US backs Argentina in debt restructuring case

The US gave strong support to Argentina on Friday in the Latin American country’s legal battle with hedge funds over the repayment of $1.3 billion to holders of defaulted bonds.

Shortly before a court-imposed deadline, the US filed a “friend of the court” brief backing Argentina’s attempt to overturn a ruling ordering it to make good on the bonds held by US hedge funds.

A hearing for Argentina’s appeal has been set for February 27, 2013, again putting off a reckoning over Argentina’s debt, which fell into arrears 11 years ago.

In a 15-page document, the administration of President Barack Obama warned the court that the November ruling “adopts a novel interpretation of a standard pari passu (fairness) clause” that “runs counter to longstanding US efforts to promote orderly restructuring of sovereign debt.”

The US also warned the ruling could create risks for the dominance of the dollar in the bond market.

“The decision could encourage issuers to issue debt in non-US currencies in order to avoid the US payments system, causing a detrimental effect on the systemic role of the US dollar,” it said.

Argentina defaulted on some $100 billion in debt in 2001, and has since restructured its debt twice, covering around 75 percent of the nominal value of the bonds.

But it insists it should not have to repay the $1.3 billion in bonds held by investment funds NML and Aurelius because they refused to take part in a 2005 restructuring agreed to by most of the other bondholders.

The two funds have demanded 100 percent repayment plus interest.

The November 21 ruling by New York lower court judge Thomas Griesa rejected Buenos Aires’ position and ordered it to repay the $1.3 billion in full, before or in parallel with any other debt payments the country must make.

With Buenos Aires scheduled to pay out $3 billion on previously restructured debt on December 15, Griesa’s order — if it had been upheld — would have meant it also must pay the $1.3 billion by that time or fall into default on all of its debt.

The ruling also raised questions for future debt restructurings, such as in Greece.

Beyond worries for the bond market, the US warned in its brief that the ruling could harm US foreign relations, as “such an order could have adverse consequences for the treatment of U.S. property under principles of reciprocity.”