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Litigation risk for years to come

No matter how successful the Argentine exchange offer is, there will always be holdouts ? investors that refuse to enter into the exchange in the hope of getting a better deal later. Many investors are worried about these holders of original debt. Will they pose a credible threat of seizing coupon payments on Argentina's new bonds? If they do, they could keep Argentina in financial purgatory, without access to investment, and with artificially high bond spreads because of the risk of coupon attachment, even though a supermajority of creditors had agreed to a restructuring. Reassuringly, the answer is that the holdout threat is probably not all that credible, although nobody knows for sure.

There is no precedent for Argentina's situation on the other side of a successful exchange. In the Ecuador, Uruguay, Pakistan and Ukraine cases, holdouts were so few that governments were happy paying them off in full to make them go away. It was a cost-effective solution to a near-term problem ? no-one wants to pay for protracted litigation in a New York court ? but it also set a precedent that is very bad for Argentina. After all, the more that holdouts have been paid off in the past, the more likely it is that they will be in this case as well, and the greater the number of holdouts is likely to be.

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