The U.S. 2nd Circuit Court of Appeals in New York rejected a dozen appeals filed by Argentina over the years, and ordered the South American country to pay the holdouts an equal amount whenever it makes payments on other debt that has been restructured since the country's economic collapse a decade ago.
"We hold that Argentina breached its promise," the appellate court said, summarizing a 29-page ruling that could make it difficult for Argentina to use the U.S. financial system to make other debt payments unless it complies.
The ruling effectively gives Argentina a stark choice: Either pay all bondholders equally, or pay none of them.
A spokeswoman at Argentina's Economy Ministry said the government had no immediate comment on the ruling.
NML Capital Ltd., the investment fund that brought the case, referred questions to its parent company, billionaire Paul Singer's Elliott Capital Management fund, whose spokesman Peter Truell has declined to comment publicly.
Prices for Argentine bonds of all kinds sank after the ruling, especially debt paid in dollars. That increases borrowing costs for the country's national and provincial governments, which are already much higher than other nations because existing Argentine debt is rated far below investment grade.
The Argentine government argued that forcing it to pay the holdouts could provoke another severe economic crisis in Argentina, but the appellate court said that "nothing in the record supports Argentina's blanket assertion." It agreed with U.S. District Judge Thomas Griesa, who ruled that with more than $40 billion in foreign reserves, Argentina can afford to pay.
Argentina also argued that U.S. law makes its assets immune from seizure as collateral. It got support on this point from the U.S. government, which warned the courts that ruling in favor of a single creditor could complicate U.S. foreign policy in ways that go far beyond relations with Argentina. Banks also warned against creating expensive bottlenecks in the U.S. financial system's clearinghouse for bond payments.
But the judges dismissed these concerns, noting that laws imposed since Argentina's default now effectively prevent would-be holdouts from opting out of debt restructurings, and that if Argentina pays up as ordered, no more assets would be seized.
Economist Arturo Porzecanski at American University in Washington called the ruling "a watershed legal event."
"This decision has driven a stake through the heart of Argentina's legal and political strategy of refusing to pay the holdouts while paying all other bondholders," said Porzecanski, who served as an expert witness for plaintiffs in a separate case involving unpaid Argentine debts.
Argentina argued that the holdouts bought the bonds at rock-bottom prices during the country's 2002 default fully knowing that they might not get repaid, but the judges said Argentina made promises when it issued the debt in the 1990s and must keep them.
The judges also said NML Capital and other holdouts legitimately invoked "acceleration" clauses that raise the total to $1.33 billion in unpaid principal and interest.
One point bothered the appellate court: Griesa said any financial institution that processes Argentina's payments to the holders of restructured bonds would be violating the court's order if it didn't ensure that the holdouts are simultaneously paid an equal amount. This could force U.S. banks to stop accepting Argentina's money unless the government complies. The appellate court asked for more clarity on how this would work.
"The judge will come up with some minor changes," Porzecanski predicted. "But he basically got the green light to find a practical solution to what seemed an intractable problem."
Argentina can appeal to the full 2nd Circuit appeals court, and then to the U.S. Supreme Court. But meanwhile it has debts to pay, and the immediate impact of the ruling is to make them much more expensive.
"If the government of Argentina were a sensible player in the international financial arena, if it were a predictable debtor, it would not have major consequences, because Argentina can certainly pay these bondholders in full, from one day to the next," Porzecanski said. "But if you were an investor in new bonds or previously restructured bonds, you have to mark them down for a greater possibility of default."
He cited Argentine President Cristina Fernandez's refusal this week to post $20 million with a court in Ghana to release the Argentine navy's signature tall ship from a port where NML Capital managed to have it detained as collateral for the unpaid debts. She said she would rather leave the ship docked in Africa for as long as she's president, than negotiate with the "vulture funds" or "fondos buitre," as she labels the holdouts.
"That's nothing compared to what they owe in this case," he said. "She might just come out and say, 'No, I'm not going to pay the regularized bondholders if it means paying the 'fondos buitre'."
The risk has increased that he next time an interest payment is due to current bankholders, they might say no.
Ruling in NML Capital Ltd. v. Republic of Argentina: http://tinyurl.com/9d5gjrs