In avoiding its debts, the country gambles with contempt and faces the discipline of international markets.
When one drives around Buenos Aires or observes a pro-government rally in Argentina, one sees posters showing the head of Judge Thomas Griesa of the U.S. District Court for the Southern District of New York superimposed on the body of a vulture. One poster reads, “Griesa wants your house, your job and your food!”
This story dates back to 2001, when Argentina defaulted for the seventh time on its sovereign debt, to the tune of almost $80 billion in bonds. The country attempted — unilaterally, with no negotiations whatsoever — to offer bondholders new bonds worth roughly 33 cents on the dollar, a deal that was among the sharpest haircuts in the history of international finance. A small group of bondholders, mostly hedge funds, rejected this deal and decided to have their day in court. In order to collect what was owed to them as bondholders according to the terms of the bonds as originally issued. The lawsuit was filed in New York because Argentina, when it issued the bonds, voluntarily chose to sell the bonds in the U.S. and the country voluntarily waived its sovereign right to immunity from suit and agreed that the bonds would be sold pursuant to U.S. commercial law.
Applying U.S. law in 2012 — after years of witnessing Argentina’s maneuvers to evade its contractual obligations and repudiate its debts — Judge Griesa ruled that the holders of the original bonds had valid claims and that these “holdout creditors” had to be paid alongside Argentina’s other creditors, which means that the holdout creditors had to be paid the same proportion of the debt owed to them as was being paid to the holders of the substitute bonds, and that such payments had to be made until the holdouts were repaid in full. On appeal the Second Circuit upheld Grisea’s ruling, and the U.S. Supreme Court declined to hear Argentina’s further appeal (perhaps because Argentina had indicated to the Second Circuit that it would not obey Judge Griesa’s order no matter how the justices ruled).
Out of legal options and determined not to negotiate with the holdouts, Argentina went into default at the end of July, further isolating itself from the capital markets and causing increased economic hardship for its citizens. As the economic climate has worsened and her popularity has fallen, Argentinian president Cristina Kirchner has taken up the slogan “Homeland or Vultures,” painting the holdouts as responsible for all of the country’s ills, from soaring inflation to increased unemployment to labor unrest. A key weapon in that campaign has been to unfairly attack Judge Grisea as an ally of the holdouts.
Cabinet leader Jorge Capitanich accused Judge Griesa of not only being “partial” and “promoting imbalance” in favor of the holdout creditors, but also of not fully grasping the complexities off the case. That is a highly unconvincing critique of a deeply respected judge who has served with distinction for more than 40 years. Not to be outdone, in July, Argentine economy minister Axel Kiciloff, one of President Kirchner’s closest aides, came to Washington, D.C., to give a speech before the Organization of American States in which he called Judge Griesa’s ruling “absurd” and “crazy.”
Minister Kicillof, who appeared again just last week at meetings of the World Bank and IMF to hector against the holdouts, has only increased the verbal attacks on Judge Griesa. In a recent address to Argentina’s Lower House of Deputies, he stated that “the vulture funds found an accomplice judge to make a scandalous profit.” He conveniently failed to mention that the holdouts have yet to collect a dime in this dispute, and have repeatedly stated that they are ready to negotiate.
Judge Griesa has been pushing for a negotiated solution. In June, he appointed the highly respected lawyer Daniel Pollack as “special master” to conduct and preside over settlement negotiations. Perhaps predictably, the Kirchner administration quickly took to disparaging Mr. Pollack and accusing him of having “overt bias in favor of the vulture funds.” Argentina then tried, unsuccessfully, to remove him from his post as special master.
On October 7, 2014, Argentina’s social-welfare minister, Alicia Kirchner, the sister-in-law of Argentina’s current president, Cristina Kirchner, and sister of former president Nestor Kirchner, told Radio America in Argentina that the country is “is making history” by flouting the law. She also asserted that Argentina “should be ruled by politics and not from economics.” This is a bit like saying that nations should not have to obey the law of gravity.
Argentina’s latest stunt involves an attempt to move the case out of U.S. courts and into Argentine courts. Unsurprisingly, Argentina is having a hard time getting its non-holdout creditors to participate in this scheme. It is a blatant violation of Judge Griesa’s orders, and creditors flouting the court’s orders by going to Argentina to collect are fully justified in being concerned that they will be held in contempt of the U.S. District Court in New York. It turns out that breaking Argentina’s contract is not quite as easy as the country’s economic leaders thought it would be.
Argentina also tried to thwart the court’s decision by depositing the money to pay the other creditors (but not the holdouts) in Nacion Fideicomisos SA, a unit of state-run Banco de la Nacion Argentina. Argentina did this because no bank in the U.S. would make these payments, since Judge Griesa had expressly ruled that paying other creditors without paying the holdouts as well was illegal. This scheme is just as unlikely to work.
The paying agent and trustee for the bonds is Bank of New York Mellon Corp., and it, along with other third parties, is barred from making payments that are inconsistent with the court’s rulings or otherwise helping Argentina to avoid the law. This means that Argentina does not really know to whom it owes money, and its U.S. banks cannot help it to find out. Bondholders’ identities are known only by the nominees who serve as the “registered owners” of the securities. The nominees are Cede & Co., a subsidiary of the Depository Trust & Clearing Corp. (DTCC), and Bank of New York Depository (Nominees) Ltd., a subsidiary of BNY Mellon based in London. In the unlikely event that the creditors can be identified without the cooperation of one or both of these firms, any creditors who make it to Argentina to try to collect the money they are owed will be running afoul of the court’s rulings.
In the long run, the real losers here are future generations of Argentinians. Their country is now a pariah in world capital markets, and its currency is rapidly in decline. President Kirchner, whose contempt for the rule of law is a core policy and campaign promise, is going to learn that as difficult as it is for an issuer to thumb its nose at U.S. law that it is committed to obey, avoiding the inexorable discipline of the capital markets will prove even more difficult.
— Jonathan R. Macey is a professor of law at Yale Law School.