Argentina defies US court ruling and passes bill

Argentina defies a US court ruling by passing a bill that will allow the country to make payments locally or in regions outside the jurisdiction of the US legal system.

The new law relates to a prolonged dispute with some hedge funds (holdouts) that refuse to negotiate on the payment of $1.4 billion on bonds they hold. They bought the discounted bonds from other creditors that were victims of an Argentine default 13 years ago.

Argentina defaulted in 2001 following an economic collapse. It has been battling in the courts with bondholders, led by hedge funds Aurelius Capital Management and NML.

Ninety-two percent of the bondholders agreed in 2005 and then again in 2010 to write off two-thirds of the bonds’ initial (pre-crisis) value.

The ‘holdouts’, i.e. the hedge funds unwilling to negotiate, won a US court ruling preventing the Argentine government from paying interest to the majority of bondholders.

Marathon debate in Congress

Yesterday in Buenos Aires, opposition Congress lawmakers argued that the Sovereign Payment Law would be undermined if it did not meet the legal requirements originally written in the bond contracts. Lawmakers allied to the government brushed aside that argument.

Juliana Di Tullio, leader of the Front for Victory ruling coalition, said:

“We have a coupon payment on Sept. 30. We have to fulfill that payment.”

Argentine newspaper La Mañana de Córdoba quoted Ms. Tullio, who also said:

We are being blackmailed by a tiny group of vulture funds and the irrational decision of a municipal judge. We have experienced vulture-fund threats, lies, insults to our country, and destabilization operations. If that is not a foreign attack, what is?” (“Estamos siendo extorsionados por un grupo minúsculo de fondos buitre y un fallo irracional de un juez municipal. Lo que hemos vivido este tiempo fueron amenazas de estos fondos buitre, mentiras, descalificaciones hacia nuestro país, operaciones y desestabilización. Si eso no es un ataque foráneo, qué es?”)

The bill, which had already been approved by the Senate last week, was passed with 134 votes ‘for’ and 99 ‘against’. The marathon debate started on Wednesday afternoon and ended in the early hours of Thursday morning.

Cristina Elisabet Fernández de Kirchner
President Fernández de Kirchner calls the holdouts “fondos buitre” (vulture funds).

While accusing the Argentine government of acting illegally, US District Judge Thomas Griesa had stopped short of placing the country in contempt.

Argentina can now circumvent US courts

Now the bill has passed, Argentina can bypass the ruling and deal directly with its creditors without outside interference, it says.

President Cristina Elisabet Fernández de Kirchner, who describes the ‘holdouts’ as “vulture funds” and accuses the US courts of meddling in issues of national sovereignty,  signed off the bill today.

In July 2014, Argentina fell into default for the second time since the turn of the millennium after Judge Griesa ruled that the Bank of New York would be acting illegally if it transferred interest payments to bondholders without Argentina first settling with the ‘holdouts’.

The ‘holdouts’ bought Argentine government bonds at knockdown prices after the country defaulted in 2001. They have refused to accept the new restructuring terms, even though most of the other creditors are happy. They demand repayment of 100% of the debt.

If the ‘holdouts’ accepted the current deal, they would still make enormous profits on the bonds they bought.

The Argentine government says it is doing everything possible to make the payments to creditors, and accuses the United States (through its courts) of doing everything it can to make this impossible.

Argentina has until September 30 to settle $200 million in interest payments. It has to find an intermediary bank where it can deposit the money. This bank needs to be outside the US court’s jurisdiction.

If payment is not made by the end of this month, there is a risk that investors may call for immediate payment on the initial value of their bonds, which are estimated to be worth about $29 billion.