The fate of Argentina and that of other emerging market nations with debt problems could be resolved as early as today as the US Supreme court is set to take up the issue of Argentina vs the “hold outs.”
Supreme Court could choose to hear Argentina’s appeal of a lower court ruling
In taking up the matter today, the Supreme Court could choose to hear Argentina’s appeal of a lower court ruling that ordered it to pay bondholders who rejected the negotiated agreement. This would be a win for Argentina and would force a protracted trial with the hold out creditors, including Paul Singer of Elliott Management and his hedge fund subsidiary, NML Capital, who are leaders in the effort.
If the court refuses to hear the appeal, it would be a victory for the hold outs who then may face additional challenges collecting on their debt. As reported in ValueWalk, a leaked memo between Argentina’s economic minister and their New York City based lawyers advised them on a variety of potential outcomes.
One probability if the court sides with the holdouts is that Argentina will be forced with the decision to pay for social programs, feed its people, fix roads and police the nation or pay the debt. Given this choice, sources close to the situation indicate a default and a restructuring of debt outside the US legal system might occur. This would freeze Argentina out of the US-based debt market and curtail further borrowing from the country, the most severe of the consequences.
Pope Francis: Hold outs was described as “savage capitalism”
As reported in ValueWalk, Pope Francis was brought into the situation recently and the description of the hold outs was described as “savage capitalism,” as the impact of forcing Argentina into a choice between repaying bond holders, who shoulder a risk of default when investing, and engaging in austerity measures that have been compared to 1933 Germany, when debt repayments and social protest triggered the rise of Adolph Hitler. In multiple meetings at the Vatican the method of a hedge fund holding out after a negotiated settlement had been reached is also being questioned.
The contrary argument is that a foreign government is responsible for their debts. Speculation is that if Argentina defaults and re-structures outside US legal jurisdiction could trigger a worldwide hunt to re-possess Argentine assets, which could be decided in additional court cases. As previously noted in ValueWalk, the hold outs have attempted to re-possess an Argentine naval vessel as it was parked off the Ghana coast, block Argentina’s role in space exploration until the debt is repaid and a separate group of investors attempted to seize the president of Argentina’s plane as it was refueling – with the president inside the plane. This game of repossession could be played out on an international stage.
While the focus is on the court, sources indicate an important component of negotiation positioning is taking place behind the scenes right now. The hold outs have indicated a willingness to negotiate and are waiting to hear from Argentina. The court ruling will play heavily into these negotiations, with the potential for the Obama administration to weigh in on the matter.