IMF voices concern over Argentina's bond case defeat

Tuesday 17 June 2014 18.47
The US Supreme Court ruled that Argentina would have to pay the full value of the bond to those who did not accept restructuring
The US Supreme Court ruled that Argentina would have to pay the full value of the bond to those who did not accept restructuring

The IMF has voiced concern over the potential impact of Argentina's US legal defeat in its fight against investors in its defaulted bonds.

The US Supreme Court's refusal to hear Argentina's appeals in the case meant the country would have to pay the hedge funds the full value of their bonds, even though they refused to take part in a restructuring accepted by most creditors.

Some analysts say that ruling could encourage investors to hold out in other restructurings of sovereign debt, making it more difficult for the IMF and other official lenders to help stabilise countries whose finances have collapsed.

"The Fund is considering very carefully this decision and, as we have said before, we are concerned about possible broader systemic implications," the IMF said in an emailed statement.

In a number of recent studies and comments the IMF has said that the US legal case raised important questions for sovereign debt contracts and post-default resolution issues.

Analysts were split: some say the ruling will make getting bondholders to support a restructuring more difficult, while others said the impact was not immediately clear.

"Did it just make it easier to hold out and harder to restructure? Maybe, maybe not," said sovereign debt expert Antonia Stolper at the Shearman & Sterling law firm. "I'm not entirely convinced, given that, historically, holdouts have been paid."

Argentina had appealed a lower US court's ruling that it was bound to pay the hedge funds, which scooped up Argentine bonds at a steep discount when the country defaulted on close to $100bn in debt in 2001.

More than 90% of the defaulted debt was covered in the 2005 and 2010 restructuring, but New York hedge funds NML Capital and Aurelius Management refused to take part and began litigation to recover 100% of the bonds they held, worth at least $1.3bn.

Argentina had argued that they gave up their claim and, as well, that paying them could further hobble the country's finances. 

Moreover, both Buenos Aires and the bond holders who participated in the restructuring had argued throughout the case that favouring the holdouts undermined the basis of any restructuring.

But the highest US court declined to accept the appeal, leaving the lower court's rulings against Argentina in place.

After the ruling, President Cristina Kirchner said Argentina would not default on its restructured debt, but left payment of the holdouts in question, lashing out at what she called "extortion".

"Argentina has shown a more than clear will to pay, but there is a difference between negotiation and extortion," Kirchner said.