Violating the sanctity of contracts, Argentina has again defaulted on her sovereign debt and diminished her ability to borrow.

Sovereign Debt: Is Argentina’s Default Legal?

by Elaine Schwartz    •    Sep 13, 2013

Does Argentina still owe bondholders the money? The US Supreme Court might decide.

It all began with what scholars Rogoff and Reinhart called the lending boom of the 1990s. Enjoying an influx of dollars, Argentina borrowed and grew and prospered…for awhile.  But when recession hit at the end of the decade, the good times quickly unraveled.  In 2001 she defaulted on $95 billion of sovereign debt while also undergoing banking, currency, and inflation crises.

Sovereign debt is money borrowed by a sovereign government. Governments borrow money by selling “IOUs” to individuals, businesses, banks, and other governments. The IOUs are different types of government bonds.

When people refer to sovereign default, they mean the borrower is not adhering to the original IOU contract in some way. For Argentina, the original contract with the protesting bondholders said:

  • Even in default, she would pay interest and principal in full.
  • NY courts would have jurisdiction over any dispute.
  • The bonds would be transferable “and payable to the transferee.”
  • Bonds would have the same status as other external debt.

But now Argentina is refusing to renegotiate the debt, preferring to remain in default with a 70% “haircut”–paying 30 cents on the dollar.

As a result, one group of bondholders has sought the $1.6 billion in Argentinian assets they believe are due them. Ghana seized an Argentine naval ship for them (really!) and Argentina’s President Kirchner flew commercial to see the Pope so her private jet would not be threatened by the group.

Now, using more traditional tactics, they are in court and so far, the outlook is good for them. Rejecting Argentina’s protests that other bondholders would be harmed as would other nations that defaulted on their debt (note Greece’s restructuring), the lower courts have decided in the bondholders’ favor.

The next stop is the Supreme Court and a decision during the beginning of October. I do wonder how the courts can enforce whatever they decide.

Sources and resources: Together, this econlife post and this Business Insider article provide a clear overview of bondholders’ and Argentina’s positions. Then, for much more detail and insight on how Argentina is resisting compliance, I recommend the court’s documents.

Please note that several sections of this post appeared earlier at econlife.

 

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