Declares certain contracts to which a debt evading foreign state is a party to be void as against public policy

Justification

New York taxpayers have invested billions of dollars in debt issued by foreign sovereigns. To facilitate the issuance of their debt to New York citizens and other individuals through New York's capital markets, many foreign sovereigns designate New York as the place of payment and the venue where the foreign sovereign waives sovereign immunity and consents to jurisdiction to be sued in the case of a default. As a result, actions to enforce defaulted debt are frequently brought in state and federal courts located in New York. Although many foreign sovereigns pay their debts responsibly, some foreign sovereigns that are capable of making payments to their creditors instead choose to repudiate their debts and to refuse to pay judgments rendered against them. Because of the difficulties associated with enforcing judgments against foreign sovereigns, New York taxpayers suffer significant losses, and have little legal recourse, when foreign sovereigns choose not to pay their debts. The losses incurred by taxpayers significantly affect New York tax revenue, not only because New York cannot tax interest and other gains that are not paid, but also because investors' losses can be offset against other taxable gains.

The most egregious example of a foreign sovereign that is capable of paying its debt, but that chooses not to, is the Republic of Argentina. In 2001, Argentina defaulted on $81.2 billion of debt, which is the largest sovereign debt default in history. Argentina refused to negotiate with its bondholders until 2005, and then offered the bondholders an exchange worth about 25-cents on the dollar on a take--it-or-leave-it basis.

Approximately 76 percent of bondholders accepted the exchange offer, and Argentina repudiated the remaining portion of its debt. Argentina has repudiated these debts while claiming, in a recent filing with the Securities and Exchange commission, to have a debt-to-gross domestic product ratio of 49.1% - less than the ratios of Canada, the United Kingdom, France, Germany, and a variety of other European countries - and a budget surplus in each year from 2004 to 2008.

Dozens of lawsuits have been filed in the united States District Court for the Southern District of New York as a result of the Argentine debt default. The two largest creditors alone have claims and judgments of over $3 billion. Judge Thomas P. Griesa, the most senior judge in the Southern District, has repeatedly observed that Argentina has never offered to pay the judgments rendered against it and instead focused all of its efforts on protecting its assets from creditors. In May 2009, Judge Griesa held that Argentina was in civil contempt of court for failing to comply with court orders and drew an adverse inference that Argentina had removed assets from New York in violation of court orders.

The economic impact of this debt repudiation has been substantial. The direct net costs to New York holders of defaulted Argentine debt currently total $902 million, including $452 million in capital losses, $382 million in foregone interest payments, and $180 million in foregone investment returns, less nearly $112 million in tax benefits created by the losses or foregone income. From December 2001 to December 2008, the indirect costs of the Argentine debt default, through lost tax revenue, total approximately $329 million.

This bill will prevent debt evading foreign states such as Argentina, which is presently preparing an offer to exchange certain of its defaulted debt for new debt of lesser value, from including in the debt exchange provisions a requirement that those holders exchanging their debt vote to extinguish the enforcement rights of holders who do not participate in the exchange but seek to enforce their rights, including judgment enforcement rights, in the courts.

Legislative history

New bill.

Fiscal implications for state and local governments

At present, at least one debt evading foreign state, the Republic of Argentina, is contemplating a securities offering that is likely to include sales or offers for the sale of securities in New York. Argentina has filed a registration statement with the Securities and Exchange Commission relating to the offer and sale of securities having an aggregate principal amount of up to$15 billion. If Argentina is prevented from extinguishing the right of holders who do not participate in the exchange to enforce their rights and judgments against Argentina, New York may collect substantial capital gains and avoid the deduction from taxes of capital losses with respect to any judgments that are satisfied by Argentina. either by agreement or by execution against its property.

Effective date

This act shall take effect immediately.