WHEN VULTURES STRIKE: MARKET REACTION TO HOLDOUT LITIGATION AGAINST ARGENTINA

Abstract

The 2001 Argentine default was followed by a series of litigations launched by holdout creditors against the Argentine government. The vast majority of cases resulted in a ruling in favor of the plaintiff. After 2011, all cases were enforced by attachment orders that prevented Argentina from servicing its outstanding debt without also paying holdouts. Almost universally, litigation events during this default episode strengthened investors’ abilities to sue. The central focus of this thesis is how the market reacts to the strengthening of creditors’ legal rights. I find that in the wake of a litigation event launched against Argentina, Argentine bond prices increased by 1.7 percent. This effect is primarily driven by court decisions that attached Argentine assets in the United States and by plaintiff decisions to dismiss the case following a settlement. When looking at those events exclusively, the treatment effect increases to around 10 percent. This conclusion is bolstered by my discovery of a structural break during the year 2011, which coincides with the initial pari passu decision. The magnitude of the treatment effect increases by 75 percent for observations after 2011. This suggests the attachment injunction was not only independently influential on prices, but also rendered all other litigation events more impactful by changing the expected outcome of a lawsuit. On the other hand, the initiation of lawsuits and preliminary decisions awarding damages to plaintiffs had no significant effect on prices. Litigation events impact prices the most when they are less anticipated or if they contain a credible enforcement mechanism to force the sovereign to pay. I also find that the treatment effect is larger for bonds with either the highest or lowest litigation risk, which is proxied by bond jurisdiction and date of issue. Finally, I distinguish between defaulted and non-defaulted bonds, finding that both bond types saw increased prices following a litigation event. My results show that legal action serves as an enforcement mechanism that deters sovereigns from breaking their contracts and defaulting on their debt. In response, investors become willing to lend at cheaper rates.