How Argentina’s Debt Resolution Process is a Model for Addressing Puerto Rico’s Debt Issues

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By Donald L. Swanson 

Let’s start by acknowledging that Argentina’s road from a $100 billion debt default in 2002 to a final mediated resolution in 2016 has been long and complex and difficult.  The road began during an economic crisis, reached partial resolutions in 2005 and 2010, and achieved a final mediated-resolution in 2016.

During that time multiple lawsuits were filed against Argentia in the U.S. District Court for the Southern District of New York by its creditors, and Judge Thomas P. Griesa of that Court took an active role in addressing the default problems.

On June 23, 2014, Judge Griesa appointed New York trial attorney, Daniel A. Pollack, as mediator in the Argentina cases.  And the subsequent mediation process ultimately achieved the final resolution in 2016.

Prior to Mr. Pollack’s appointment, however, no mediator existed in the case.  The prior partial resolutions came about through a process described as a ’judge-mediated’ sovereign debt restructuring.”    The “judge-mediated” term refers to a judicial activism in which the judge deals with issues before the court “as part of an on-going restructuring process and not as isolated suits by a series of aggrieved creditors.”  The judge acts as both, (1) an arbiter of substantive and procedural issues, and (2) a mediator between opposing parties.

It is noteworthy that, by mid-2014, Judge Griesa had terminated any idea that he would continue to serve a mediator-type role.  He did so by formally appointing a mediator for the Argentina cases.

Currently, Puerto Rico is facing debt default issues.  While the details of Puerto Rico’s current situation are different from Argentina’s debt default situation in 2002, the essence of the two are the same:

–Both face serious cash flow and debt service problems; and

–Both face serious problems in providing day-to-day services.

However, the challenges for Puerto Rico appear more daunting than those of Argentina, given the large disparity in population, GDP and land mass, while the amounts of debt involved are not-that-far apart.  Check these rough comparisons:

Population:  3,474,182 (P.R.); 43,417,000 (Arg.)

GDP:        $127 billion (P.R.); $964 billion (Arg.)

Area:       3,515 sq. mi. (P.R.); 1,073,518 sq. mi. (Arg.)

Debt:          $72 billion (P.R.); $100 billion (Arg.)

The U.S. Congress has been embroiled in controversy over the actions it should or should not take to address Puerto Rico’s financial problems.  A proposal Congress has been considering would establish a reorganization process similar to Chapter 9 of the Bankruptcy Code.  This proposal would allow Puerto Rico to pursue a court-supervised reorganization similar to Detroit’s bankruptcy.

As of this writing, such Chapter 9-type proposal has not passed into law.  If non-passage continues, Puerto Rico will, in all likelihood, follow a Court-supervision process similar to what Argentina went through:

–Creditors will file lawsuits in U.S. Federal Court to collect defaulted obligations;

–The Federal Court will establish an on-going restructuring process; and

–The Federal Court will appoint a mediator to pursue negotiated settlements.

Does anyone have any experience or insights on this matter?

Here is a link to an article on this blog from Monday (two days ago) about Argentina’s mediation efforts.

 

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