The U.S. Supreme Court rejected a petition on June 16th by Argentina to stop a group of its sovereign bondholders from foreclosing on Argentine assets in the U.S. The decision effectively ends five years of legal battles in U.S. courts.
The socialist Argentine government will now be subject to a 2012 ruling by lower courts that requires the country to pay its bondholders in full. The decision, for the first time, will force socialist nations that default to be subject to U.S. courts foreclosing on their assets.
New York District Judge Thomas Griesa ruled in 2012 that Argentina would not be able administratively discount through what is called a “haircut,” $15 billion in interest and principal owed to a group led by U.S. hedge fund Elliot Associates. The investors bought $1.3 billion of Argentine bonds at a big discount after the country defaulted on its sovereign debt during the country’s 2001-2002 economic crisis.
The Argentine peso currency lost 20% of its value, and U.S. dollar reserves plunged to a seven-year low in the first 30 day of 2014. Average Argentines were desperate to convert their salaries and savings into greenbacks as inflation soared to almost 30%. Many analysts warned the country was about to default.
But Argentina has regularly suffered through these types of crises in the 60 years since a coup by Juan Peron and his iconic wife Evita established the Peronist Party that has consistently looted the country in the name of socialism. Despite Argentina having five major financial crises that involved creditors and bank depositors being forced to take a haircut, international institutions, such as the World Bank and IMF, continue to allow the country to hammer creditors and still be bail out.
In 2005, Argentina forced 93% of their bondholders to take a $6 billion haircut on their bond principal and abandon another $30 billion of bond interest. But investors holding approximately $6 billion in bonds called Argentina’s bluff and began going to court around the world to seize the nation’s assets as default collateral for non-payment.
The group of holdouts, called NML Capital, is led by a U.S. hedge fund named Elliott Associates. After losing a four year legal battle against NML, Argentina finds itself with only $28 billion in foreign exchange in their Central Bank and now responsible to pay about $6 billion in principal and about $7 billion in accrued interest to holdout creditors.
Prior to the Supreme Court decision, Argentina was in the process of regaining access to international credit markets. A May 29th deal with the “Paris Club” of creditor nations would have allowed Argentina to escape paying $9.7 billion in interest and still gain renewed lending from the World Bank and IMF. But the Supreme Court decision will now force Argentina for the first time to actually have to first pay a group of creditors in full.
Argentina has three choices:
- Refuse to pay, which would trigger an automatic default on debt payments owed to bondholders, who would then foreclose on any and all Argentine assets in the U.S. or its allies;
- Comply fully with the U.S. District Court ruling and immediately pay NML and its partners about $1.3 billion in principal and an equal amount of interest. But this would trigger lawsuits by the bondholders took the haircut, but have the right to any improved deal thru 2014; or
- Reach an agreement to pay NML Capital in 2015, when Argentina would not have to pay out the same terms to the bondholders that took a haircut.
I my opinion, Argentina will wait until 2015 and only pay NML and the holdouts in full.
The U.S. Supreme Court decision has now established a precedent that socialist countries that serially default on their bonds must either pay their creditors on time or the creditors can start seizing the nation’s assets around the world. Socialism will truly never be the same.