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Argentina Hold ‘em

9 April 2012 By Reynolds Holding

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.


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