€1.5 Billion Judgment for Holders of Argentina’s GDP-Linked Sovereign Warrants
Following years of economic turmoil, the Argentine Republic arranged the largest-ever restructuring of debt by a sovereign beginning in 2005. Because investors and the government disagreed on the capacity of the Argentine government to pay its restructured claims, a solution was reached in which debt repayment would be linked to the size and real growth rate of the Argentine economy (and by extension, its tax base). Argentina thus issued two tranches of GDP-linked debt securities in 2005 and 2010, composed of a fixed-rate bond and warrants which would pay out only if the level of real GDP and economic growth exceeded a baseline path.
A dispute arose about whether a payment was due by the Argentine Republic (the Defendant) for Reference Year 2013 on euro-denominated GDP-linked warrants held by the Plaintiffs, a group of investors (Palladian Partners, L.P., HBK Master Fund L.P., Hirsh Group LLC and Virtual Emerald International Limited). SEDA’s Willem Buiter was an expert witness for the Plaintiffs, providing expertise on GDP-linked debt instruments.
The Argentine Republic did not make a payment for Reference Year 2013 because the official statistical agency determined that a Performance Condition concerning the growth rate of real GDP for that year had not been met. The agency’s evaluation of the Performance Condition was impacted by the rebasing of real Argentine GDP from constant 1993 prices to constant 2004 prices. Such adjustments are made by statistical agencies in the normal course to align real GDP calculations with a base year that better represents the current state of the economy’s technology and demand patterns.
Plaintiffs argued that the Performance Condition had indeed been met for Reference Year 2013 following the rebasing of Argentine GDP data to 2004 prices. Providing evidence for the Plaintiffs, Dr. Buiter connected the Performance Condition to the Argentine government’s capacity to raise tax revenue, the plain language of the offering documents for the GDP-linked securities, and an economically-sensible method for adjusting the calculation of benchmark real GDP to constant 2004 prices pursuant to the warrants’ Adjustment Provision.
On April 5, 2023, Mr Justice Simon Picken in the High Court of Justice, Business & Property Courts of England and Wales, King’s Bench Division, Commercial Court, Financial List, ruled in favor of the Plaintiffs, finding that the amount payable on the GDP-linked securities for Reference Year 2013 is approximately €1.330 billion. Justice Picken further ruled that interest on that amount is payable at a rate of 2% above Euribor from 15 December 2014. On June 8, 2023 Justice Picken refused permission to appeal, but he granted a stay in respect of the payment pending any possible request for permission to appeal from the Court of Appeal itself.
In his opinion, Justice Picken praised the evidence given by Dr. Buiter. “His evidence was considered and careful. It was also even-handed since he acknowledged from the outset that there are multiple possible ways of dealing with a rebasing in the context of the Securities and, in particular, that the Adjustment Provision could have been written in different ways.”.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Dr. Willem has over 40 years of experience in the financial industry as the Global Chief Economist at Citigroup, Professor of International Economics at Yale University, and consultant to the International Monetary Fund, the World Bank, the International Development Bank, the Asian Development Bank, and the European Commission. He is a world-class expert in monetary policy, bank insolvency, central bank interventions in financial markets, crypto-assets, and DeFi.
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