Deviant Debt: Reputation, Litigation, and Outlier Effects in Argentina's Debt Restructuring Saga

The literature on sovereign debt restructurings has not yet fully accounted for the fact that today these deals are mostly about the contractual terms and judicial decision-marking that shape disputes in foreign courts. The heavily theorised concepts of reputation and sovereign immunity can, at best, only partly explain the specific dynamics at play. Here, we present the limitations of the two concepts through an analysis of the protracted US court battle between Argentina and some of its holdout creditors. The December 2011 NY district court decision in favour of these creditors reversed a long record of unenforceability for creditors’ demands in foreign litigation. The paper argues that the inability of sovereigns to issue debt abroad due to ongoing international litigation, rather than the more rhetorical reputational punishments, makes default costly and its outcome less predictable. This is possible because governments often waive sovereign immunity from suit, particularly in the Unites States. Since the Argentine case has spurred preemptive reactions by other sovereigns in the form of contractual changes, the deviant case is also a ‘trend-setter’, informally institutionalising a new international ‘contractual normal’.