The United States Supreme Court issued a ruling on 16 June 2014 declining to hear Argentina's appeal against a lower New York court decision that had ordered it to pay suing hedge funds $1.33 billion, which is principal plus interest for holdout bonds. This was followed shortly by another decision by the Supreme Court to order the relevant financial institutions of the United States of America to turn over information to these hedge funds about assets that Argentina holds worldwide, including accounts held by entities of the Government of Argentina and by individual officials.One of the scariest parts about the genuinely radical decision on behalf of the vulture funds against Argentina is that the judge who handed down the original ruling, Thomas Griesa, was appointed to the federal bench by our old friend Tricky Dicky. Who left office 40 years ago this year. That means in 2049, some appointee of the Cheney Administration could still be around to wreak havoc on the international financial system.
These two rulings targeted at Argentina's 2005 and 2010 debt swaps, in the wake of its catastrophic 2001-2002 default on $100 billion bonds governed by New York law, resonate well beyond the borders of Argentina and the United States. The rulings are a resounding victory for the specific hedge funds that have held out on Argentine debt swaps. They also open the door for other "vulture" funds and holdout investors to come forward to request full payment on Argentine bonds, estimated at around $15 billion. If Argentina pays the holdout bond holders, it must extend full payment to the bond holders that accepted the 2005 or 2010 debt swaps, due to a "Rights upon Future Offers" clause in its law. This would amount to an estimated cost of over US$120 billion2. In fact, the rulings could open floodgates to other similar cases depending on interpretations given by courts under New York law, British law or other laws. Copycats will abound.
But they also set legal precedents which could have profound consequences for the international financial system:
- First, by removing financial incentives for creditors to participate in orderly debt workouts, the rulings will make future debt restructuring even more difficult, in particular for outstanding bonds without a Collective Action Clause, the actual amount of which is unknown but is likely to be large.
- Second, obligating third-party financial institutions to provide information about assets of sovereign borrowers will have a significant impact on the international financial system as it forces financial service institutions to provide confidential information on the sovereign borrower's global financial transactions to facilitate the enforcement of debt contracts for the creditors.
- Third, the ruling will erode sovereign immunity.
UNCTAD describes it as a pretty radical decision:
This was an unheard of interpretation of the clause which shocked even veterans in the debt restructuring world. However, on 18 November 2013, the United States Second Circuit Court of Appeals ruled in favour of NML Capital. Argentina appealed the ruling to the United States Supreme Court. With the Supreme Court leaving the lower court rulings intact, it has created a precedent for awarding holdout creditors and penalizing creditors who participated in a debt restructuring.Even Angela Merkel's Germany opposed Nixon-appointed Judge Griesa's decision. Merkel and her Finance Minister Wolfgang Schäuble know that Greece, Portugal and Spain and maybe other eurozone countries will need further debt restructuring. And this decision considerably complicates that:
Since the Argentine default, there has been a more prevalent introduction of the Collective Action Clause in bond contracts which has the potential of restricting the likelihood of a small number of creditors holding out on debt restructuring. However, it is important to note that existing bonds without Collective Action Clause will take years to expire. This means that, with the Supreme Court rulings, the world has limited tools to initiate debt restructuring for bonds with a pari passu clause and without Collective Action Clause. The Supreme Court ruling has given bond holders a strong weapon to get full payments. As stated in the recently published International Monetary Fund (IMF) paper on debt restructuring, "in essence, the [United States] courts have interpreted a 'boiler plate provision' of these contracts (the pari passu clause) as requiring a sovereign debtor to make full payment on a defaulted claim (in this case, held by the secondary market purchaser) if it makes any payments on the restructured bonds".The decision also affects sovereign immunity:
Given such consequences, the Governments of France and Germany supported Argentina in its legal struggle. Economists such as Joseph Stiglitz and Anne Kruger petitioned against the hedge funds.
The Second Circuit also rules that third parties (banks in this case) who make payments on behalf of the Government of Argentina to bond holders which participated in the two debt swaps will be punished and viewed and treated as being in contempt of law if they continue to make such payments and holdouts are paid in full. On top of this, the second ruling of the Supreme Court confirmed NML Capital's request that banks involved in handling the payment of Argentine bond holders must turn over information to holdout bond holders on assets that Argentina holds worldwide. Obliging financial institutions to provide information about assets of sovereign borrowers' assets worldwide will have significant impact on the international financial system as it forces financial service providers to provide confidential information on the sovereign borrower's global financial transactions to facilitate enforcement of debt contracts on behalf of the creditors. Third parties have been dragged from the wings to centre stage. In addition, it also seems they are obliged to assist holdout bond holders in reclaiming their debt. Once again, exchange holders are punished and holdouts are rewarded.This is another radical acts by the Roberts Court.
Justice Ruth Bader Ginsburg, a member in the Supreme Court's group of justices deciding the case, asked: "By what authorization does a court in the United States become a 'clearinghouse for information' about any and all property held by Argentina abroad?" By setting this legal precedent, it would not be surprising to see changes in the financial market and ways to aid creditors in enforcing contracts and punishing borrowers.
The ruling does not only impact the financial service providers involved, it also severely erodes sovereign immunity and is not in compliance with the United States Foreign Sovereign Immunities Act. The Government of the United States filed a brief in favour of Argentina and stated that a ruling in favour of bond holders would harm international relations and could provoke "reciprocal adverse treatment of the United States in foreign courts". An official representing the Administration cautioned at the Court that "the United States would be gravely concerned about an order of a trial court in a foreign country, entered at the behest of a private person, seeking to establish a clearinghouse in that country of all the United States' assets". However, the Chief Justice of the United States Supreme Court did not seem to feel any apprehension. In response to concern of the Government of the United States on non-compliance with the Immunities Act, the Justice advised the Government to amend the Act.
With the Supreme Court ruling, the likelihood of aggressive holdout investors snatching assets of defaulted sovereigns might increase. In 2012, NML Capital detained an Argentine navy vessel in Ghana as part of its effort to gain repayment on the defaulted securities. [my emphasis]