Disrupting the delicate sovereign debt equilibrium
Default leads to lawsuit; lawsuit leads to precedent; precedent leads to suffering.
Every restructuring of sovereign debt over the last half century has been conducted in the shadow of a delicate equilibrium. Once again, this fragile balance is being rattled by the idiosyncratic interpretation of a US judge.
In the absence of any form of bankruptcy code or other insolvency process for sovereign debtors — and bereft of the legal immunities that sovereign governments enjoyed until the last quarter of the 20th century — it has been relatively easy for creditors to obtain court judgments against payment-challenged sovereign borrowers.
Countervailing this advantage, however, has been the practical difficulty facing creditors when they attempt to collect on those judgments. Most governments typically hold few assets abroad that can be seized by creditors to satisfy court awards.
The US government has even implied that this equilibrium produces the optimal outcome. Countries are dissuaded from casually defaulting on their debts by the fear of creditors hounding them in foreign courts. And investors are discouraged from “holding out” of consensual debt restructurings by the prospect of an exasperating and expensive effort to collect on their court judgments.
A great disturbance in the Force
This equilibrium suffered a major shock on June 30, 2025 when Judge Loretta Preska of the federal District Court in New York issued two orders directing Argentina to bring into the US assets held by Argentina outside of the US to satisfy two federal court judgments (specifically, shares of the Argentina’s mostly state-owned energy company, YPF).
For obvious reasons, the principal restraint on holdout creditor behaviour in sovereign debt workouts — that is, the paucity of government assets that can be seized to satisfy court judgments — would be seriously eroded were holdouts able to force sovereign defendants to bring fresh assets into the jurisdiction for them to seize.
The implications are worrisome enough that the rationale behind Judge Preska’s so-called “turnover orders” is worth exploring in some depth. The logic unfolds in two steps.
The first focuses on the New York statute governing the procedure for enforcement of a money judgment against property of a defendant.
In a 2009 case the New York Court of Appeals held that this statute authorised courts to order the turnover of a private sector debtor’s property held outside of New York. However, countries that issued bonds under New York law and submitted themselves to the jurisdiction of US courts took considerable comfort from the fact that the only US statute governing the immunity of foreign sovereign property — the Foreign Sovereign Immunities Act of 1976 — limited creditor attachment rights only to property in the US “used for a commercial purpose”.
The second step in Judge Preska’s reasoning derives from a case that reached the US Supreme Court in 2014 — the infamous Republic of Argentina vs NML Capital legal saga.
The question at the time was whether a creditor of Argentina was entitled to discovery concerning Argentina’s worldwide assets in order to assist in recovery efforts. Argentina argued that because the Foreign Sovereign Immunities Act limited creditor attachments to property used for a commercial purpose in the US, the plaintiff’s discovery request was overly broad. The Supreme Court disagreed.
In a decision written by Antonin Scalia, the court held that because the FSIA is silent on the question of the scope of post-judgment discovery in aid of execution, there is no basis in the text of the statute to restrict such discovery to US-based assets. In the two sentences that would later form the basis for Judge Preska’s finding, Scalia wrote: “Thus, any sort of immunity defence made by a foreign sovereign in an American court must stand on the [FSIA’s] text. Or it must fall.”