The International Capital Market Association, a group of banks and investors, released new standards aimed at reducing the ability of predatory funds and holdout investors to undermine debt restructuring.

The reforms and standards, to be included in the ICMA Primary Market handbook, are aimed at preventing a repeat of the Argentina/NML Capital debt dispute, and were created after meetings convened by the U.S. Treasury Department in the wake of Greece's debt restructuring.

ICMA in Zurich, Switzerland represents institutions active in the international capital market worldwide, and has 450 members in 52 countries.

Earlier this month, Argentina was pushed into default when a court ruling in the case NML Capital Ltd. vs. The Republic of Argentina blocked interest payments of $539 million to some of the country's restructured bondholders. The court ruled Argentina couldn't pay some bondholders and not others. The decision led to a downgrading by some credit rating agencies.

NML Capital, a hedge fund, was seeking $1.65 billion for bonds defaulted on by Argentina in 2001. The company rejected offers of 30 cents on the dollar in debt restructuring, and won two court cases seeking payment in 2005 and 2010. Argentina has pay arrangements with 92 percent of its creditors, but the holdout investors refused to accept lower payments.

The ICMA plan would reduce the ability of predatory funds and holdout investors to undermine debt restructurings. Specifically through contract clauses all bond-holders will be bound to any debt restructuring agreement. Under the plan, the 'pari passu' or parity clauses would require would-be holdouts to accept restructured bonds approved by the majority of creditors. 

The ICMA plan states that all bondholders must accept a deal approved by 75 percent or more of the country's creditors, a clause that would have prevented Argentina's holdouts from litigating for full repayment. The International Monetary Fund is set to propose similar guidelines in late September.

"The potential adverse fallout globally from the default and restructuring of Argentina's debt demonstrates the important of having a clear, unambiguous contract terms for sovereign bonds," said Leland Goss, ICMA's general counsel.

The proposal comes while a number of nations are facing debt problems. In July, a U.S. judge in New York ordered the Democratic Republic of Congo to pay $68 million to two hedge funds that acquired the country's debt on the secondary market and then sued. The award of nearly $50 million in interest on loans dates back to the 1980s. According to the United Nations, the DRC is the world's second poorest country. 

In a related case, the Import-Export Bank of Taiwan is suing the Caribbean nation of Grenada, making an identical legal argument to  the one used against Argentina. The case is currently on hold as Grenada attempts to resolve its debt situation. Its debt is 40 percent private bondholders, and 40 percent multilateral investors -- IMF, World Bank, Caribbean Development Bank and Inter-American Development Bank -- and sovereign debt with Taiwan, Kuwait and Trinidad & Tobago.

Grenada, with barely 100,000 inhabitants, experienced economic loss when hit by hurricanes in 2004 and 2005 -- Ivan and Emily -- which pulverized its tourism industry causing damages costing 200 percent of its GDP. In addition, the EU gave Grenada privileged access to banana and spice exports, but U.S. pressure through the World Trade Organization led the EU to cut trade preferences and open markets to banana producers in Central and South America. Small-scale producers in the eastern Caribbean were destroyed.

"The actions of the ICMA are impressive. It really shows there is a global consensus to stop this predatory behavior," said Eric LeCompte, Executive Director of the religious anti-poverty group, Jubilee USA. "While this is another step in the right direction, it doesn't solve the immediate problems. Without statutory approaches the behavior won't be slowed down to 12 to 15 years. Poor people and legitimate investors will continue to be harmed by this behavior for the foreseeable future."