WASHINGTON — Argentina this week requested that the U.S. Supreme Court review a lower court ruling that would compel the country to pay more than $1.3 billion to U.S. “holdout” bondholders that the Argentine president has called “vultures.”
The case is being widely watched due to its immediate, as well as long-term implications. On one hand, economists worry that the lower court’s ruling could force Argentina back into default, potentially leading the Supreme Court justices to play the odd role of dictating another country’s economic fate.
Anti-poverty and global development advocates say any decision in favor of the bondholders would have far-ranging implications for future attempts at debt restructuring or debt relief. They say this would impact — first and foremost — the world’s poorest countries and the most marginalized communities within those countries.
“The ruling would make it very hard for debtors going through similar problems in the future to restructure their sovereign debt in a successful, timely and orderly fashion,” Aldo Caliari, director of the Rethinking Bretton Woods Project at the Center of Concern, a think tank here, told MintPress.
“This is bad news for the poorest and most vulnerable in the world, because we can expect more extended uncertainty in future crises. And in crises situations, the poorest and most vulnerable are the ones that suffer the most from job and service cuts, failures in the social safety net, and increases in inequality as wage [cuts] take a toll.”
The issue goes back to the economic crisis that seized Argentina for half of a decade starting in the late 1990s. It was partly spurred by financial problems in other parts of the world, including the bursting of the Internet bubble in the United States. With the country’s economy contracting by more than a quarter, the Argentine government defaulted on its external debt in 2001, then worth a record $95 billion.
Twice over the following decade, in 2005 and again in 2010, Argentine officials tried to restructure their debt by offering to “swap” the government’s externally held bonds for new ones worth around a quarter of the original value. The idea behind such a swap is that creditors can make back some of their money, write off the rest of the value as a loss and allow a struggling government to get back on its feet. About 93 percent of Argentina’s foreign creditors agreed to the swap.
Meanwhile, a very small number of creditors refused to do so, led by two U.S.-based hedge funds, Aurelius Capital Management and NML Capital. Instead, over the past decade these “holdout” creditors have waged a legal battle to force Argentina to make good on the original price of the debt they now hold.
Due to legal technicalities, by refusing to accept the bond swap offer, Aurelius and NML have held up the entire restructuring process.
In a widely watched decision, in August a court in New York ordered the Argentine government to pay the two funds more than $1.3 billion dollars. Buenos Aires rejected the decision, saying that it would continue to repay its debts on its own terms. Indeed, a law passed by the Argentine legislature in 2005 bars it from paying the hedge funds.
Argentina has now requested the Supreme Court to revisit the August decision, questioning, among other things, the sovereignty issues involved in a U.S. court targeting assets held by another government. The previous decisions “effectively reach into Argentina’s borders, coercing it into violating its sovereign debt policies and commandeering billions of dollars of core sovereign assets,” according to the appeal filed this week.
The U.S. Supreme Court is already hearing another, narrower case in the fight over Argentina’s holdout creditors, with arguments expected in April. Some observers say it would appear likely the court would want to hear the broader case, though others disagree.
It’s important to note that Aurelius and NML were not original holders of Argentine bonds. Rather, following the country’s financial implosion, these and other hedge funds purchased Argentine debt at extremely cheap prices. Now they stand to make a massive return on their investment if the U.S. courts decide in their favor.
The United Nations has noted that the United States is the “preferred jurisdiction” for holdout creditors. As such, a Supreme Court decision could largely make or break this type of “holdout” activity far into the future, with a favorable ruling legally legitimizing such activity.
“As the International Monetary Fund has recognized, it will do this by reinforcing the belief among creditors that not participating in debt restructurings and suing for the full amount is a feasible avenue to recover their claim in full,” Caliari said. “With this, the chances that any debtor country can in the future succeed in achieving a debt restructuring solution with its creditors will diminish significantly.”
Indeed, some suggest that players such as Aurelius and NML are fighting so hard for the Argentina case less for the money that’s at stake in this case, and more for the model that a favorable ruling would solidify for future such actions.
“At the end of the day, Argentina caucuses with the [Group of 20 industrialized] countries – it has the financial means and is able to hire the lawyers that countries such as Cote D’Ivoire and Zambia can’t,” Eric LeCompte, executive director of Jubilee USA Network, a religious anti-poverty organization, told MintPress.
“The precedent of this case will essentially allow these predatory hedge funds to take advantage of poor countries in sub-Saharan Africa and those struggling throughout Eastern Europe. Part of me wonders whether the holdout hedge funds are more interested in the precedent of this case than in actually collecting from Argentina.”
Improvement through pain
At the heart of the current judicial wrangling, of course, are intricacies of U.S. law. Yet LeCompte warned that the broader problem – what truly allowed for such a situation to arise in the first place – is what he calls the “mind-bogglingly illogical” structure of today’s international financial system.
“The reality of why we’ve had more than a decade of litigation on this case is because of the absence of a sovereign bankruptcy process, a transparent arbitration process like we have in most developed countries around the world. We need to understand that this whole problem essentially starts with this lack of process,” LeCompte said.
“With that absence, we have an international financial system that’s not regulated. Essentially, the way that debt restructuring has been looked at is that it needs to hurt the struggling economy in order to work – that we can only improve economies by hurting them.”
There is both domestic and international momentum on creating such a bankruptcy mechanism, though nothing is imminent on the horizon. Jubilee USA will be moving forward with legislation on responsible lending and borrowing in the U.S. Congress later this year. (The group released a full report on proposed principles in 2012.)
Several U.N. bodies are also currently looking at ways to outlaw holdout-type behavior, while the International Monetary Fund (IMF) has expressed its own similar concerns. Such processes have the backing of governments around the world, which are likewise taking various actions to outlaw vulture funds through domestic laws.
The Obama administration, too, has been a forceful advocate on behalf of Argentina as these cases have moved through the courts. If the Supreme Court takes up the new request, many observers expect that it would do so again.
While the U.S. government’s concern is partially moral – distress over the impact of holdout creditors on poor countries – it also has to do with its own finances. After all, the pots of money targeted by many vulture funds in the aftermath of a country’s economic crisis often come from bilateral and multilateral relief funds, including those from the United States.
“The U.S. understands the potential impact here when the United States is part of giving debt relief to countries, because that’s the money these holdout creditors target and collect,” LeCompte said. “And they also know that it impacts on extreme poverty.”
If the Supreme Court justices decide to take the new Argentina case, oral arguments would take place this fall or next spring. If the court declines to take the case, the lower court directive for Argentina to pay Aurelius and NML would go forward – though Argentine authorities in the past have stated that they would never do so.