Edição Especial - Faap

Protection features
Understanding of different creditor protection features is a third systemic
issue that is worthwhile revisiting. Not only bonds issued in foreign currency
yielded lower interest rates that those denominated in domestic currency to
offset currency perceptions but bonds where applicable law was of certain
foreign sites had also lower spreads than otherwise. The differential was usually
attributed to the perception that creditor rights were more protected in those
jurisdictions.
The fact is that there were rulings of different nature in the case of a
payment default, but so far they have not served for actual collection of unpaid
obligations. Even the enforcement of attachments has proven difficult to the
point that – in practical terms – no enforcement of contracts was possible
through this route several years after the terms of the obligation remained
altered. This outcome can be explained by a combination of factors, such as
that no assets were exposed to possible attachments and rulings that effectively
were not conducive to immediate actions.
Other protection mechanisms that were in place guarding foreign
law/currency securities like pressure exercised by international organizations
looking after the interest of the related holders also diminished significantly due
to the facts explained previously. The effective outcomes occurred so far do not
necessarily mean that those will prevail in the future. Given that the sovereign
nature of the debtor, it cannot be ruled out that at some point political entities
would intervene. So far, they have been reluctant to do so, and are likely to
continue with similar attitude, but enforcement of rulings in third party
jurisdictions involving those debtors sometimes require going through
channels governed by political entities of different nations.
Recently, domestic currency/law securities have revived. This is consistent
with both, currency realignment prospects, as well as the realization that, in the
end, the practical differences between domestic and foreign currency/law when
protection is concerned might not be as thought previously.
Resolution process
Sovereign debt resolution process or the lack of it when bonded debt is
prevalent, is a fourth issue to be discussed. There is an established debt
resolution process for pure private sector situations that works across different
jurisdictions. Even when not used it serves as a reference for out-of-court
settlements. Nevertheless, situations where the sovereign is involved are beyond
the boundaries of those mechanisms.
Previously also certain commonality of interest and some homogeneity of
the creditor group created incentives for consultations that in the end lead to
an agreement where holdouts ended up being less of an issue.
Currently, we are witnessing increased litigation due to a certain vacuum
in the resolution mechanisms. As a consequence of that, Courts are becoming
more relevant.
Collective Action Clauses were designed to deal with it, but so far they
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Revista de Economia & Relações Internacionais, vol.5(edição especial), 2006