Argentina assailed by investors
on May 7, 2014 at 9:49 pm
Investors holding more than $1 billion worth of bonds that Argentina has forsaken argued Wednesday evening that the South American nation has become such an irresponsible debtor that it deserves no help from the Supreme Court or other U.S. courts, which it will defy, if it doesn’t get its way.
Two hedge funds, in a strongly worded brief, opposed Supreme Court review of a federal appeals court decree that, if Argentina makes any payments on bonds that it chooses to honor, it has to make equal payments on defaulted bonds. Argentina is rich enough to cover both, and its sovereignty as a nation won’t be harmed in any way if it pays up, the new filing contended.
This is the second round in the Supreme Court this year in an ongoing courthouse battle between the South American nation’s government and investors who bought interests in bonds after the nation had chosen to default when hit with a financial crisis in 2001. With the backing of its national legislature and its supreme court, the Argentine government has said it will never pay anything on the defaulted bonds.
The Supreme Court held an argument in the first round in this battle, on April 21, focusing at that point on what steps U.S. courts have the power to take to help bondholders discover where Argentina is keeping its money, worldwide, so that they can try to collect for its default on their investments.
It is unclear whether the Court will act on Argentina’s new appeal, seeking to head off the equal-payment obligation, until after it rules on the fund pursuit case between now and the end of June.
The new case is often referred to as the pari passu case, because it made a promise covered by that phrase when it sold the now-defaulted bonds in 1994. It promised to treat its obligations on those bonds equally — that is, in parity — with all of its other debt commitments.
The hedge fund investors argued in their new filing in that case that the dispute is nothing more than a run-of-the-mill contract dispute, and will impose no obligations on Argentina that it had not already agreed to carry out. Because Argentina is a sovereign government, the new brief went to considerable lengths to suggest that Argentina has made a choice to assume the same obligations that an ordinary borrower would to attract lenders.
Several of the Justices, in the April argument in the fund pursuit case, had voiced concern about the possibility that U.S. courts might reach too far to control how that sovereign nation manages its own external debt.
Argentina failed in its first attempt to get the Supreme Court to review the equal-payment court order. The Justices turned that down without comment on October 7, with Justice Sonia Sotomayor not taking part. The new petition followed a later order, reinforcing the equal-payment mandate.
It is unclear whether Justice Sotomayor will again remain on the sidelines when the equal-payment case is ready for consideration, perhaps later this month.
If the Court were to agree to hear that case, it would not play out until the next Term, starting in October.
In pursuing its new challenge, Argentina made two requests to the Supreme Court. First, it asked the Justices to send to the highest state court in New York, the Court of Appeals, a question whether its pari passu promise allows it to make payments only on its later bond issues. A state court would have authority to rule on that, because that is a question of interpreting a contract, governed by New York law under the terms of the Argentine issue of the 1994 bonds.
The hedge fund investors argued that this attempt to get the state court involved is just another delaying tactic, and one that represents an insult to the federal appeals court that had refused an earlier plea to call upon the state court for advice.
Argentina’s second plea in the pari passu case is that a U.S. law that protects foreign governments from being ordered by U.S. courts to hand over their assets protects it from having to obey a court order to pay out money that could come from those assets.
In response, the hedge fund investors contended that the equal-payment order does not tell Argentina to make any payments at all, if it does not want to, and does not specify where Argentina should find the money to make payments on its debts. All that Argentina has been told to do is to live up to its own promises, the new brief asserted.
The lower court orders, the brief said, merely track what Argentina agreed to do in order to induce investors to buy its bonds before financial crisis engulfed that nation. It is up to that nation’s government to choose how it complies, the investors said.
“Allowing Argentina to choose whether to honor its obligations and with what resources looks nothing like an order seizing specific assets,” the brief contended.
At several points in the new document, the investors cited statements by Argentine government officials that they would not obey a U.S. court order controlling how that nation deals with its own debt obligations.
Argentina will have a chance to reply to this brief before the case is referred to the Justices for their initial reaction. One option open to the Court is to ask the U.S. Solicitor General for the federal government’s views on the pari passu case. The government is supporting Argentina in the first round, funds-pursuit case.
