A U.S. appeals court said Argentina improperly discriminated against bondholders who refused to take part in two massive debt restructurings, setting back the country’s efforts to recover from a roughly $100-billion (U.S.) default a decade ago.
The 2nd U.S. Circuit Court of Appeals in New York said on Friday that Argentina’s decision – to pay holdout bondholders later than bondholders who agreed to participate in the 2005 and 2010 debt swaps – violated provisions that required the country to treat bondholders equally.
Argentina vowed to fight the decision. Finance Secretary Adrian Cosentino was quoted by state news agency Telam as saying “today’s ruling is not in any way the end of litigation” on the relative treatment of bondholders, and that it had no immediate impact on debt payments.
Prices of Argentine government debt nevertheless fell, and the cost of protecting the debt against default surged higher.
“It complicates debt restructurings generally and could impede them outright because no restructuring gets 100-per-cent acceptance,” former Argentine Finance Secretary Guillermo Nielsen, who helped oversee the 2005 swap, told Reuters in an interview. “It appears to be cornering Argentina into a new default,” potentially forcing it to pay holdouts while it services restructured debt.
Friday’s decision largely upheld injunctions issued in February by U.S. District Judge Thomas Griesa in Manhattan in favour of holdout bondholders, including Elliott Management Corp. affiliate NML Capital Ltd. and the Aurelius Capital Management funds, which owned $1.4-billion of defaulted debt.
NML has been particularly aggressive, having this month won a court order to detain the Argentine naval ship ARA Libertad in a Ghana port, demanding that it be paid some of what it is owed.
Writing for a unanimous three-judge panel of the 2nd Circuit, Judge Barrington Parker said he had “little difficulty” in finding that Argentina breached its bond obligations, citing efforts by the country’s officials and legislators to ensure that holders of restructured debt had priority.
Judge Parker also rejected the contention that an adverse decision would wreak havoc.
“Nothing in the record supports Argentina’s blanket assertion that the injunctions will plunge the republic into a new financial and economic crisis,” he said. “Argentina makes no real argument that, to avoid defaulting on its other debt, it cannot afford to service the defaulted debt.”
Judge Griesa was asked to clarify how the injunctions’ payment formula is intended to work, and how the injunctions apply to third parties such as intermediary banks. The 2nd Circuit returned the case to his court to address those issues.
Friday’s decision could make it harder for other countries to extricate themselves from sovereign debt crises and fend off angry creditors that may sue in U.S. courts.
In oral arguments in July, Argentina said such a decision could threaten the ability of countries such as Greece, Ireland, Italy and Spain to undergo debt restructurings.
The U.S. government, moreover, had warned that Judge Griesa’s ruling could undermine federal efforts to encourage consensual, global efforts to address sovereign debt crises.
“There is no way a government can restructure its debt and be shielded from litigation, apart from exercising sovereign immunity,” said Anna Gelpern, a law professor at American University in Washington, D.C. “Argentina’s shield now seems to have a hole in it, and this ruling signals that every sovereign’s shield could now have a hole in it.”
Aurelius, Elliott, their lawyers and the U.S. Department of Justice either declined to comment on the ruling or were not immediately available for comment.
Argentine bond prices on average fell more than 5 per cent in local over-the-counter trading, while dollar-linked discount bonds issued during the debt swaps fell 12.5 per cent.
The cost of protecting Argentine government debt against default rose by more than 350 basis points to 1,325 basis points, according to Markit. This means it costs $1.33-million annually to protect $10-million of debt against default for five years.
“Any possibility that Argentina will have to make extra payments in dollars will hurt its finances at a time when the economy is decelerating and (the government) can’t put the brakes on capital flight,” said Marcelo Paccione, an analyst at ConsultCapital.
Judge Griesa has awarded several billion dollars to holdout creditors, but they have been largely unable to collect because of U.S. sovereign immunity laws.