The U.S. Supreme Court has handed a small group of sophisticated creditors an important victory in their long-running legal tussle with Argentina, stemming from that country's bond default during a severe recession in 2002.
Faced with paying about $1.5-billion (U.S.) as a result of an earlier lower-court judgment that the high court refused to review – and billions more that could be demanded by other investors who weren't part of the case – Argentina may be forced into yet another default. Its credit rating was cut almost immediately.
President Cristina Fernandez is reluctant to accept it – she calls the creditors' demands "extortion" and the court ruling "absurd" – but the courts reached the right decision.
After the government defaulted on nearly $100-billion worth of bonds, it offered an exchange of new debt as part of a restructuring in 2005, which lopped about 70 per cent off the value of the old bonds. That was followed by a similarly hard-nosed proposal five years later. Bondholders who own about 92 per cent of the debt outstanding accepted the deal, because it was better than nothing.
The remaining bonds are in the hands of holdouts – largely hedge funds and other opportunistic investors who acquired the defaulted debt for a fraction of its face value and are demanding repayment of the entire amount. They are entitled to do so under the conditions of the original bond issue.
Argentina insists it cannot pay what the holdouts are owed and still meet interest payments due on the restructured bonds.
The government could have avoided this setback through negotiations, which may yet occur. It also could have attached a collective action clause to the original bond issue. That would have forced everyone to accept the terms of a restructuring if an overwhelming majority of bondholders agreed. Greece applied such a clause retroactively to force bank creditors to take a big haircut during its financial crisis.
Critics warn that the U.S. ruling could make it tougher for other embattled governments to restructure debts in future, because there would be less incentive for creditors to accept unfavourable terms. But on the flip side, it ought to persuade policy-makers to exercise greater discipline in managing their economic and fiscal affairs.