Argentina’s bills come due
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Argentina lost not one but two Supreme Court cases on Monday regarding paying back bonds that it issued before its 2001 default. First, in what Noah Feldman calls a “legally surprising, financially worrisome, and internationally questionable” move, the court declined to hear Argentina’s appeal regarding the Second Circuit decision last fall. In that case, the court found in favor of Paul Singer’s hedge fund Elliott Management, a “holdout” bondholder that did not agree to Argentina’s debt restructurings in 2005 and 2010 after its 2001 default. Second, and somewhat tangentially, the court found in a 7-1 decision that NML Capital, a subsidiary of Elliott, can seek information about Argentina’s finances to get its money back from the country.
By declining to hear the big case, the court “made final and binding” lower court decisions that Argentina is required to treat its bondholders equally says SCOTUSblog. (Felix Salmon has a good explanation of that ruling, and a video explainer of the whole case here.) This is big not only for Argentina, but for future sovereign debt cases litigated in the United States. “Pari passu will now be enshrined as a powerful enforcement device in New York-law sovereign debt”, says Joseph Cotterill. Peter Eavis thinks this could be a good thing, writing, “Once countries realize that it is harder to get an advantageous deal when defaulting, they may be less likely to take on too much debt”. (Salmon disagrees.) Practically, this “raises the cost to banks which are still dealing with Argentina or other defaulting nations”, says Tyler Cowen.
“Roughly speaking, this moves out of being a judicial matter and becomes a political and financial matter,” international litigator Henry Weisburg told MoneyBeat. Argentina’s options from here are: settle with NML Capital, default on its debt again, or try to find some way around the American legal system.
Plans to try to set up an alternate system of paying bondholders outside of the United States leaked earlier this month, but it’s unclear whether Argentina can get that together in time, not to mention whether current bondholders would have any interest, writes Tim Fernholz. Another default, says Matt Yglesias, would be bad for all its bondholders, not to mention terrible for its weak economy. “The only ultimate answer is for Argentina to settle, whenever it thinks it has the best negotiating leverage”, writes Cottrill, even though the sovereign’s past reluctance to take this step is what brought it to the Supreme Court in the first place.
Argentina’s president, Cristina Fernandez de Kirchner, made a speech yesterday (full text in Spanish) mostly holding the longstanding Argentine line on this, which in this case amounts to stalling. “It’s our obligation to take responsibility for paying our creditors, but not to become the victims of extortion by speculators”, she said. Ed Stoker at the FT reports that “Argentina has hinted it might consider negotiating with holdouts but could not do so until after December 31, when a clause in its debt swaps prohibiting it from offering holdouts better terms expires”. That’s a little late, since Argentina’s bondholders are scheduled to be paid next on June 30. –Shane Ferro
On to today’s links:
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