Sovereign Debt

Argentina Goes to Court (Again)

Things aren't looking good for Argentina--or its current bondholders

Ten years after they defaulted on their bonds, Argentina is still wrangling in the New York courts over who will get paid, and how. It looks like the courts are getting ready to affirm a controversial ruling that could cause Argentina to default once again.

Here's the back story: when Argentina defaulted, they came to an agreement with most of their bondholders in which they exchanged the old, defaulted bonds for newer ones that were worth less. (This is commonly how sovereign defaults work). However, there were some holdouts. (There always are). The holdouts had some grounds for complaint, in that Argentina was dictating deeper haircuts than is common. But Argentina's response was, more or less, "So sue us. We're a sovereign nation."

The holdouts did just that, in US courts. Last year, District Court Judge Thomas Griesa ruled that the holdouts had to get paid--or at least, that Argentina couldn't pay anyone else (i.e., the bondholders who had taken the exchange deal) without also cutting a check to the holdouts. Since both old and new bonds were issued under US law, the payments on the new bonds run through the New York banking system. Griesa said that those bankers had to divide the money equally among all bondholders--holdout and not--if it paid anyone.

The case is now up in the appellate court, where things are not looking good for Argentina. Felix Salmon was in the courtroom:

The questioning was led, aggressively, by Judge Reena Raggi, who barely let a sentence get finished and who made it clear from the very beginning that she is if anything even more fed up with Argentina’s antics than the district court judge, Thomas Griesa, whose verdict was being appealed. The fact that Argentina’s vice president and economy minister were sitting right in front of her didn’t faze her for one second: this was her courtroom, she was in charge, and it took her no time at all to accuse Argentina of being “contumacious”. (Which is fair enough, even Argentina’s counsel didn’t really disagree on that front.) In Raggi’s eyes, clearly, there’s nothing worse than a contumacious defendant: it doesn’t matter how many footnotes you have or how much precedent you cite, if you’re thumbing your nose at her she’ll find against you.

What’s more, Raggi really doesn’t like being blackmailed. Both Argentina and David Boies, acting on behalf of the bondholders who are currently being paid by Argentina, made the point multiple times that if Griesa’s order was upheld, the certain result would be another Argentine default, a whole new set of cases on Griesa’s docket, and, essentially, a loss for everybody, including Elliott Associates, which still wouldn’t actually get paid. Raggi was unimpressed: “Is that really this court’s concern?” she asked Boies, saying that it was not her job to wonder about “whatever the market might do” as a result of her ruling.

Boies, in truth, was unimpressive: he never seemed entirely on top of his brief, and there was one excruciating episode where he had to go scurrying off to ask Bank of New York’s lawyer to find out the answer to a question which everybody else in the courtroom knew the answer to. Argentina’s tactic today was to spend less time arguing its own case, and to outsource the job of fighting Elliott to Bank of New York and to David Boies, in the hope that they would be more sympathetic and less contumacious. But Raggi made mincemeat both of BoNY’s lawyer — telling him in as many words at one point that he was giving very bad advice to his client — and of Boies, who was clearly out of his depth. Remarked one lawyer, observing the proceedings: “If you’re going to bring in a hired gun, at least make sure it’s fully loaded.”

Argentina’s own lawyer, Jonathan Blackman, started off rockily yet actually finished quite strongly, warning of the practical consequences of what everybody in the courtroom could quite clearly see coming at that point. “You’re making it worse!” he said. “Do no harm!” It was an argument with no legal weight, and it won’t change the final result. But he did give Argentina the use of a “don’t say we didn’t warn you” card at any time the US or anybody else criticizes it for defaulting yet again.

Felix's sympathy is pretty clearly on the side of the Argentinians. The holdouts are lead by a vulture fund named NML Capital that bought Argentina's debt at a discount after its financial troubles went nuclear, hardly the most sympathetic plaintiff. A ruling in their favor may make it harder for other distressed nations to negotiate debt relief in the future. And it also threatens the bondholders who agreed to the exchange; since Argentina is adamant about not paying the holdouts, this probably means a second default.

But why should the court consider that last? Giving in because Argentina threatens to default on its current bonds would be rather like allowing a wife beater to walk on the domestic violence charges because he's threatened to beat up his girlfriend, too, unless he gets a not guilty verdict. It gives the best outcomes to the most inveterate bad actors.

In Felix's telling, that seems to be why the judges are taking a hard line here; they think Argentina is completely intransigent, and they are tired of taking all this guff, even from a sovereign nation.

Of course, while the courts shouldn't reward Argentina for, as Felix puts it, " "", there are public policy considerations: we have an interest in making sovereign debt restructurings go smoothly. No, that doesn't mean that we should be eager for countries to default on their debt. But sometimes, countries simply don't have the money, and when that happens, it's in everyone's best interest to renegotiate as quickly as possible and move on. I mean, everyone except vulture funds who can buy the debt for pennies on the dollar and bet on a big payout sometime in the distant future.

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Anyhoo, the point is that we shouldn't make it too attractive for holdouts to stick to their guns. We don't want to keep countries in a years-long crisis while they frantically try to renegotiate their debt in the face of intransigent holdouts. When holdouts cause problems in the private sector, bankruptcy judges can cut them off. But in the sovereign debt world, there's no such relief.

The good news is that Felix argues that the Argentina cases won't have much relevance for other holdouts. Judges in future cases will still have broad discretion about when to step in, and more reasonable countries can expect less stringent sanctions. So it seems to me that the courts are getting this one just about right: disciplining Argentina for its intransigence, while still leaving the option of relief open for future needy sovereigns. Thoguh it's unfortunate that the people who took the initial deal also get whacked in the process.