Yesterday, the Republic of Argentina defaulted on a $539 million interest payment due on its dollar-denominated Discount 2033 bonds. It is Argentina’s second debt default in 13 years. It is too early to know what the ultimate consequences of the default will be. Although presently limited in scope, it is possible that cross-default provisions in other indentures could find Argentina in default on substantially all of its debt in the near future. A number of analysts believe that the default could plunge Argentina into an economic crisis marked by hoarding of dollars, peso devaluation, and runaway inflation. If they have not done so already, foreign companies that have invested in Argentina are advised to consider the potential consequences of a crisis and how to best prepare themselves for what may come.
Recurring economic crises are an unfortunate fixture of Argentina’s history. The most recent crisis, in 2001-2002, suggests that foreign investors may be in for a rough ride. In response to that crisis, Argentina implemented several measures by means of a hastily-drafted “Emergency Law”. The measures radically altered the monetary and banking systems and fundamentally changed even private contracts by force of law. The measures caused significant, immediate harm to foreign investors. Many investors saw long-term investments, such as public works concessions, lose all their economic value.
Among other fallout, Argentina’s actions in 2001-2002 led to dozens of arbitration claims by foreign investors. These investors acted under Argentina’s bilateral investment treaties — or “BITs”. BITs provide investors with legal protections against unfair treatment, expropriation, and discriminatory treatment. Breach of BITs is actionable via arbitration before independent international tribunals. Argentina remains a party to a number of BITs, including BITs with the United States and European countries such as Germany, France, and Spain. BIT claims can lead to enforceable awards for damages and can provide leverage critical for settlement negotiations. Indeed, although Argentina mounted a vigorous defense against the claims asserted against it, sometimes successfully, a number of investors obtained large arbitration awards in their favor (later settled) or were able to reach settlements without the need to press their claims to an award. Thus, investor BIT claims helped to mitigate the impact of Argentina’s response to the crisis in a meaningful way.
It is too early to tell whether the current circumstances will lead to an economic crisis. Of course, if a crisis develops, it may not lead to measures of the sort Argentina resorted to previously. But, the 2001-2002 experience at least suggests that Argentina’s reaction to a crisis may cause serious harm to foreign investors. Thus, in assessing the current situation, investors should include an analysis of their options under Argentina’s BITs prepared with the help of counsel experienced with BIT disputes. The goal should be to develop a strategy that will, in the event of adverse action by Argentina, permit an investor to maximize its likelihood of successfully obtaining compensation from Argentina once the crisis subsides.