The case involved Argentina and a group of so-called vulture funds, led by the deep-pocketed and highly litigious hedge fund Elliott Associates, which was demanding repayment in full on old Argentine debt. Elliott had first come to broad public attention in 2000, when it brought -- and won -- a similar case against Peru. That unprecedented victory against a sovereign government, although worth a mere $90 million, so deeply shocked the international financial community that it prompted the International Monetary Fund to undertake a messy and protracted attempt to create a brand-new sovereign bankruptcy court. The Argentina case is much, much bigger -- Argentina owes Elliott over a billion dollars. The total amount that it owes “holdout creditors,” as the vulture funds are more formally known, is some $15 billion. Given that other holdout firms will immediately demand any terms awarded to Elliott, Argentina is not lying when it says that it simply can’t afford to do what the U.S. courts are demanding of it -- which is to pay all the holdouts in full.
Normally, when a borrower violates a contractual obligation, a judge will hand down a judgment against that borrower. In this case, however, Griesa went after the bondholders who had accepted 30 cents on the dollar for restructured Argentine debt. He told every other agent in the payments chain, up to and including the trustee for the exchange bondholders, that Argentina was not allowed to pay them until Elliott had been paid in full. If the trustee or anybody else helped Argentina pay its exchange bondholders, then Griesa would find them in contempt of court, assuming that Elliott had not been paid at that time.
That order was stayed pending appeal, but it is now in full effect. Make no mistake: the innocent are being punished. The exchange bondholders have done nothing wrong, and there is no way that they’re going to get their payment in full and on time, as Argentina would like. But the ruling goes well beyond punishing the innocent. It also turns the natural order of debt on its head. It used to be that having a bond was good but that having a judgment was much better. Now, however, it’s the other way around: judgments will get you nowhere, while bonds, if they have a pari passu clause, can make you all-powerful.
The case in New York -- the one that made it all the way to the Supreme Court -- was brought by bondholders that didn’t participate in the exchange. They originally bought their debt at a deep discount, and they knew how to apply past-due compound interest calculations to make the face value of the defaulted debt balloon into the billions. They knew that it wouldn’t be easy to get paid in full, but if they managed it they would have scored one of the biggest home runs in hedge-fund history.
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