NEW YORK -- A U.S. appeals court gave Argentina’s spurned bondholders a slam-dunk victory on Friday in the lengthy legal battle over unpaid debts leftover from the country’s world-record 2001 default, upholding a ruling that would force the government to pay $1.4 billion in cash.
President Cristina Fernandez has publicly vowed to pay "not one dollar to the ‘vulture funds’," led by New York billionaire Paul Singer and other U.S. investors, whom she accuses of preying on countries in crisis. Her lawyers even told the judges that Argentina won’t pay no matter what they rule.
Argentina also made a point backed by the Obama administration and the International Monetary Fund -- that the court’s method of forcing payment, by stopping other bond payments if it doesn’t comply, could destabilize the global financial system and make future debt relief much more difficult worldwide.
But the 2nd U.S. Circuit Court of Appeals in Manhattan unanimously rejected every Argentine argument, saying the country had failed to provide any proof that "cataclysmic repercussions" could result if it keeps the promises it made on its 1990s bond contracts.
"What the consequences predicted by Argentina have in common is that they are speculative, hyperbolic and almost entirely of the Republic’s own making," the three-judge panel wrote.
The only good news Friday for Argentina was that the judges stayed the payment order pending a U.S. Supreme Court appeal.
While it remains very unclear whether the high court will accept the case, the stay probably means that no final decision will be made until well after Argentina’s critical mid-term congressional elections on October 27.
The decision "affirms a proposition essential to the integrity of the capital markets: borrowers and lenders may, under New York law, negotiate mutually agreeable terms for their transactions, but they will be held to those terms," the three-judge panel wrote.
Argentine officials have warned the impact of a ruling against the country could be severe, since a novel payment formula already generally upheld by the appellate court last year could prompt the South American government to default again if it doesn’t comply. They said the ruling also could force other countries to put lenders before their own citizens as they rebuild their economies.
"The religious community is saddened by today’s decision as it hurts poor people around the globe," Eric LeCompte of the Jubilee USA Network, a religious anti-poverty campaign, said in a statement. "Our eyes are on the U.S. Supreme Court. We pray the court will not forget the world’s poor as they consider taking the case."
Theodore B. Olson, a lawyer for bondholder Elliot Management Corp., said the decision was sound.
"Today’s unanimous, well-reasoned decision appropriately condemns Argentina’s persistent violation of its obligations and its extraordinary defiance of the laws of the United States and the orders of U.S. courts," Olsen said in a statement. "It confirms that Argentina is not above the law."
Fernandez made no immediate comment about the ruling, which came down as she met privately with top ministers inside her official residence in suburban Buenos Aires.
The U.S. case stems from Argentina’s financial crisis a dozen years ago, when the government defaulted on $100 billion in debts, and some investors scooped up nearly worthless Argentine bonds. Fernandez’s late husband, President Nestor Kirchner eventually offered creditors new bonds that initially paid less than 30 cents for each dollar of bad debt. More than 90 percent of bondholders agreed and some of them have since recovered three-quarters of their pre-default investment.
But a small fraction of bondholders, many of whom bought the debt securities at cut-rate prices, demanded that Argentina make good on its promises to pay 100 percent plus interest in the event of a default. Investment fund NML Capital and 18 other holdout creditors sued, and U.S. District Judge Thomas Griesa ordered Argentina to pay them $1.4 billion.
When Argentina issued the bonds in 1994, it promised to treat them "at least equally with its other external indebtedness," the appeals court wrote. "As we have held, by defaulting on the bonds, enacting legislation specifically forbidding future payment on them, and continuing to pay interest on subsequently issued debt, Argentina breached its promise of equal treatment."
Exasperated with Fernandez’s refusal to pay, Griesa finally agreed with the drastic approach suggested by NML: He would hold the Bank of New York and other U.S. financial institutions in contempt if they don’t become the court’s enforcers, blocking Argentina’s efforts to pay other bondholders if it hasn’t first paid the plaintiffs an equal amount.
The proposed formula sent shudders through the international bond business last year and prompted dozens of friend-of-court objections, including warnings from the U.S. Treasury, the U.S. Federal Reserve and the nation’s leading banks that the judge’s remedy mustn’t do anything to slow down the system that smoothly handles electronic transfers of trillions of dollars in transactions every day.
But economist Arturo Porzecanski, an emerging markets specialist at American University in Washington, agreed with the appellate judges Friday, saying no other country in modern history has so stubbornly refused to honor its commitments, not only to pay sovereign debt but also to comply with international arbitration rulings and membership fees countries are supposed to pay to financial organizations.
For all these reasons, he said it’s not likely that the ruling will harm any country other than Argentina.
"We’ve never seen such a rogue sovereign debtor like we’ve had in Argentina. Thanks to that, we’ve now seen the limits of what’s possible, what’s the meaning of all those financial contracts, what’s the potential for collecting," Porzecanski said. "This is legal history in the making."
Warren reported from Buenos Aires.