Argentina Rejected by U.S. Court in Bond Payment Appeal

The U.S. Supreme Court left intact a ruling that may force Argentina to make payments on defaulted government bonds, rejecting that country’s appeal in a clash that has roiled its financial markets.

The justices, without comment, today let stand a 2012 U.S. appeals court decision that bars Argentina from making payments on $24 billion in restructured debt unless it also pays owners of the earlier repudiated bonds. The bondholders include a fund controlled by billionaire Paul Singer. The Supreme Court still could get involved at a later stage.

The legal fight, which puts U.S. courts in the unusual position of shaping a foreign country’s finances, has raised the possibility of a new Argentine default and prompted Standard & Poor’s, Fitch and Moody’s to lower the country’s bond ratings. Argentina says it faces the prospect of having to pay more than $15 billion to cover defaulted debt and penalties.

The lower court ruling “represents an unprecedented intrusion into the activities of a foreign state within its own territory,” Argentina argued in its appeal.

The focus of the fight now turns to a federal appeals court in New York, where Argentina is seeking reconsideration of a separate decision in the case. Should that bid fail, the country could file a new Supreme Court appeal.

The appeals court has said its decision won’t take effect until the Supreme Court makes a final decision on whether to hear Argentina’s appeals.

Finance Secretary

Argentina will use all legal means to appeal the case, Finance Secretary Adrian Cosentino said today in an e-mailed statement.

Justice Sonia Sotomayor didn’t participate in today’s high court action, giving no reason. She took part in Argentina debt litigation when she was an appeals court judge.

Singer’s NML Capital Ltd., a unit of Elliott Management Corp., says Argentina is exaggerating the impact of the appeals court ruling, which directly affects claims for $1.5 billion. The fund says Argentina can afford to pay both sets of bondholders.

Singer said the dispute won’t affect the ability of nations to borrow money. Argentina’s problems are “of its own making,” he said today at the Wall Street Journal’s Heard on the Street conference in New York.

The dispute stems from Argentina’s 2001 default on a record $95 billion in debt. The country offered to substitute bonds worth 25 to 29 cents on the dollar in 2005 and made a similar proposal in 2010. Owners tendered about 92 percent of the outstanding debt.

Bond Agreement

NML bought some of the defaulted bonds from the holdouts and sued to collect the full amount. NML said a clause in the bond agreement bars Argentina from treating the restructured securities more favorably than the defaulted bonds.

A federal trial judge agreed with that argument, as did the New York-based 2nd U.S. Circuit Court of Appeals.

In its Supreme Court appeal, Argentina contended that the lower courts violated foreign sovereign immunity by dictating what the country can do with property located outside the U.S.

NML and a second group of investors led by Aurelius Capital Master Ltd. urged the high court to reject the appeal.

The 2nd Circuit issued a second ruling in August, saying Argentina must pay the holdout creditors in full if it makes payments on its restructured debt. Argentina is seeking a new hearing before a larger panel of judges. A rejection of that request would clear the way for the country to file another Supreme Court appeal.

‘Speculative, Hyperbolic’

In the August opinion, the appeals court said Argentina’s predictions of a financial cataclysm were “speculative, hyperbolic and almost entirely of the republic’s own making.”

The country is exploring options for trying to sidestep the appeals court ruling. Argentine President Cristina Fernandez de Kirchner said in August that the country will offer a new restructuring to defaulted bondholders and let investors who own the restructured notes swap them into debt subject to local law.

A federal judge on Oct. 4 barred Argentina from going forward with that plan, calling it “an apparent attempt to evade” his previous orders.

Argentina previously said it never would pay the funds, which the country’s leaders have called “vultures.” Its legislature passed a law in 2005 barring payment on the defaulted bonds.

The case is Argentina v. NML Capital, 12-1494.

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