Argentina is running out of wiggle room in a billion-dollar showdown over foreign debts left unpaid since the country’s world-record default a decade ago, and the stakes could not be higher for Argentine President Cristina Fernandez. She risks triggering another historic debt default if she does not agree to pay the so-called “vulture funds” she blames for much of Argentina’s troubles.
Fed up with Argentina’s refusal to honor its debts despite losing in appellate court, US District Judge Thomas Griesa said he was determined to make Argentina pay at least something to the plaintiffs.
His idea is to tap into the money Argentina already pays to other bondholders, by making banks that process the payments divert some of the money to the plaintiffs. US financial institutions would become his enforcers, either helping to satisfy the judgement or “aiding and abetting” a crime.
The unprecedented idea was broadly upheld on appeal last month and Griesa tried to push the case closer to resolution late on Wednesday by lifting a legal stay, and issuing an order directing Argentina to make a first round of payments into an escrow account on Dec. 15, when the country is scheduled to make payments to the other bondholders.
The idea has sent jitters through the legal departments of the most powerful financial institutions in the US. The US Federal Reserve and the Clearing House, a trade group representing the world’s largest commercial banks, warned that Griesa’s remedy could have severe consequences for the US financial system, which automatically moves an average of US$2.6 trillion a day in half a million transfers between more than 7,000 banks.
The US Federal Reserve’s legal brief, filed on Sunday, said the entire system depends on transfers being “immediate, final and irrevocable” when processed, and that requiring intermediaries to identify, stop and divert payments according to court orders “would impede the use of rapid electronic funds transfers in commerce by causing delays and driving up costs.”
The plaintiffs dismissed the concerns, saying that the only bank at risk would be Argentina’s “paying agent,” the Bank of New York Mellon, which should be held responsible by the court if it does not guarantee compliance.
Still, the Federal Reserve’s filing pleased Fernandez so much that she cited it in a speech on Monday night.
“When an Argentine says something, the President of the Argentines or the economy minister, well, everyone comes out to criticize them, but now it’s [US Federal Reserve Chairman Ben] Bernanke talking, honey, and everyone shuts their little mouth,” she said.
The debts date back to the bloody dictatorship that ruled from 1976 to 1983. The military junta tripled the country’s foreign debts. By 2001, the burden had become unsustainable and the economy collapsed.
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