Argentina stands by refusal to pay holdouts

The national government signalled to a US appeals court it would not comply with any demand that it fully pays a group of dissident bondholders, in a showdown that has sparked fears the country could suffer its second massive debt default in 11 years.

The Second US Circuit Court of Appeals in New York yesterday heard more than two hours of arguments from lawyers for Argentina, the so-called holdout investors and other parties in the closely watched case, but it made no immediate ruling. The court is weighing whether to reverse an order that the Argentine government pay US$1.3 billion to the holdouts.

The court is weighing whether to reverse an order that the Argentine government pay the holdouts, led by Elliott Management affiliate NML Capital and Aurelius Capital Management. The court’s decision could have wide impact on global debt markets.

The court said it would deny Argentina’s request for a rehearing of an earlier appellate order in October that required it to treat bondholders equally.

Argentina stood by the position of its government, led by President Cristina Fernández de Kirchner, that the holdouts should not be paid in full, and that the country could end up ignoring a court order requiring payment.

“We would not voluntarily obey such an order,” Jonathan Blackman, a lawyer for Argentina, told a three-judge panel.

He nonetheless said the country is open to a solution which is “workable and doesn’t create a terrible confrontation.”

Economy Minister Hernán Lorenzino yesterday said during an interview with news channel C5N that “what’s at stake here is the future, if any, of the sovereign debt swap process.”

Lorenzino said that Argentina’s stance and that of the bondholders who joined the debt swap agreed in highlighting that “the inequity demanded by common sense and at the same time the impossibility of assimilating the equal treatment demanded by the vulture funds.”

Vice-President Amado Boudou, during the same interview with Lorenzino, said that “Argentina will not break its own laws” in ordering payment in full of the sum the holdouts are demanding.

“When governments are in debt, they work for the creditors and that was taking place until the arrival of Néstor Kirchner. Argentina will not allow the lender’s interest to be prioritized over education, health and Argentine well-being,” said Boudou, adding that “Argentina will not break its own laws that state that it will not pay those debt-holders who did not accept the debt swap.”

The appeal comes after US District Judge Thomas Griesa in Manhattan ruled last February that Argentina had violated its contractual obligation to treat all creditors equally. That meant the country would have to pay the holdouts if it also wished to pay bondholders who agreed to two giant debt swaps.

If ordered to pay the small group of holdout creditors, there are fears that Argentina could default again on US$24 billion in previously restructured debt.

A victory by the holdouts, Argentina argues, would harm those investors who agreed to the restructurings as well as banks which handle its payments. The country also says such a ruling could make future debt crises “unresolvable,” and spur further investor litigation.

Circuit Judge Reena Raggi said at the hearing that a court’s role is to enforce contracts, “not to rewrite them.”

She said it “hardly seems appropriate for a court not to enforce one of its orders because a party will breach another of its obligations.”

As a sign of the importance of the case, Boudou, Lorenzino and several other high-level Argentine officials attended the hearing.

ARGENTINA’S OBLIGATIONS

For years, the holdouts have demanded full payment after spurning two debt exchanges. These investors say they are simply attempting to hold Argentina to its obligations and that the government has plenty of reserves to pay them.

There is “no question” the country has the capacity to pay them, Ted Olson, a lawyer for NML, told the court.

In October, the Second Circuit largely upheld Griesa’s ruling on equal treatment for bondholders. Yesterday, the court said it would not revisit that ruling, clearing the way for it to review Griesa’s plan for how the payments would be made.

Griesa had said the next time Argentina made an interest payment to the exchange bondholders, it would have to pay US$1.3 billion owed to the holdouts into a court escrow account.

Argentina defaulted 11 years ago on about US$100 billion in sovereign debt. About 92 percent of its bonds were restructured in 2005 and 2010, giving holders 25 cents to 29 cents on the dollar.

The appeals court is also examining treatment of Bank of New York Mellon, which acts as trustee to the exchange bondholders, and the impact from the ruling’s injunction on other third parties.