The U.S. Supreme Court on Monday will wade into Argentina's multi-billion dollar legal fight with bond investors who turned down two debt restructuring offers after the country's 2002 default.
The relatively narrow case that the nine justices are due to hear concerns whether the investors can force banks in New York with which Argentina does business to disclose information about the country's non-U.S. assets as the investors seek repayment.
The case is in some ways the appetizer, with the main course in the no-holds-barred litigation yet to come. A bigger case, in which Argentina is challenging a court judgment ordering it to pay $1.33 billion to the so-called “holdout” bond investors or face a potential default if it refuses to do so, waits in the wings.
The high court could decide in June whether to take up the bigger case. It would not be argued or decided until the court's next term beginning in October and ending in June 2015.
Argentina has been battling for a decade with the bondholders led by hedge funds NML Capital Ltd, a unit of billionaire Paul Singer's Elliott Management Corp, and Aurelius Capital Management. Argentina argues the funds bought most of the debt at a deep discount after the default and sought to thwart the country's efforts to restructure. Creditors holding about 93 percent of Argentina's bonds agreed to participate in two debt swaps in 2005 and 2010, accepting between 25 and 29 cents on the dollar.
Although the two cases present different legal questions, both broadly concern the scope of sovereign immunity, which is the legal principle that sets limits on when nation states can be sued. The bond investors have embraced a litigation strategy that aims to circumvent those limits.
Theodore Olson, a lawyer for NML, said both cases were about “Argentina's default on its obligations and its refusal for decades to honor those legally binding obligations which it voluntarily incurred in order to raise capital in American financial markets.”
A ruling on Monday's case is expected by late June. Observers on both sides will be watching the argument and the ruling for clues as to how the justices will act on Argentina's second case, referred to as the “pari passu” case. Pari passu clauses, routinely included in the contracts that govern the sale of debt, require equal treatment of investors.
The pari passu case could have implications for other countries facing defaults and the bond market as a whole, according to Brett House, a senior fellow at the Center for International Governance Innovation, a think tank based in Waterloo, Ontario. A ruling against Argentina could have a damaging effect on New York's role as an issuer of bonds, House said.
“They don't want to issue debt if it can come back and bite them,” he said.
Argentine President Cristina Fernandez's government is struggling with high inflation, anemic economic growth and falling central bank reserves. As such, a victory in the first case would likely be used by the Argentine government as evidence that the bondholders do not have a strong legal argument in the second.
“It could be read like that. But it is another thing to say that would be the correct reading,” said Daniel Marx, an economist who formerly served as a civil servant in the finance ministry.
The Argentina government declined to comment on the litigation. Last week, the G24 group of emerging market nations, which includes Argentina, issued a statement stressing the importance of an Argentina victory.
“Any resolution that incentivizes predatory holdout behavior would undermine the basic architecture for sovereign lending and debt resolution,” the statement said.
Ships and satellites
The case being argued on Monday concerns NML's efforts to enforce U.S. court judgments it already has won against Argentina. The only way it can enforce the judgments is by tracking down Argentina's assets in the United States and elsewhere.
NML says it has won judgments worth about $1.7 billion but it has had little success in seizing assets as the legal process is convoluted and is resolved on a case-by-case basis.
Among the assets NML has tried to seize so far are an Argentine frigate that was docked in Ghana and a contract for launch slots at the SpaceX private satellite launch site in California.
In the matter before the high court, the question is whether NML could enforce subpoenas against Bank of America and Banco de la Nacion Argentina seeking information about Argentina's non-U.S. assets.
In August 2012, the 2nd U.S. Circuit Court of Appeals in New York said NML could subpoena the banks.
In court papers, Argentina's lawyers say that its sovereign immunity, as outlined in a federal law called the Foreign Sovereign Immunities Act, extends to the type of information NML is seeking via the subpoenas.
The U.S. government backs Argentina in the first case, saying lower court rulings undermined sovereign immunity. It supported Argentina in the pari passu case in the lower courts but has yet to say whether it would do so in the Supreme Court.
It is because of the difficulty of seizing assets a piecemeal way that NML and the other holdout investors tried another strategy, which led to the pari passu case pending before the high court.
NML's argument is that when Argentina services its debt on the restructured bonds, it must also pay a proportion of that money to the holdout bond investors.
In August 2013, the appeals court in New York endorsed that argument. The ruling was suspended pending Supreme Court review.
The bondholders have said they are willing to negotiate, while Argentina responded to the ruling by proposing a voluntary swap of foreign debt in exchange for bonds issued under Argentina law.
With President Fernandez vowing never to pay the holdout bond investors, the case raises the possibility of another default on Argentina's debt if it ultimately loses the case.