New York state legislators are considering a change to an existing law that imposes a 9% interest rate on defaulted sovereign emerging-market bonds which, if enacted, could make cases like Elliott Investment Management’s dispute with Argentina less likely, according to a report by Bloomberg.
The hedge fund acquired inexpensive debt from Argentina following its default in late 2001, leading to years of legal actions and recovery attempts. The new law could make such strategies more restrictive.
The proposed measures, introduced by State Senator Liz Krueger and Assemblymember Jessica Gonzalez-Rojas, aim to replace the mandatory rate with a rate equivalent to the current yield on one-year Treasury bills, which stands at 5.1%.
The existing law, which applies a 9% rate on past-due coupons following a default, can significantly increase a country’s debt during restructuring. Advocacy groups have long argued for a reduction in this statutory rate, claiming it unfairly penalises countries during economic crises.
The proposed changes are part of a wider effort by New York lawmakers to reform the lengthy process of restructuring defaulted government debt. According to Bloomberg, around $800bn — half of all hard currency, emerging-market sovereign bonds — is at stake.
An amendment introduced on Monday — the so-called champerty doctrine — seeks to distinguish between conventional creditors and “vulture funds” in emerging-market restructurings. The amendment aims to prevent a minority of bad faith creditors from exploiting New York law to profit from the distressed debt of struggling countries.
This amendment specifically targets funds that purchase sovereign debt at a low cost with the intention of pursuing litigation, according to nonprofit New York Communities for Change, which supports the bill.
Finally, another bill known as the Sovereign Debt Stability Act would cap the amount private creditors could recoup during a restructuring.
