In a worst case scenario for Argentina, the U.S. Supreme Court refused to hear the country’s appeal on Monday, upholding decisions from lower courts that would force the country to pay billions of dollars to “hold out creditors” who refused to participate in debt restructurings following the country’s 2001 default. While Argentina may request a “rehearing,” such requests are often denied.
The Supreme Court’s decision means that earlier rulings from the Second Circuit Court of Appeals for New York should be upheld, and force the country to pay $1.3 billion to hedge funds – what the Argentine government has dubbed “vulture funds” - holding Argentine debt. That case, brought by Elliott Management representing 19 plaintiffs, argued that Argentina violated paripassu (equal footing) clauses in its debt agreements by distributing payments to creditors that agreed to earlier “haircuts,” and not to the holdouts. Argentina argued lower courts had misread these agreements, and that such rulings violated their sovereign immunity.
If similar cases are brought by other holdout credits, Argentina could be on the line for as much as $15 billion. The lower court order prohibits Argentina from making payments to the 93 percent of bondholders who agreed to restructuring until it pays the holdouts in full. Argentina has claimed being forced to pay this much would push the country into technical default.
The question, then, is what does the country do from here? Will it refuse to cooperate with the Second Circuit Court’s ruling, as it has stated in the past? Or will it seek to negotiate with the “vultures”?
Despite strong past rhetoric from the government, most analysts believe Argentina will seek to negotiate with the holdout creditors. Facing an extremely more challenging domestic economic situation, the government has this year made some more pragmatic macroeconomic decisions, and conciliatory gestures towards the international financial community. These have included a 20 percent devaluation of the peso in January; an easing of currency controls; compensating Spain’s Repsol for $5 billion after expropriating a majority share of its hold in YPF in 2012; settling various disputes with ICSID, the World Bank’s arbitration unit; and introducing better statistics at the demand of the IMF.At the end of May, the government agreed to repay $9.7 billion to the Paris Club over the next five years, giving Argentina access to financing export credit agencies of member countries, and settling one of the longstanding barriers to the country being able to re-access international capital markets.
This case and its possible repercussions remain the final barrier for the administration to reenter capital markets. Given that President Cristina Fernández de Kirchner would like to reach the end of her term in late 2015 without facing another economic catastrophe, it is likely she will negotiate. As it is also in the funds’ best interest to negotiate rather than see the country default, this is the most likely option. Debt could be paid in new bonds rather than in cash, as Argentina negotiated with Repsol. However, local law forbids the government from negotiating with holdouts until the end of the year.
But if the country does default, as Fernández de Kirchner has threatened in the past, the effects will be wide-ranging. It will limit Argentina’s ability to issue debt internationally, force them to enter new negotiations with creditors, and have serious implications for the Argentine economy – already struggling amid low growth and high inflation.
President Fernández de Kirchner was scheduled to address the nation Monday night at 9pm to discuss how the government would proceed.
Whatever the solution for Argentina, the world will be watching given the wider implications for the case. If the holdouts are able to receive a better settlement, it will put future “haircuts” offered to bondholders into question if creditors believe they can eventually receive face value by refusing to negotiate – a situation which could have serious reverberations for sovereign debt.