International Monetary Fund Managing Director Christine Lagarde withdrew a proposal to back Argentina in the country’s legal battle over its defaulted debt, citing opposition from the U.S., the fund’s largest shareholder.
Argentina bonds tumbled the most in five months after the announcement, which came three days after Lagarde said she’d recommend that the IMF board file its first-ever friend-of-the-court brief to the U.S. Supreme Court in support of Argentina’s request for a review of a lower court ruling. The case involves holdout creditors from the nation’s $95 billion default in 2001.
“The managing director’s recommendation was premised on U.S. support, as it would not be appropriate for the IMF to file this brief without that support,” the IMF said in an e-mailed statement yesterday. “The fund remains deeply concerned about the broad systemic implications that the lower court decision could have for the debt restructuring process in general.”
The South American nation contends that a federal appeals court in New York was wrong when it ruled in October that investors who accepted Argentina’s debt restructuring can’t be paid unless holders of defaulted bonds who rejected the plan are also paid. The holdouts are led by billionaire Paul Singer’s Elliott Management Corp. and its NML Capital Ltd. unit.
The yield on the nation’s restructured dollar bonds due 2033 jumped 51 basis points, or 0.51 percentage point, to 14.12 percent at 4:50 p.m. in New York, according to data compiled by Bloomberg. The bond’s price fell 2.26 cents on the dollar to 63.47 cents, the biggest drop on a closing basis since Feb. 28.
“We do not think that the IMF should file a brief with the Supreme Court at this time,” the U.S. Treasury Department in an e-mailed statement.
The Treasury said it strongly disagrees with Argentina’s actions in international financial markets, including failures to pay creditor nations including the U.S. The IMF earlier this year also censured the country for not providing accurate data on inflation and economic growth.
“It is a bit awkward, but it is consistent with the consensus-based nature of IMF’s decision making,” said Domenico Lombardi, the director of the Global Economy program at the Centre for International Governance Innovation in Waterloo, Ontario. “This is a case in point showing the political reality under which international organizations operate and how such constraints limit their institutional effectiveness.”
The extra yield investors demand to own Argentine bonds instead of Treasuries jumped 37 basis points to 10.62 percentage points, according to JPMorgan Chase & Co.’s Embi Global index. Emerging-market debt yields were unchanged from yesterday at an average 3.19 percentage points more than Treasuries.
In asking the Supreme Court to take the case, Argentina argued that the lower-court ruling “represents an unprecedented intrusion into the activities of a foreign state within its own territory that raises significant foreign relations concerns for the United States.”
An attorney for NML Capital wrote to Lagarde and members of the IMF’s executive board on July 19 urging them not to intervene in the lawsuit, according to a copy of a letter obtained by Bloomberg News.
“Any attempt by the IMF to support Argentina’s petition -- an attempt to undo previous court rulings in this litigation -- should be abandoned,” wrote Matthew McGill, an NML attorney at Gibson Dunn & Crutcher LLP. “If the IMF abandons its long-standing legal duty of neutrality and supports Argentina’s position in its long-running litigation against its creditors, the consequences for both the Fund and the consensual system for resolution of sovereign debt could be substantial.”
NML declined to comment in an e-mail.
Last week, the Obama administration said it won’t file a brief at this stage urging the Supreme Court to hear Argentina’s appeal. The U.S. backed Argentina at the appeals court. The Treasury said in yesterday’s statement it “will continue to consider whether and when to participate in this litigation.”
That includes the possibility of sharing its view with the justices if they invite the U.S. to do so, according to the statement.
“Clearly this is a politically sensitive issue and the politically conservative thing to do is not to file at this time,” Anna Gelpern, a law professor at Georgetown University in Washington and senior fellow at the Peterson Institute for International Economics, said in a telephone interview.
“Unfortunately, this is another blatant reminder of how the U.S. continues to dominate key decision-making at the IMF,” said Deborah James, director of international programs at the Center for Economic and Policy Research, a foundation- and union-funded group in Washington. “The implications of this case for restructuring in sovereign debt defaults is not to be underestimated.”
Part of the case is still pending in the appeals court. That aspect stems from U.S. District Judge Thomas Griesa’s order that Argentina must pay defaulted bondholders the entire amount they’re owed whenever the nation makes a required payment to holders of the restructured debt.
Griesa also said his earlier order barring third parties from helping Argentina avoid payment applies to Bank of New York Mellon Corp., indenture trustee for the restructured bonds, and others. The appeals court decision on Griesa’s orders may come at any time.
“We understand that the IMF has serious concerns about the impact of the ruling on its ability to meet some of its core responsibilities,” the Treasury said. “The litigation, however, remains pending in the court of appeals.”