Tribunalizing Sovereign Debt: Argentina's Experience with Investor-State Dispute Settlement.

• Author: Park, Stephen Kim

TABLE OF CONTENTS I. INTRODUCTION 1034 II. THE APPLICATION OF INTERNATIONAL INVESTMENT LAW TO SOVEREIGN DEBT FINANCE 1037 A. The Problem of Rogues and the Challenges of Enforcement in Sovereign Debt 1037 B. Enforcing Sovereign Debt Obligations through Investor-State Dispute Settlement 1040 III. ARGENTINA'S DEBT RESTRUCTURING AND INVESTOR-STATE DISPUTE SETTLEMENT 1043 A. Argentina's Historic Default and Debt Restructuring 1043 B. The Abaclat Case and its Progeny 1048 C. Argentina's Responses to Tribunalization 1052 IV. SYSTEMIC IMPLICATIONS OF TRIBUNALIZATION FOR SOVEREIGN DEBT FINANCE 1058 V. CONCLUSION 1062 I. INTRODUCTION

It is fair to say that the global sovereign debt market is governed by what its participants think the law should be--rather than what it actually is. (1) The role of legal imagination--and constant re-imagination--is stronger in sovereign debt finance than arguably any other part of the global financial system. The absence of a formal bankruptcy regime or binding regulatory oversight is fertile ground for rogue behavior by opportunistic debtors and creditors alike. (2) Nowhere has this been more evident than in Argentina's decades-long dispute with holdout creditors following its historic default in 2001. While Argentina's standoff with its holdout creditors appears to finally be over, (3) its reverberations will be felt for decades.

The search by creditors for the holy grail of enforceability has spurred a range of novel legal strategies. Arguably one of the most important consequences of Argentina's debt crisis is the use of investor-state dispute settlement (ISDS) to adjudicate and enforce sovereign debt obligations. In Abaclat and Others v. The Argentine Republic, an arbitral tribunal at the International Center for the Settlement of Investment Disputes (ICSID) determined that it had the legal authority to hear mass claims by Italian bondholders brought under Argentina's bilateral investment treaty (BIT) with Italy. (4) This landmark decision has been followed by two other ICSID cases against Argentina. (5)

The use of ISDS in Argentina's debt disputes raises two intertwined questions. First, what are appropriate fora for resolving sovereign debt disputes? Sovereign debt is typically refinanced through the exchange of original bonds for new bonds following ad hoc negotiations between sovereign debtors and their creditors. (6) Argentina's unilateral exchange offers in 2005 and 2010 involved limited and narrow negotiations and the presentation of "take-it-or-leave-it" offers to creditors. (7) Refusing to participate in these exchange offers, holdout creditors filed hundreds of lawsuits in New York and other jurisdictions, arguing that they were entitled to full repayment. (8) Given the likelihood of future cases before other ICSID panels and other arbitral tribunals, how should the "tribunalization" of sovereign debt finance be addressed in the event of overlap or conflict with litigation in national courts? (9) In the years following Abaclat, legal scholars have started to grapple with the implications of this source of pluralism in the global sovereign debt market. (10)

Second, what interests should be taken into account in ISDS cases involving a sovereign debtor? BITs and other international investment agreements (IIAs) have dramatically grown in number and importance in the past couple of decades. (11) At their heart is the private right of action granted to foreign investors to sue host countries for violation of a treaty-based standard of protection. (12) As this Article shows, Abaclat and its progeny may be viewed as a consequence of Argentina's extraordinary intransigence. (13) However, responses to rogue debtors, such as Argentina, often make bad law. (14) Critics remain skeptical that ISDS is likely to rectify fundamental problems in sovereign debt restructuring. In fact, prescriptions for the widespread or standardized application of ISDS underestimate the systemic implications of sovereign debt restructuring. (15) Rather than fixing sovereign debt restructuring, the tribunalization of sovereign debt disputes through ISDS undermines the need for flexibility and the importance of politically palatable settlements. (16)

This Article proceeds as follows. Part II describes the convergence of international investment law and sovereign debt finance. The Article explains how the unique challenges of enforcing creditor claims against sovereign debtors and the proliferation of ISDS mechanisms gave rise to this new remedy. Part III examines Argentina's debt restructuring cases before ICSID as a case study. Retrospectively, the Article analyzes Abaclat and its progeny in the context of Argentina's experiences in litigation in national courts. Prospectively, the Article identifies and addresses current and possible future measures by Argentina in response to sovereign bondholder arbitration. Part IV addresses the systemic implications of ISDS for the exercise of sovereign authority in the context of sovereign debt restructurings.

2. THE APPLICATION OF INTERNATIONAL INVESTMENT LAW TO SOVEREIGN DEBT FINANCE

   The use of ISDS is a product of iterative efforts by Argentina and holdout creditors to exploit legal uncertainty and ambiguity in the sovereign debt restructuring process. The following discussion examines the legal and institutional basis for applying international investment law to resolve sovereign debt disputes.

   1. The Problem of Rogues and the Challenges of Enforcement in Sovereign Debt

      The global sovereign debt market differs from the commercial debt market in several fundamental ways. There is no global court or regulator to enforce debt commitments or monitor restructurings, (17) and there is no bankruptcy law to determine priority of payment to creditors. (18) Due to a lack of enforcement mechanisms, sovereign debtors have the discretion to default opportunistically. (19) However, most sovereigns do in fact satisfy their debt obligations, sometimes even under significant economic duress. (20) To explain this compliance, many scholars cite the threat of reputational sanctions, political pressure, and internal collateral damage. (21)

      Traditionally, sovereign insolvencies are resolved through voluntary negotiated exchanges of existing debt obligations for new debt obligations. (22) Holdout creditors seeking full repayment have chosen to sue sovereigns in foreign courts, typically in New York City and London. (23) Creditors have had little difficulty establishing jurisdiction over sovereign debtors, either by negotiating waivers of sovereign immunity in loan documents ex ante or through the commercial activity exception to foreign sovereign immunity. (24) However, creditors have limited recourse collecting judgments against sovereigns that assert immunity against attachment of assets (25) or contract out of debt liability. (26)

      This ad hoc, decentralized restructuring process has deteriorated dangerously in recent years. (27) Negotiation between sovereigns and their private creditors has drifted towards "litigotiation"--an unstable situation in which litigation and negotiation in different courts against multiple sovereigns blurs with unpredictable results. (28) Fragmentation among creditors that have weak institutional relationships with each other and divergent interests has enabled rogue behavior by sovereign debtors and creditors. (29) Reputational considerations, creditor coordination mechanisms, and cross-conditionality all have weakened as sources of order and authority in the global sovereign debt market. (30) Contentious, costly, and inequitable restructurings--most notoriously, Argentina's--have incited calls for legal reform. (31)

      For the past couple of decades, reformers have fallen into two camps: the public law institutionalists and the private law contractualists. (32) Among institutional reform advocates, the International Monetary Fund's proposed Sovereign Debt Restructuring Mechanism (SDRM) exemplified efforts to transplant bankruptcy-like procedures into sovereign debt restructurings. (33) In contrast, contractual reform advocates point to the ability of sovereign debt contracts to impose meaningful restraints on sovereign behavior, in spite of the weakness of coercive external enforcement. (34) First and foremost among the contractual innovations that have taken root are collective action clauses (CACs), which permit a majority or a supermajority of bondholders to change the payment terms of an issue of bonds. (35) Coupled with exit consents, which enable a sovereign debtor to implement modifications to nonpayment terms as a condition to participating in an exchange offer, (36) CACs are a powerful tool against holdout creditors. However, CACs are not a panacea: among various shortcomings, many old sovereign bonds do not include them, and they do not address coordination problems in loans and other non-bond debt. (37)

   2. Enforcing Sovereign Debt Obligations through Investor-State Dispute Settlement

      Amidst ongoing differences about the optimal manner to resolve sovereign debt disputes, international investment law has emerged to fill a perceived enforcement gap. There is no multilateral treaty regime equivalent to the World Trade Organization (WTO) for international trade or the Bretton Woods institutions. (38) Rather, international investment law consists of over three thousand separate, independent, and freestanding IIAs. (39) Despite their number, IIAs arguably constitute a cohesive global regime for international investment, with its own architecture and decisionmaking processes. (40)

      ISDS provisions in IIAs predominantly enable foreign investors to opt to bring an investment-related claim to international arbitration or to initiate a proceeding in a domestic court. (41) IIAs generally provide for investor--state arbitration under ICSID rules or, alternatively, under ad hoc arbitration governed by the rules of the United Nations Commission on...