A years-long court battle in New York could have major implications for the world’s financial system as investors seek to recover unpaid debts from Argentina’s massive 2001 default.
Global finance officials fear a victory by creditors could make it more difficult to put together an international financial rescue package like the one that pulled the Greek economy from the brink of collapse in the past few years. Those concerns have put the US government and the Washington-based IMF in an awkward position. They have both criticized Argentina’s handling of its economy, but they fear a judgement against the Latin American country in the case could set a dangerous precedent.
“It has nothing to do with Argentina,” IMF spokesman William Murray said on Thursday last week. “It has to do with the principles, the policy implications of a particular legal case.”
The concerns arose again last week as the IMF contemplated formally backing Argentina in the court case. After the US opposed that plan, the international lending agency decided against doing so, saying it was wary of taking sides in a US legal dispute. However, the IMF clearly worries that a ruling against Argentina could make it difficult to craft future rescue packages that call for a country’s creditors to accept less than what they are owed.
The US, which has supported Argentina at earlier stages of the case, said on Wednesday last week that it shares the concerns, even though it had opposed IMF involvement in the case. The IMF was considering filing a friend-of-the-court brief in support of Argentina’s petition to the US Supreme Court to overturn a lower court’s ruling against it.
The case stems from Argentina’s financial crisis a dozen years ago, when the government could not pay its debts and Argentine bonds became nearly worthless. As the country tried to get its finances in order, it offered creditors new bonds that initially paid less than US$0.30 for each dollar of bad debt. More than 90 percent of bondholders agreed and some of them have since recovered three-quarters of their pre-default investment, but a small fraction of bondholders, some of whom bought the debt securities at cut-rate prices during the crisis, say Argentina should pay them the face value of the bonds, plus interest. Investment fund NML Capital and 18 other creditors sued and a lower court ordered Argentina to pay US$1.4 billion.
Normally, it would be difficult for plaintiffs to collect on such a ruling. However, the judge granted their request for an unprecedented mechanism to force Argentina to pay: Using the US funds transfer system — it automatically zips trillions of dollars a day around the world — to block the payments Argentina makes to all the other bondholders unless it also pays the plaintiffs.
That worries the US and the IMF. When a country is basically insolvent, the IMF often steps in and helps craft a package that may force the country to overhaul its finances — and also pressure creditors to accept restructured or reduced debt. If the lower-court ruling is upheld on appeals, the IMF says that would make it less likely that the majority of creditors in any future bailout would agree to complex debt restructurings such as the one Greece recently went through. Bondholders would have less incentive to reduce their claims on the country down to levels where payments can be met.