US courts strangle Argentina

Submitted by Matthew on 4 July, 2014 - 3:43

On 29 June, Argentina went into technical default on its foreign debt. 30 days “grace” expires on 29 July. Either the Argentine government fixes a deal before then, or the default goes into full force.

This drama is the outcome of 13 years’ legal wranglings since Argentina defaulted on its debt in 2001. Then, as usually happens in such cases, the Argentine government negotiated a deal with the bondholders to pay them off at a reduced rate.

In the Argentine case, though, some “vulture funds” which had bought Argentine bonds cheap in the run-up to the deal refused to play. They went to court to demand 100% payment on their bonds.

Argentina, like many other countries, had issued its bonds not under Argentine law, but under US law, so as to increase bond-buyers’ confidence and willingness to buy. Thus the case went to the US courts, which have finally and definitively decided in favour of the “vulture funds”.

To complicate things, it is now illegal for Argentina to continue paying the old bondholders according to the 2001 deal.

Either the Argentine government will strike a compromise with the “vulture funds” — one which will surely mean severe cuts in Argentina in order to swell the already-bursting wallets of New York financiers — or it will comprehensively default, and this time without any early prospect of a deal like 2001’s.

An economic crisis in Argentina of some scale or another seems almost inevitable, and may spread.

The orthodox financial journalist Felix Salmon comments that “the ruling will make it more difficult for countries to free themselves from the burden of over-indebtedness. It will be very bad for international capital markets”.

The crisis could lead to pressure for hard-pressed governments to have legal rights to the same access to “easy” default as individuals and corporations, and that would be a good move.