A US appeals court ordered Argentina on Friday to pay US$1.47 billion to hedge funds holding its defaulted bonds, quashing an appeal by Buenos Aires against the initial judgement last year.
In a case closely watched by financial and debt markets, the court endorsed the original decision that Argentina must compensate two hedge funds 100 percent of the value of defaulted Argentine government bonds they hold, even though the two declined to take part in a restructuring of the debt.
Argentina had not made a convincing case that the court had abused its discretion, the decision said, and had also not proposed a viable alternative way to settle the debts.
In addition, the New York federal court said, Argentina’s lawyer in the case and Argentine officials “have publicly and repeatedly announced their intention to defy any rulings of this court and the district court with which they disagree.”
Given those points, the court said, it affirmed the earlier judgement, which was rooted in the specific contract obligations of the borrower.
However, it added, given that Buenos Aires had requested the US Supreme Court to weigh in on the case, it would hold off on enforcing the decision to force Buenos Aires to repay the debts. The stay on enforcement effectively bought more time for Argentina, which has said that the court decision could force it back into default on all its debt.
The Argentine government has argued that bondholders who took part in the 2005 and 2010 restructuring of nearly US$100 billion of defaulted debt, which forced on them huge writedowns of the face value of the bonds, would now be able to lay claim as well for 100 percent compensation.
That could overwhelm the country’s finances and lead to a fresh default, Argentina has argued.
The case has implications for the massive global market for sovereign debt.
Critics say the New York judgement could set a precedent for all sovereign debt restructurings in which a majority of bondholders, but not all of them, accept a “haircut” or writeoff of the debt’s value to help the borrower restore financial stability and make good on at least a part of the bonds’ worth.
Analysts have pointed to the risks implicit for the massive restructuring of Greece’s debt, a cornerstone of the international bailout by the EU, European Central Bank and the IMF.
However, the court said that its judgement did not open the way for restructured-bondholders to insist on equal payment to those who stayed out of restructurings.
“We believe that it is equitable for one creditor to receive what it bargained for, and is therefore entitled to, even if other creditors, when receiving what they bargained for, do not receive the same thing,” the court said. “The reason is obvious: The first creditor is differently situated from other creditors in terms of what is currently due to it under its contract.”
In that case, the court added, the burden of the payments the case orders would not force the country into default: Argentina has the money to service all its debts under current contracts.
The court also insisted that the Argentine case is “exceptional” and hinged on the country’s “extraordinary behavior.” It had “little apparent bearing on transactions that can be expected in the future.”