By Reynolds Holding
NEW YORK, Oct 29 (Reuters Breakingviews) - The rule of law
has finally caught up with Argentina. The nation exploited fuzzy
contract language to stiff debt-swap holdouts. As Breakingviews
predicted, a U.S. appeals court ordered it to pay up, saying a
promise to treat creditors equally is plenty clear. Rather than
spark market chaos, the ruling should encourage future lending
by providing reassurance that contract terms have teeth.
For a decade, Argentina has thumbed its nose at an affiliate
of hedge fund Elliott Associates and other creditors that
spurned the nation's bond exchange. In fact, South America's
second-largest economy passed laws prohibiting payments to the
A three-judge panel ruled unanimously that those laws, as
well as statements in prospectuses and other official documents,
breached Argentina's promise of equal treatment. It upheld an
order blocking the country from paying exchange-bond holders
without also paying Elliott's affiliate. The court also
essentially confirmed that the order applies to the New
York-based trustee actually making the payments. That's a novel
and potentially powerful way for creditors to enforce debtor
The decision's critics contend that it violates U.S law
barring courts from grabbing foreign assets. But rather than
take property, the order merely holds Argentina to its contract.
That's an appropriate remedy, considering the nation would have
almost certainly ignored any demand to pay bondholders money
What's more, Argentina is a uniquely defiant deadbeat whose
case won't easily translate to other countries like Greece. That
should reassure nations fearing that the court's broad
interpretation of the equal-treatment clause - a typical
provision of sovereign debt agreements - will undermine bond
restructurings. Besides, most such contracts now contain clauses
that strictly limit any holdouts' power.
The judges did question some of the bonds' payment mechanics
and sent the case back to the lower court for clarification.
Argentina may also appeal. But the message of this court - among
the world's most authoritative on matters relating to
international debt - will almost certainly stand: It really is
possible to win against sovereign nations. Even for them a deal
is still a deal.
- The U.S. Court of Appeals in New York on Oct. 26 upheld an
order blocking Argentina from paying bondholders without also
paying NML Capital, an affiliate of New York-based hedge fund
Elliott Associates, and other investors in defaulted bonds.
- The case involves Argentina's 2005 offer to exchange $95
billion in defaulted debt for new bonds worth 30 cents on the
dollar. NML and other holders of about $20 billion of the debt
rejected the offer, and in 2010 NML spurned a second
restructuring that exchanged $12.9 billion of the remaining $20
billion for new bonds. About 92 percent of the original debt has
been swapped out. Argentina has not made payments on the NML
bonds since 2001.
- The three-judge appellate panel ruled that Argentina's
official actions, including a law prohibiting payment on the
hedge fund's debt, violated the bonds' so-called pari passu
provision, which requires equal treatment for all of the debt.
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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