On Wednesday morning, readers of major American newspapers, including the New York Times and Washington Post, were greeted by full-page ads decrying Argentina as “A Model of Unsoundness” and accusing President Cristina Kirchner of “disregard for U.S. courts and Argentina’s refusal to pay its debts.” The ad was sponsored by a group called American Task Force Argentina.
If the broadside was perplexing to some readers, it’s because the referenced dispute relates to a complex legal case in which a group of U.S. hedge funds rejected a plan by which Argentina restructured its debt after its default in 2001, an arrangement that was accepted by 93 percent of Argentina’s creditors but not by the hedge funds that speculate in “distressed debt” and want a bigger payout.
A central figure in the American Task Force Argentina is Elliott Associates LP, which owns NML Capital Ltd., the named plaintiff in the U.S. court case against Argentina, NML Capital Ltd. v. Argentina. Elliott Associates and NML are controlled by Paul Singer, a hedge fund billionaire who specializes in snapping up distressed foreign debt at a discount and then pressuring governments to pay in full.
In other words, the ads were part of a legal/political/PR strategy to extract a better settlement from Argentina for the 7 percent of creditors who are holding out. But the larger implications of this battle relate to the national sovereignty of all debtor nations, the power of U.S. courts to enforce payments of government bonds, and ultimately American hegemony over the global financial system.
The legal fight also may force Argentina back into default because U.S. Appeals Court Judge Thomas Griesa ruled in 2012 that Argentina cannot pay the restructured debt holders without also paying the holdouts who are demanding full payment plus interest. After Argentina’s appeals of Griesa’s ruling failed, the judge forbade banks to transfer interest payments to holders of restructured bonds until the holdouts were paid about $1.5 billion.
When payments were due on July 30 and the banks didn’t transfer the cash that Argentina had deposited as payment, Argentina technically defaulted for a second time in 13 years. The next payment is due on Sept. 30 and prompted more failed appeals of Griesa’s ruling, including one from Citibank, one of the banks holding Argentina’s frozen payments. Citibank fears its affiliates in Argentina could be nationalized as a result.
Argentina has condemned the hedge-fund holdouts as vulture capitalists placing personal greed ahead of the welfare of both the Argentine people and the owners of the restructured debt. But the hedge funds and their allied American Task Force Argentina insist they are simply demanding responsible governance from President Kirchner and her administration.
Whatever the merits of the arguments, Argentina’s fight with the U.S. hedge funds has now entered novel legal terrain. The story began when Argentina went bankrupt in 2001 and couldn’t honor payments for about $100 billion in long-term sovereign debt. Then, over the next decade, the country restructured its debt much like any bankrupted individual or business would, working out partial payment terms with creditors.
Most creditors accepted Argentina’s offer to honor only about a third of the original loaned amount on the promise that the traded value of replacement bonds would increase once the country overcame its financial slump. And they did.
But the hedge funds representing less than 7 percent of the original debt balked at the terms offered by Argentina and after years of litigation in U.S. courts, the hedge funds won an unprecedented court ruling from Judge Griesa compelling Argentina to pay all creditors or none at all.
Initially, Argentina appealed the ruling but was rebuffed at every level of the U.S. courts, leaving it little alternative but to move into outright defiance with clever but untested financial mechanisms to sidestep the judicial power of the U.S. government.
It would be the equivalent of a homeowner fighting a big bank over unjust mortgage terms and then rejecting the authority of courts and deciding to pay under different terms. For a citizen impossible, and for a country unprecedented, but Argentina decided that the U.S. system is unjust and that Argentina would lead the way in rewriting the rules.
Buenos Aires launched a full-blown assault on the U.S.-dominated financial system, successfully dragging in the United Nations with the vital support of the world’s most powerful developing countries. At stake is not simply Argentina’s solvency, but sovereign-issued debt globally, past and future. How Argentina’s drama is resolved will redefine the workings of the global financial system.
We are talking about trillions of dollars in emerging country debt that will be affected—and the U.S. possibly losing one of its critical advantages over the last century: being the clearinghouse of the global financial system with the U.S. dollar as the undisputable currency.
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Did Argentina Default?