For more than 12 years the Republic of Argentina has battled so-called vulture funds in US federal courts. This litigation grew out of the country’s massive sovereign debt default in 2001. At that time most investors did everything possible to unload their portfolios of the country’s debt. Yet, there were courageous investors who were willing to speculate on the country’s debt rising up from the financial abyss. A few funds invested billions into purchasing Argentina’s junk bonds. Though Argentina has renegotiated much of its 2001 debt with bondholders and has paid these “exchange bondholders” pennies on their original debt, the funds who took the risk of investing in the junk bonds have refused to renegotiate the contractual terms of their bonds. These funds want to be paid what they were promised and not a penny less. Who can blame them for demanding full payment.
Most legal experts and financial advisers close to the litigation have little sympathy for the former South American economic powerhouse. Don’t Cry for Me Argentina is their response when Argentina demands justice that it does not deserve. On October 26, 2012 the United States Court of Appeals for the
Second Circuit decided the case of NML Capital v. the Republic of Argentina. The Court affirmed in part and remanded in part the lower court’s decision of Federal Judge Griesa of the Southern District. In the case Judge Griesa ruled against Argentina in granting the applications of the Plaintiffs. Much to the chagrin of Argentina; its fiery pronunciations of sovereign integrity and legal (quasi political) arguments that it had a sovereign right to force restructuring upon debt holders were judicially debunked by the District Court.
It did not surprise anyone that Argentina appealed the court’s decision to the Supreme Court. While Argentina was litigating its case before the Supreme Court Argentinians in high office were waging a battle to wind public opinion. Clearly Argentina was (is) looking to negotiate a settlement with the non-exchange bondholders. Yet the country’s last formal offer of settlement was rejected on or about March 27, 2013 by the U.S. Court of Appeals for the 2nd Circuit as being inadequate. I wrote at that time that Argentina was heading for another debt default. The U.S. courts are not going to let politics trump the law or their decisions. Argentina’s total disregard for the judicial decisions and judgments makes a mockery of America’s judicially system and the sanctity of the law.
The high court next considered and disposed of Argentina’s (its banks’ claim) that its foreign assets were not subject to discovery by the non-exchange bondholders. The Justice’s were almost unanimous in deciding against the Latin America country. Justice Anthony Scalia writing for the court held that the Foreign Sovereign Immunities Act did not limit the scope of discovery available to a judgment creditor in a federal post-judgment execution proceeding against a foreign sovereign. In the well written decision Justice Scalia specifically alluded to the fact that Argentina had waived part of its immunity by choosing to litigate in the U.S. courts. The Republic of Argentina stands properly before the court like any other person. Argentina’s dreaded “vulture funds” are now positioned to discovery the Republic’s assets worldwide. What follows next is rather obvious; the non-exchange bondholders will seek to attach the discovered assets in hopes of satisfying their judgments.
In December 2001 the world saw Argentina voluntarily walk away from its debt obligations. In a storm of nationalistic rhetoric the country defaulted on billions of dollars of sovereign debt. The massive default caused the Argentine economy to collapse. The difficult economic times drove more than half of the country’s population below the poverty line. Not surprisingly; international lenders and institutions have been reluctant to again lend money to the country. It must be stated that since the default Argentina has reached agreements with about 90% of the bondholders. The investors have been offered a small percentage of their original investment and had their defaulted bond exchanged for new ones. The country has twice restructured the new debt. Some of these exchange bondholders had to believe that receiving something for their investment was better than receiving nothing. They might be right, but only to a limited extent.
It did not come as a surprise to the commentators and experts that investors would eventually grow weary and suspicious of Argentina’s constantly restructuring its debt. These restructurings were basically forced upon the exchange bondholders. The restructure terms clearly favored Argentina. In October 2009 Japan’s finance minister criticizedthe South American country over its debt restructuring scheme(s). He accused Argentina of not negotiating in good faith with it creditors. Has Argentina ever respected the interests of its bondholders?
Photo Eduardo Di Baia, AP
About 10% of the original bondholders decided to sue to recover their complete investment(s). In a earlier post I discussed the torturous and never-ending path of the litigation. I also considered the significance of Argentina’s latest appeal in the 10 year legal battle with the 2001 bondholders. I believe that the courts have finally reached their limits with Argentina’s refusal to pay on money judgments while continuing to litigate the same legal arguments over and over. The courts are aware of President Fernandez’ public declarations that Argentina will never pay “vulture funds.”
On February 27, 2013 the U.S. Court of Appeals for the 2nd Circuit (Court) heard oral arguments on Argentina’s latest appeal. The presiding judges made it clear that they were not there to interpret the terms of the bond contracts but to enforce them. The Court dispensed with any notion that Argentina might have had about litigating de novo the underlying case. The issue before the court centered on the federal court’s imposed repayment scheme. The attorney for the Argentine Republic intimated that his client would be amenable to payment but under a different scheme. This limited and qualified suggestion of a possible settlement of the payment issue intrigued the Court. The judges directed appellant (Argentina) to file its plan for the cancellation of the plaintiffs’ judgments. The order was as follows:
At oral argument on Wednesday, February 27, 2013, counsel for the Republic of Argentina appeared to propose that, in lieu of the ratable payment formula ordered by the district court in its injunction and accompanying opinion of November 21, 2012, Argentina was prepared to abide by a different formula for repaying debt owed on both the original and exchange bonds at issue in this litigation. Because neither the parameters of Argentina’s proposal nor its commitment to abide by it is clear from the record, it is hereby ordered that, on or before March 29, 2013, Argentina submit in writing to the court the precise terms of any alternative payment formula and schedule to which it is prepared to commit.