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June 17, 2014 2:35 pm
Waivers of immunity in sovereign bond contracts, as a rule, exclude embassies. So, no: bondholders will probably not have a right to seize Julian Assange – or anything else inside the Republic of Ecuador’s diplomatic legation in London – if it were to default on its debts.
Default again, that is. Ecuador may soon sell its first US dollar bonds abroad since, in 2008, its president refused to pay debts he deemed to be odious. There was plenty of capacity to pay, but bondholders had little recourse or appetite to sue – especially after Ecuador craftily bought back most of the bonds for 35 cents on the dollar. Rafael Correa remains president. ‘Good faith’ was recently shown with another buyback – at 50 cents.
The punchline? Investors in the new bond will probably accept a yield as low as 7 per cent. The pricing of credit risk has turned nutty lately in emerging market debt anyway. But the Ecuadorean bonds’ prospectus will probably disclose at great length the risk and legal recourse in default – and equally probably, very few investors will read it. Most bondholders wish for quiet lives unbothered by legal detail.
That is going to change. Benign neglect of sovereign bond contract terms became untenable at exactly half-past-nine in the morning in Washington DC on Monday. That is when US Supreme Court threw out Argentina’s appeal against orders requiring it to pay holdout creditors alongside bondholders who accepted restructuring. The holdouts’ weapon of choice was a forgotten promise of equal treatment (pari passu) in the bonds. These clauses are ubiquitous in sovereign debt. If, after a default, one set of creditors can use pari passu clauses to intercept payments to another set, then it is at last time to read the contract. And it is past time to demand higher yields for taking financial risk.
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