US court verdict on Argentine debt could cause chaos

A US court ruling in favour of vulture funds may force Argentina to either pay-up on unjust debt, or default on its loans to all creditors.

In 2001 Argentina defaulted on unaffordable debt payments. At the time the Argentinian people had experienced three years of recession and over half the population, 20 million people, were living below the poverty line. Much of the debt from this time was regarded as illegitimate by Argentina’s people, originating in the brutal dictatorship of the late 1970s and early 1980s, a period known as the ‘dirty war’ when 30,000 people were ‘disappeared’.

Protest outside Presidential offices in Buenos Aires in May 2010, ‘No payment of the external debt’ / Xomiele, Flickr

The Argentine government subsequently reached a deal with most creditors to pay the equivalent of 25-35 cents on every dollar owed, over several years. However some creditors refused to accept this deal, known as ‘holdouts’. These holdouts include vulture funds such as Elliot Associates, which are thought to have bought Argentinian debt at knock-down prices during the early 2000s debt crisis, and are now suing for exorbitant profits. Argentina is making debt payments to the creditors which accepted the deal, but not the holdouts.

On Friday, a New York appeal court ruled that every time the Argentinian government makes debt payments to any creditor, it must also make payments to the holdouts. For example, if and when Argentina pays off the full debt to the creditors which accepted the restructuring (25-35 per cent of an original loan) it must also pay off the full debt to creditors (100 per cent of an original loan).

The ruling might be enforced because Argentina makes debt payments to the creditors which accepted the restructuring via banks in New York. It potentially means such banks could only process the payments if Argentina were also paying the vulture funds, something President Christina Kirchner has vowed not to do.

The Argentinian government could be faced with a choice of making unjust debt payments to vulture funds, or being forced to default on its payments to all creditors.

Tim Jones, policy officer at Jubilee Debt Campaign said:
“Argentina is only able to make payments because of the cancellation of some debt following the 2001 default. The vulture funds gambled and lost, they should not receive a penny in unjust debt payments.

“This court decision could cause chaos by forcing Argentina to unwillingly default. The ruling needs to be quickly overturned. New rules are needed to ensure all creditors comply with write-downs of government debt.”

Prices in financial markets indicate that traders regard the ruling as increasing the chance of Argentina defaulting on its debt payments, with the price of Credit Default Swaps increasing by 20 per cent.

It is thought that Argentina will appeal the ruling, with the case potentially ending up in front of the US Supreme Court.

In a separate legal case, NML Capital, a subsidiary of Elliot Associates, has got a Ghanaian court to seize Argentine Navy training ship ARA Libertad in Tema Port, Ghana, in an attempt to make Argentina pay the unjust debt.

Further reading

Jubilee Debt Campaign’s Nick Dearden on Argentina 

Wall Street Journal article

Felix Salmon blog

Blog on why credit default swaps would not have helped


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