NEW YORK, April 9 (Reuters Breakingviews) - An Argentina
debt case has put bite in the bark of holdout creditors. Hedge
fund Elliott Associates spurned the nation's debt swap but may
still get paid in full, thanks to a U.S. judge's plan for
blocking payouts to other bondholders. If upheld on appeal, the
ruling might muddle sovereign lending and workouts. But it
should also reassure creditors that a deal is still a deal.
Elliott affiliate NML Capital has been owed money for a
decade but, like many holders of defaulted sovereign debt,
hasn't been able to collect. In fact, Argentina passed laws
barring payments to the hedgie and other bond-exchange holdouts.
Judge Thomas Griesa said those laws violated the obligation of
South America's second biggest economy to treat bondholders
equally, and he ordered the country not to pay holders of the
exchange bonds without also paying NML. The breakthrough is that
the order can be enforced against the New York-based trustee
that actually makes the payments.
It's similar to a 2000 Belgian court edict that Elliott used
to stop settlement service Euroclear from paying on Peruvian
bonds. The latest decision carries much more precedential
weight, not least because it comes from a U.S. district court.
But together, the orders offer creditors a potentially powerful
way to enforce debtor nations' obligations.
Courts might still disagree. Griesa's ruling could violate
the U.S. law that shields foreign countries from most lawsuits.
It could also undermine debt restructurings, the bond-payment
system and, if Argentina ignores it, the credibility of U.S.
courts. And it's possible that the judge misinterpreted
bondholders' right to equal treatment.
The U.S. government made similar arguments in a brief filed
last week, and judges listen closely to Uncle Sam on these
matters. Other lawyers say the concerns are overblown, because
Argentina is a uniquely defiant deadbeat whose case won't
translate easily to other countries.
Either way, Elliott and Judge Griesa may have already had an
impact. They've shown it's possible to win against debtor
nations, perhaps emboldening tenacious holdouts in, say, the
Greek debt swap. That might gum up restructurings but, more
important, it should encourage future lending by giving
sovereign contracts teeth.
(Reynolds Holding is a Reuters Breakingviews columnist. The
opinions expressed are his own.)
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