Argentina is talking its case against creditors including Elliott Management and Aurelius Capital Management to the US Supreme Court, essentially asking a foreign judicial system to acknowledge its sovereign rights.
The case started in 2001 when Argentina defaulted on $80 million in sovereign bonds and told bondholders they could either accept a haircut of 70% or more, or they could keep their worthless old bonds and get nothing. Most took the hard bargain, but a group of US hedge funds (and some others) held tight and waited for Argentina to recover. Now they are trying to get paid back, and Argentina is attempting to refuse, but Federal courts have thrown a wrench in the process.
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US courts have ruled that all bondholders must be repaid
While Argentina has sovereign immunity, and its assets can be seized to pay back Elliott Management and others, the old bondholders have argued that US courts have the authority to direct payments that pass through the US to treat all bondholders equally, rerouting payments that Argentina intends for one group of creditors for another that, as far as Argentina is concerned, no longer have valid claims.
“The hedge funds have argued in court that they are not seeking to seize Argentine property. Instead, they argue, when Argentina pays money through the United States financial system on its new bonds, the agents transferring that money can be ordered to simply pay the holdouts first,” explains Ohio State University law professor Steven M. Davidoff for The New York Times. “Since there is no attachment of Argentine funds, the Foreign Sovereign Immunities Act is not implicated. Voilà.”
Argentina is making two arguments to the Supreme Court. First, it’s asking that the court find that Federal court rulings do in fact violate the Foreign Sovereign Immunities Act and give Argentina the freedom to pay back the creditors who accepted its new bonds and ignore Elliott Management and others. But just in case the justices aren’t in the mood to make such a sweeping decision, it has also argued that the original bonds were subject to New York State law and that the New York judicial system should have been presiding over the cases all this time.
Supreme Court decision may not end Argentina – Elliott Management’s dispute
If the US Supreme Court kicks the case down to the state level, Argentina essentially gets a do over and the result can’t really be worse for them. The tactic doesn’t have much downside because if the Supreme Court upholds the existing ruling, then both sides find themselves in the same situation they’re in today. Argentina is threatening to default on all bond payments within the US, which would effectively cut it out of modern finance, but a last minute negotiated settlement shouldn’t surprise anyone.