While you were wondering what a Greek sovereign default might look like, an Argentinian one has been brewing in a New York court room. A U.S. District Court judge yesterday ordered that Argentina fully repay $1.3-billion to a group of hedge fund creditors which refused to accept debt restructurings that included savage haircuts. In so doing, the judge tossed a judicial grenade into the precarious matchstick palace that is Argentina's public finances and sent the country's bond yields soaring even above the level of Greece.
The ruling doesn't seem to make practical sense. Without going into legal niceties, it appears to stem from the court's loss of patience with Argentina, which is refusing to even consider the claims of the "hold-out bond investors," whom President Cristina Fernandez de Kirchner has denounced as "vultures." The court has ordered that Argentina must pay $1.3-billion, representing the capital and interest owed. The hedge fund creditors include NML, a fund run by Elliott Associates, a management company that specialises in distressed sovereign debt.
The judge's mood can be read from the belt-and-braces ruling, which prevents the agent bank from making a payment of $3.4-billion due to restructured bond holders, unless Argentina at the same time fully satisfies the hold-out hedgies. If the paying agent allows Argentina to ignore the bird of prey in preference to rewarding the gentle doves, the bank will find itself in contempt of court. The only alternative seems to be Argentinian default, asset seizures and another downward spiral towards financial chaos. The Libertad, an Argentinian tall sailing ship which is used to train navy cadets, is already under arrest in Ghana, in pursuit of the NML claim.
All of which begs the question why the court is siding with the refusenik hedgies. In his ruling on Wednesday, Judge Thomas Griesa said: "It is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes ...After 10 years of litigation, this is a just result." President Fernandez has been vocal in her refusal to heed the U.S. court's demands, threatening to appeal every decision to the Supreme Court. Some investors wonder whether this sudden insistence on the sanctity of contract is a welcome redressing of the balance in favour of sovereign creditors, and against irresponsible government.
In this argument, you can find political echoes with the debate over the bailout of Greece. The key question is whether a country should repay the debts accumulated by its discredited and corrupt former governments. The Argentinian bonds in dispute stem from debts accumulated during the 1990s, the bad old days of inflation, corruption and ballooning foreign borrowing. Argentina eventually defaulted in 2001 when the IMF refused to provide new funding and devalued the peso, leading to bank runs, riots and attacks on foreign institutions. Interest on the outstanding bonds was never paid, as the new government of Nestor Kirchner and his wife, the current president, refused to acknowledge the debts. In a bid to regain access to capital markets, Argentina offered an exchange in which creditors were paid only 30 cents for every dollar owed. Over 90 per cent of the creditors accepted the deal, preferring money up front to the risk and expense of years of litigation.
Should a country be allowed to forget its past mistakes, wipe the slate clean and start again – and, maybe, again after that? The New York judge seems to want to draw a line in the sand and insist that nations cannot slough off the old debt and regain trust by issuing new pieces of paper. If his judgment stands, it could be bad news for other sovereign creditors. It will certainly stiffen the resolve of those who want more from Greece.
Carl Mortished