You don’t have to be an Argentina fan to worry about the precedent set on June 16, when the U.S. Supreme Court refused to hear the nation’s appeal in a case brought by hedge funds that hold Argentine government debt. The high court let stand a lower court ruling that blew a hole in the country’s attempt to shrink its debt burden following a 2001 default on $95 billion in bonds. Although the U.S. courts’ actions apply only to this case, they send a message about the empowerment of creditors that could make it harder for other countries to stretch out or cut debt payments in hard times.
Argentina, as a defiant, serial defaulter that offered creditors the worst terms since World War II, isn’t the ideal poster child for debt relief. But France, Brazil, and Mexico submitted friend of the court briefs on its behalf because of the principle involved—that U.S. courts should not be able to force sovereign nations to do the bidding of bondholders. The International Monetary Fund planned to submit a brief but didn’t last year because of opposition from the U.S.
“I’m reeling a little bit,” says Eric LeCompte, executive director of Jubilee USA Network. “It’s clearly the worst possible outcome.” The coalition of religious and other organizations says it has helped coordinate efforts to win $130 billion in debt relief for governments of the world’s poorest countries.
“It is a pretty remarkable precedent for the U.S. to allow a lower court judge to push around a sovereign nation,” says Karen Hooper, director of analysis for Latin America at Stratfor, a geopolitical intelligence company. Some countries could choose to issue debt in countries that are more favorable to debtors, she says. In 2012, Greece, whose bonds were issued under Greek and English rather than New York law, reduced its debt by about €100 billion ($136 billion) in a restructuring.
Holders of about 92 percent of the Argentine bonds accepted restructuring deals in 2005 and 2010 for about 30¢ on the dollar. The Supreme Court’s inaction is a win for investors, led by billionaire Paul Singer, who refused. Federal courts have ruled that Argentina can’t make payments on the restructured bonds unless it pays holdouts in full. A federal district court in Manhattan issued an injunction that could put banks in contempt of court if they pass along Argentina’s payments on the restructured bonds without a deal in place to pay holdouts. Many new bonds avoid the holdout problem by including clauses requiring all investors to accept the same terms.
On June 18, Argentina said officials would travel to New York to negotiate with holdout creditors. The previous day, the government had proposed a way out: Swapping the restructured bonds for new ones governed by Argentine law. Citigroup analysts wrote that the finesse might be “perceived as violating a U.S. Court order.”
Argentina has been able to get along without tapping international bond markets. Other nations might have a harder time. “It’s a really bad precedent for countries like Greece,” says Stratfor’s Hooper. “Sovereigns have to be able to default. They have defaulted continuously since money was invented.”