Argentina: Return from Debt Mountain

Back in 2013, we provided a somewhat in-depth look at the ongoing legal battle between Argentina and debtors who declined to participate in its post-default restructuring plan.

So first, to recap: Back in 2001-2002, Argentina defaulted on its debt.  More than 90% of bondholders participated in one of the two restructurings that took place (2005 and 2010), accepting a repayment structure that would pay them a fraction of their original holdings.  Argentina steadfastly refused to make any payments to the holdout bondholders (which Argentina describes as "vulture funds").  The holdout bondholders, meanwhile, took Argentina to federal court for the full payments (the original bond agreements gave U.S. federal courts jurisdiction over any disputes).  The federal district court had ruled in the bondholders' favor in November 2012 -- mandating that Argentina pay the holdout bondholders in full if it make any payment on the restructured bonds -- but the opinion had been stayed pending appeal to the Second Circuit by Argentina.

Flash forward to August 2013: The Second Circuit upheld the district court's opinion, rejecting arguments put forth by Argentina (and the U.S. government, siding with Argentina) with respect to both the bond contract interpretation as well as sovereign immunity.  Specifically, the Second Circuit ruled that Argentina must pay the holdout bondholders in full before it makes any payments on the restructured bonds.  Importantly, it also held that anyone helping Argentina make payments on the restructured bonds in defiance of its ruling could be held in contempt of court:

Argentina could simply ignore the ruling and continue to make payments on the restructured bonds while ignoring the other ones. 

But the court also made it clear that it would view anyone who helped Argentina make such payments as “assisting in a violation of the injunction.” It directly ordered Bank of New York Mellon, the trustee for the restructured bonds, not to make the payments to bondholders if Argentina sends it the money. And it warned that others not named in the case might face legal problems if they helped Argentina.

Argentina expected the case would be heard by the U.S. Supreme Court.  In June, the Court declined -- without comment -- to heart the case.

A poster in Argentina decries the "vulture funds" of the U.S. (Source: Yahoo News)


Today, Argentina was found to be in "technical default" because its payments to restructured bondholders were thwarted by the court-issued injunction preventing payments on the restructured bonds unaccompanied by payments to the holdout bondholders.  Markets in both Argentina and the U.S. dropped today, after last-minute talks collapsed.  Argentina, meanwhile, denies that it is in default, asking restructured bondholders to demand payment from the U.S. federal court system while its chief cabinet member cried conspiracy:

“The credit rating agencies, the financial agents and opinionators who are trying to say that Argentina is in a supposed technical default are playing an absurd hoax that is aimed at destroying the restructuring process of Argentina debt,” he said.

He further went on to accuse the federal judge and the negotiations mediator of complicity in the supposed default conspiracy:

"If there's a judge who's an agent of these speculative funds, if the mediator is their agent, what is this justice you're talking about? There's a responsibility of the state here, of the United States, to create the conditions for the unconditional respect of other countries' sovereignty," he said.

Investors remain hopeful that some sort of deal will be reached in the coming weeks.  Argentina, meanwhile, must at some point backtrack from its anti-capitalist populism.  Such rhetoric is sometimes necessary in South American politics, but it is unhelpful when your country is in the midst of its second debt default in 13 years.  Argentina was able to successfully restructure the large majority of its defaulted debt.  The remaining 7% has remained a political football in Argentina, used by politicians to burnish their populist credentials.  Throughout the holdout bondholder litigation, meanwhile, Argentina has expressed indignation at the notion that the holdouts would prevail in U.S. courts (especially when the U.S. government itself sided with Argentina).  Furthermore, it has time and again expressed its lack of respect for the federal judge in charge of the case and expressed its intentions to not abide by U.S. court rulings.  This is certainly Argentina's right as a sovereign nation, unless of course it wishes to utilize the U.S. financial system to develop its economy.  If that's the case, then Argentina should meet its debt default with serious answers rather than conspiracy-laden propaganda.