MercoPress. South Atlantic News Agency

Breathing space for Argentina’s bonds case: litigation continues at US appeals court level

US Supreme Court non-action decision means it will not at this time review the October 2012 ruling

The U.S. Supreme Court left intact a ruling that may force Argentina to make payments on defaulted government bonds, rejecting that country’s appeal in a clash that has roiled its financial markets. The justices, without comment, on Monday let stand a 2012 U.S. appeals court decision that bars Argentina from making payments on 24 billion in restructured debt unless it also pays owners of the earlier repudiated bonds.

The bondholders include a fund controlled by billionaire Paul Singer. The Supreme Court still could get involved at a later stage.

The legal fight, which puts U.S. courts in the unusual position of shaping a foreign country’s finances, has raised the possibility of a new Argentine default and prompted Standard & Poor’s, Fitch and Moody’s to lower the country’s bond ratings.

Argentina says it faces the prospect of having to pay more than 15 billion dollars to cover defaulted debt and penalties.

The lower court ruling “represents an unprecedented intrusion into the activities of a foreign state within its own territory,” Argentina argued in its appeal.

The court's decision means it will not at this time review an October 2012 ruling by the 2nd U.S. Circuit Court of Appeals in New York in which the court said the Argentine government had broken a contractual obligation to treat bondholders equally.

The Supreme Court's refusal to get involved means litigation in lower courts continues, with Argentina able to seek high court review again at a later date when there is a final ruling in the appeals court.

Justice Sonia Sotomayor didn’t take part in Monday’s high court action, giving no reason. She took part in Argentina debt litigation when she was an appeals court judge.

Singer’s NML Capital Ltd., a unit of Elliott Management Corp., says Argentina is exaggerating the impact of the appeals court ruling, which directly affects claims for 1.5 billion dollars. The fund says Argentina can afford to pay both sets of bondholders.

The dispute stems from Argentina’s 2001 default on a record 95 billion dollars in sovereign debt. The country offered to substitute bonds worth 25 to 29 cents on the dollar in 2005 and made a similar proposal in 2010. Owners tendered about 93% of the outstanding debt.

NML bought some of the defaulted bonds from the holdouts and sued to collect the full amount. NML said a clause in the bond agreement bars Argentina from treating the restructured securities more favourably than the defaulted bonds.

A federal trial judge agreed with that argument, as did the New York-based 2nd U.S. Circuit Court of Appeals.

In its Supreme Court appeal, Argentina contended that the lower courts violated foreign sovereign immunity by dictating what the country can do with property located outside the U.S.
NML and a second group of investors led by Aurelius Capital Master Ltd. urged the high court to reject the appeal.

The 2nd Circuit issued a second ruling in August, saying Argentina must pay the holdout creditors in full if it makes any payments on its restructured debt. Argentina is seeking a new hearing before a larger panel of judges and, should that bid fail, could file a new Supreme Court appeal.

In the August opinion, the appeals court said Argentina’s predictions of a financial cataclysm were “speculative, hyperbolic and almost entirely of the republic’s own making.”

Argentina is exploring options for trying to sidestep the appeals court ruling. Argentine President Cristina Fernandez said in August that the country will offer a new restructuring to defaulted bondholders and let investors who own the restructured notes swap them into debt subject to local law.

US federal judge Thomas Griesa on October 4 barred the country from going forward with that plan, calling it “an apparent attempt to evade” his previous orders.

Argentina previously said it never would pay the funds, which the country’s leaders have called “vultures.” Its legislature passed a law in 2005 barring payment on the defaulted bonds.

However the Argentine congress recently passed a bill again opening the possibility of a debt restructuring process to outstanding bond holders on similar conditions at the 93%. Argentina also claims that if forced to pay the holdouts it will be dishonouring the remaining 93% and could face another default situation plus the fact that sovereign debt restructuring worldwide will be imperilled.