The New York Second Circuit Court will hear Argentina’s appeal of a ruling that required the South American state to make payments to bondholders who have gone unpaid since a 2001 default.
The original ruling on the case interpreted the bond contract’s pari passu clause to require the country to treat the original bondholders equal to those who took reconstructed exchange payment offers. When the bonds were initially issued, Argentina agreed to this provision as an incentive for creditors. The exchange bondholders have been receiving payment for their bonds since a deal was negotiated in 2005, while the holdout bondholders have gone unpaid for over a decade.
“[T]he issue that was decided by the Second Circuit was whether Argentina had violated that Equal Treatment Provision when the country issued and then honored new bonds in exchange for the old,” Paul Keenan, a noted attorney at Greenberg Traurig, said earlier this week on a conference call by American Task Force Argentina.
Keenan pointed out that the court described the issue of pari passu as “a simple question of contract interpretation as a bond as a contract.”
Argentina’s appeal, among other things, claims violation of the Foreign Sovereign Immunities Act, a law that establishes limitations on sovereign nations getting sued in the U.S. court system. The court, however, is expected to be unmoved by this argument given that Argentina waived sovereign immunity as a condition — and also as a creditor incentive — when it issued the bonds.
The country has also passed the onerous Lock Law, blocking payments to the holdouts.
While there have been thousands of pages and millions of words of amicus briefs filed — five on the side of Argentina and six on behalf of the holdouts — the U.S. government has failed to weigh in.
Though this may be the largest sovereign default in history, Argentina has defaulted a total of six times, the first time as far back as 1827.
Still, the country has been named a member of the elite G-20, comprised of 20 of the most powerful global economies. It simultaneously sits on cash reserves of more $45 Billion.
If Argentina is allowed to continue to shirk bond payments, some fear that countries in worse financial condition will emulate its practices, thereby undermining creditor rights and the rule of law, and calling into question the enforceability of sovereign debt contracts. This could spell ruin for many sovereign bond investors, including the European Union.
The ongoing litigation and behavior from Argentina have led to criticism of the country’s president, Cristina Kirchner.
“It’s enough to listen to the Argentine president to know what populism and demagoguery is,” Peruvian Nobel Literature Prize winner Mario Vargas Llosa previously wrote, adding, ”It’s hard to understand how a country like Argentina, that we all know what it has meant culturally and scientifically at world level, has chosen a president of such intellectual and cultural poverty.”
Arguments for the appeal will begin at the end of February, after all papers surrounding the case have been filed.
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