In a move that could have major repercussions for eurozone economies, a US appeals court dealt Argentina a blow on August 23 in the legal battle over the country's massive 2001 default by upholding a ruling ordering Buenos Aires to pay over €1bn to bondholders.
The decision by the 2nd US Circuit Court of Appeals in Manhattan stayed the order to pay so that Argentina could file an expected appeal to the US Supreme Court.
The decision "affirms a proposition essential to the integrity of the capital markets: borrowers and lenders may, under New York law, negotiate mutually agreeable terms for their transactions, but they will be held to those terms," the appeals court wrote.
The case stems from Argentina's financial crisis a dozen years ago, when the government could not pay its debts and Argentine bonds became nearly worthless. As the country tried to get its finances in order, it offered creditors new bonds that initially paid less than 30 cents for each dollar of bad debt. More than 90 percent of bondholders agreed and some of them have since recovered three-quarters of their pre-default investment.
But a small fraction of bondholders, some of whom bought the debt securities at cut-rate prices during the crisis, say Argentina should pay them the face value of the bonds, plus interest. Investment fund NML Capital and 18 other creditors sued and a lower court ordered Argentina to pay $1.4 billion.
When Argentina issued the bonds in 1994, it promised to treat them "at least equally with its other external indebtedness," the appeals court wrote. "As we have held, by defaulting on the bonds, enacting legislation specifically forbidding future payment on them, and continuing to pay interest on subsequently issued debt, Argentina breached its promise of equal treatment."
The impact of the ruling on Argentina's economy could be severe, since a novel payment formula already generally upheld by the appellate court last year could prompt the South American government to default again.
The case draws interesting parallels with recent moves, reported in the Financial Times, by thousands of Greek bondholders seeking compensation for having to accept a 75 per cent “haircut” on the value of their investments in last year’s partial default agreed with the EU and International Monetary Fund. Greece's creditors want to see their case examined by US courts.
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