NEW YORK (AP) — A U.S. appeals court gave Argentina's spurned bondholders a substantial $1.4 billion victory on Friday in their lengthy legal battle to collect debts unpaid since the country's world-record 2001 default.
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's forced to keep the promises it made in 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 for Argentina was that the judges stayed payment pending a U.S. Supreme Court appeal. The high court rarely accepts such cases, but the stay probably puts off any final decision until next year, well after Argentina's congressional elections in October.
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 accused of preying on countries in crisis. Argentina's lawyers even told the judges that her government won't pay no matter how 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 judges said "such cases are unlikely to occur in the future" because "Argentina has been a uniquely recalcitrant debtor."
"Our role is not to craft a resolution that will solve all the problems that might arise in hypothetical future litigation involving other bonds and other nations," the judges added.
Argentine officials have warned that 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.
But the judges essentially said the Fernandez government would only have itself to blame if that happens.
Activists who believe that powerful lenders should take a backseat to a country's citizens during sovereign debt crises criticized the ruling.
"The religious community is saddened by today's decision as it hurts poor people around the globe," Eric LeCompte said in a statement from the Jubilee USA Network, a religious anti-poverty campaign. "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."
But 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; the rest sued.
This 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. U.S. District Judge Thomas Griesa agreed, and ordered payment in cash of $1.3 billion, plus interest to Singer's NML Capital Ltd. and 18 other holdout creditors.
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.
The judges countered that their ruling "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."
Economist Arturo Porzecanski, an emerging markets specialist at American University in Washington, said no other country in modern history has so stubbornly refused to honor its commitments, not only to repay sovereign debts but also to comply with arbitration rulings and pay nearly $9 billion it owes in principal and interest on loans from import-export agencies in Europe, Japan, the US and beyond, as represented by the Paris Club of international lenders.
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."
Charles R. Blitzer, a former IMF official and a consultant with significant experience in debt restructurings like Argentina's, said the ruling should end concerns that it will be harder to put together rescue packages calling for creditors to accept less than they are owed by countries in distress. The judges "went out of the way to emphasize this is a very narrow application" because of Argentina's specific behavior," he said.
Blitzer urged both sides to negotiate a settlement in light of this ruling.
Argentina's government has made it clear throughout that it will instead attempt a "plan B" maneuver, and try to persuade bondholders to accept payments somewhere other than New York, beyond the reach of U.S. justice, said Juan Pablo Ronderas of the abeceb.com consultancy in Buenos Aires.
"It forces the government to try some financial engineering," he said.
The judges appeared to warn any would-be partners of Argentina against such a ploy in a footnote to their ruling that referred to "whether U.S. sanctions legally apply to non-U.S. persons or institutions," Porzecanski noted.
"It's a salvo across the plan B bow," he said. "The judges have said that just because you're a non-U.S. financial entity, don't think you're beyond the reach of U.S. policy."
Warren reported from Buenos Aires, and Marjorie Olster contributed from Washington.