Argentina on Friday lost an appeal of a U.S. court ruling that would force it to pay $1.33-billion (U.S.) to bondholders that rejected debt restructurings after its milestone 2001 default on nearly $100-billion.
The decision represents an important victory for what Argentina disparagingly calls “vulture funds.” It also revives market fears that the South American country could be moving inexorably towards its second default in just over a decade. The dispute also has important implications for future sovereign debt restructurings.
The 2nd U.S. Circuit Court of Appeals in New York said enforcement of the injunctions would be delayed pending resolution of an appeal to the U.S. Supreme Court, which last year ordered Argentina to pay the so-called “holdout” bondholders. Earlier this year, Argentina asked the Supreme Court to review the case as it continues its dispute with the creditors led by Elliott, a U.S. fund, who bought debt cheaply after the 2001 default and have been suing to collect in full.
“This will take time to resolve, and the politics could change before it is. The final chapter of this saga hasn’t been written yet,” said a lawyer with knowledge of the case.
Important midterm legislative elections will be held in Argentina on Oct. 27, after President Cristina Fernández de Kirchner’s party suffered a major defeat in primary elections earlier this month. Ms. Fernandez is now unlikely to secure the two-thirds majority needed to reform the constitution and enable her to stand for re-election when her term expires in 2015.
Observers believe that the Supreme Court is unlikely to look at the case until late September, and since it will have an impact on sovereign relations, it is possible that the court may ask the Solicitor-General for its opinion. The lawyer said that there would be “a ferocious lobbying battle” in Washington over what the Solicitor-General might say.
The price of Argentina’s bond maturing in 2033, which is affected by the ruling, fell from 66.12 cents on the U.S. dollar before the ruling to 62.5 cents by midday in New York. The bond is very illiquid, but this equates to a yield of 14.49 per cent.
“The court did what was politically correct: uphold New York Law by ruling against Argentina but granting a stay that had not been asked pending appeal at the Supreme Court. Thus, whatever impact this may have on the market, it will be on the shoulders of the Supreme Court,” said Marcelo Etchebarne, an Argentine lawyer who has been following the case closely.
The development follows the cancellation last month of plans by the International Monetary Fund to support Argentina’s push for a U.S. Supreme Court review of the case, after the U.S. made clear that it would not support the move.
The IMF’s planned intervention was driven by concerns about the implications for future sovereign restructurings, although some experts argue that Argentina’s case is so unusual that there would be no knock-on effects.
Argentina’s first bond restructuring took place in 2005. In that, and a second debt swap in 2010, Argentina restructured some 93 per cent of its defaulted debt with a steep writedown.