- By Jamila TrindleJamila Trindle is a senior reporter who covers finance, economics and business where they intersect with national security and foreign policy. Her beat spans everything from the economic underpinnings of conflict to sanctions, corruption and terror finance. Before coming to Foreign Policy magazine, Jamila reported for the Wall Street Journal’s Washington bureau, covering financial regulation and economics. She has also worked as a foreign correspondent in China, Indonesia and Turkey as a freelancer for NPR, Marketplace, The Guardian and others. She moved back to the U.S. to cover the post-crisis economy for PBS in 2009.
The U.S. Supreme Court dealt a blow to Argentina’s already fragile economy Monday when it sided with hedge funds that have zealously pursued the country to repay its debts.
Argentina had appealed to the court in its decade-long legal battle to hold off bondholders seeking to seize the country’s assets all over the world.
The court’s decision is a win for so-called "vulture funds" that buy up a country’s distressed debt, often after other creditors have agreed to a write-down, and then fight to be paid back in full. It’s a loss for Argentina’s struggling economy, which could be hit with another default. And it could make it harder for other countries to walk away from new debts.
Argentine bonds have fallen 6.6 cents on the dollar to 75.09 cents, according to Bloomberg. President Cristina Fernández de Kirchner is expected to speak Monday evening and could address whether she will talk to the holdout creditors or default.
"The risks are high that they’re going to end up defaulting," said Robert Kahn, a senior fellow at the Council on Foreign Relations who has worked for the World Bank and the IMF.
Kirchner faces that stark choice because the Supreme Court declined to hear Argentina’s appeal on Monday. The country hoped to overturn a lower court ruling that Argentina pay holdouts at least $1.33 billion. After a financial crisis in 2001, Argentina defaulted on nearly $100 billion worth of debt. Most bondholders — 93 percent — eventually accepted that the country wasn’t going to pay and agreed to exchange their bonds for new ones worth cents on the dollar. But a small percentage held out. Others bought the bonds while they were cheap and then sought to force Argentina to pay in full. Now, the court’s decision forces Argentina to negotiate a resolution with all the holdouts in the next two weeks or face default.
In pursuit of those debts, the hedge fund NML Capital, a subsidiary of Elliott Capital Management, pursued Argentine assets far and wide, even seizing an Argentine naval vessel in Ghana in 2012. The United Nations maritime court eventually told Ghanaian authorities to let the boat go, but that wasn’t the end of the hedge fund’s treasure hunt. In an effort to find out more about Argentina’s money, NML served subpoenas to U.S. and Argentine banks. Argentina tried to stop the fund’s snooping by arguing it violated the country’s sovereign immunity. Siding with the hedge fund for the second time Monday, the Supreme Court ruled that NML could seek bank records in its attempts to collect on its debts. Political and military assets are still immune, according to U.S. law, but the high court’s ruling makes it easier to interfere with the country’s payments to other creditors or banks.
"Now it is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina’s economy and its international standing," an NML spokesman stated via email.
For critics of the hedge funds’ pursuit, who argue countries should be able to seek freedom from unpayable debts just as companies and individuals do in bankruptcy, the ruling was a defeat.
"I am blown away by the decision," said Eric LeCompte, executive director of Jubilee USA Network, a group advocating debt forgiveness for developing countries. "For heavily indebted countries supporting poor people, this is a devastating blow. These hedge funds are equipped with an instrument that forces struggling economies into submission."
Economists say it’s not yet clear how far-reaching the impact of the decision will be. Argentina has fought harder against paying its holdout creditors than most countries.
"You have an extremely determined creditor and an extremely determined debtor pushing a dysfunctional system to the limit," said Anna Gelpern, a Georgetown law professor and expert on debt contracts. She said the case raises the question of how far an investor could reach to find a country’s assets around the world.
"And the answer is very far," she said.
Douglas Rediker, a former IMF board member and a fellow at the Peterson Institute, said making countries more reticent to borrow a lot of money may not be a bad thing.
"One of the outcomes of this ruling could be that you’re unable to issue that much debt without making the hard choices sooner," he said. "You could argue most countries are better off, not worse."