, Argentina is on the ropes. It can't keep ignoring the holdouts. Paying them in full would be politically and financially fraught: Because the law requires that all creditors be treated equally, the government could also end up owing billions of dollars to holders of its restructured bonds. The most likely outcome is some kind of compromise that would favor the holdouts without being too expensive, though the possibility of a disorderly sovereign default can't be dismissed.

Some would argue that a decisive win for the holdout creditors would be a victory for long-term investors in emerging markets, because it would discourage other sovereigns from defaulting. Even the more likely outcome of a partial holdout win, in which they accept less-than-full payment in both cash and securities, would embolden other creditors to consider non-cooperation as a viable and profitable strategy, making it harder for sovereigns to contemplate orderly restructurings.

As attractive as all this may seem for creditors' rights, the ultimate outcome could well be a lot less beneficial. A holdout win would surely re-invigorate efforts by the international community to reduce the ability of small minorities to scuttle agreements between sovereign debtors and their creditors -- perhaps by swapping existing debt for new securities with tougher provisions against holdouts, though this would take a while. It could also encourage alternatives to old-style debt restructurings -- something the International Monetary Fund is already considering. Sovereigns would adjust by being more opportunistic in where and how they issued debt, and would be more inclined to explore legal opt-outs.

It would be truly ironic if the holdouts' long campaign to extract payment from Argentina, a country with one of the world's worst records of defaults, ended up weakening creditors' rights rather than strengthening them.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed Aly El-Erian at

To contact the editor on this story:
Mark Whitehouse at