Argentina Argues That Debt Payment Order Violates Its Sovereignty
Argentina is asking a Manhattan federal appeals court to reverse an order for the country to pay $1.33 billion to "holdout" creditors who refused to join two swaps for the country's defaulted debt.
Argentina's lawyers at Cleary Gottlieb Steen & Hamilton said in papers filed on Dec. 28 that the order violates the country's sovereignty. The lawyers said the order also threatens service on at least $24 billion of Argentina's restructured sovereign debt, impairs the rights of third parties and puts global debt markets at risk.
"The Amended Injunctions have no basis in law, are inequitable, and threaten to wreak havoc on countless innocent third parties, which have already suffered losses due to the plunge in their bonds' value provoked by the insecurity that the Amended Injunctions have created in the market for Argentina's New York law-governed bonds," the brief said in NML Capital v. Republic of Argentina, 12-105. "This harm to private and sovereign creditors, as well as to New York law and New York as a place to do business, will only grow if the Amended Injunctions are affirmed."
The U.S. Court of Appeals for the Second Circuit on Oct. 26 ordered the country to pay the holdouts an equal amount whenever it makes payments on other debt that has been restructured since the country's economic collapse 11 years ago.
It agreed with Southern District Judge Thomas Griesa (See Profile), who ruled that with more than $40 billion in foreign reserves Argentina can afford to pay. The ruling gave Argentina a difficult choice: pay all bondholders equally, or pay none of them and risk going into default.
The court then returned the case to Griesa, who ordered Argentina to pay the $1.33 billion into escrow for holders of its defaulted debt and banned banks and other third parties from intervening. Griesa based his ruling on the principle of "pari passu," or equal footing, which says debtors can't pick and choose between creditors.
Argentina's president, Cristina Fernandez, called Griesa's ruling "judicial colonialism," and the country sidestepped the impending economic chaos when the order was suspended by the appeals court on Nov. 28 pending its consideration of Argentina's motion for panel rehearing or rehearing en banc.
But just the threat of the payment deadline set by Griesa had harsh outcomes. In the week after he issued his order, the cost of maintaining Argentina's overall debt soared in trading on U.S. and European bond markets and the cost of insuring those debts spiked.
"A court can arguably enjoin a foreign state from engaging in a commercial activity within the United States. But it cannot issue an order to force or preclude a foreign sovereign to act or not act within the limits of that sovereign's own territory," Argentina's brief said. "By dictating to Argentina that it cannot pay moneys it owes to the exchange bondholders in a funds transfer in its own country, and commanding that it make a payment (including via escrow) to holdout creditors that it is precluded from paying under its own laws, the Amended Injunctions violate this fundamental principle."
Argentina, however, said it is willing to make concessions. To end the lengthy dispute, government lawyers said the country is willing to ask Congress to give holdout creditors the same treatment as those who joined a 2010 debt swap.