Argentina Says It Won’t Voluntarily Comply With Bond Ruling

Argentina told a U.S. appeals court in New York that it won’t obey rulings that might force it to pay holders of its defaulted debt and trigger a financial crisis.

A lawyer for the South American nation went before the three-judge panel today to challenge a lower-court order that obliges it to pay the defaulted bonds whenever it makes payments on restructured debt. The republic claims that the order violates its sovereignty, exposes it to the possibility of a new financial crisis and threatens efforts by other countries to restructure overwhelming sovereign debt.

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Lawyers David Boies and Theodore Olson

Michael Buckner/Getty Images for American Foundation for Equal Rights

In today’s appeal, lawyers Theodore Olson, right, represents NML Capital, and David Boies, left, will argue for the Exchange Bondholder Group.

In today’s appeal, lawyers Theodore Olson, right, represents NML Capital, and David Boies, left, will argue for the Exchange Bondholder Group. Photographer: Michael Buckner/Getty Images for American Foundation for Equal Rights

Argentina “won’t voluntarily comply” with the rulings if the appeals court upholds them, said Jonathan Blackman, a lawyer for the country. “If that’s the confrontation the court seeks with the injunctions, that is the court’s decision.”

A range of third parties with a stake in the outcome -- including the holders of Argentina’s restructured debt, international payment intermediaries and banks, and the trustee for the restructured bonds -- claim the lower court’s actions also threaten their interests.

Equal Treatment

U.S. Circuit judges Reena Raggi and Barrington Parker opened the hearing by asking about equal treatment of debt holders. Raggi called holders of the defaulted bonds “victims” and asked why Argentina can’t pay both bond groups.

The country will default on restructured debt if forced to pay defaulted bonds, Blackman said.

“We’re representing a government and governments will not be told to do things that fundamentally violate their principles,” Blackman said.

Hernan Lorenzino, Argentina’s minister of economy, and Vice President Amado Boudou sat in the courtroom as Blackman spoke.

Holders of defaulted bonds, led by Elliott Management Corp.’s NML Capital Ltd., run by billionaire hedge-fund manager Paul Singer, and Aurelius Capital Management, have won U.S. court judgments recognizing their right to be paid and are asking the appeals court to uphold the lower court to give them the ability to collect the $1.3 billion they say they’re owed.

Argentina says a ruling in the creditors’ favor would open it up to more than $43 billion in additional claims it can’t pay. The country defaulted on a record $95 billion in debt in 2001. Holders of about 91 percent of the bonds agreed to take new exchange bonds in 2005 and 2010, at a deep discount.

Full Amount

The U.S. Court of Appeals panel is hearing arguments from both sides, as well as from lawyers for the Exchange Bondholder’s Group, which represents holders of Argentina’s restructured debt, and for Bank of New York Mellon Corp., the indenture trustee for the restructured bonds.

In today’s appeal, Theodore Olson represented NML Capital. Attorney David Boies argued for the Exchange Bondholder Group. The creditors are seeking to uphold rulings by U.S. District Judge Thomas Griesa in Manhattan that require Argentina to pay them the full amount they’re owed whenever it makes a required payment to the holders of the exchange bonds. The Exchange Bondholder Group claims the ruling improperly threatens their investment.

Griesa’s order shouldn’t apply to restructured debt holders, Boies told the panel. The court can’t hold new bondholders hostage, Boies said.

“We’re innocent parties,” Boies said. “I represent people who did what they thought was right. All I’m saying is what they did shouldn’t count against them.”

Holders of the defaulted debt are seeking “what they are owed,” Olson told the judges.

Court Rematch

The arguments today feature a courtroom rematch between Boies and Olson, who opposed each other in the litigation that decided the 2000 U.S. presidential election -- Olson for Republican George W. Bush and Boies for Democrat Al Gore.

The appeals court may not rule for weeks or months.

The extra yield that investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries narrowed 17 basis points, or 0.17 percentage point, to 1,097 basis points at 4:06 p.m. in New York, the highest in emerging markets after Belize, according to JPMorgan Chase & Co.’s EMBI Global index.

The cost to protect $10 million of Argentine government debt against non-payment over five years with credit-default swaps surged 65 basis points to 2,342 basis points, the highest in the world, according to data compiled by Bloomberg.

Country’s Assets

Government officials have characterized holders of the defaulted debt as “vultures,” and the country’s legislature in 2005 passed a law barring payment of the defaulted bonds. Argentina has spent the past decade opposing claims brought in U.S. courts by holders of the defaulted bonds.

Over the past decade, many holders of the defaulted Argentina bonds have won U.S. court rulings requiring the country to pay them. Despite the favorable rulings, courts have generally prevented the holders of defaulted debt from moving to seize the country’s assets, citing the Foreign Sovereign Immunities Act, which limits the ability of plaintiffs to sue foreign countries in U.S. courts.

The appeals court affirmed Griesa’s ruling that an equal treatment, or pari passu, clause in the original bond agreements prevents Argentina from treating defaulted bondholders less favorably than exchange bondholders. The appellate court upheld an injunction issued by Griesa that barred Argentina from paying the exchange bondholders without also paying holders of defaulted debt.

Scheduled Payment

Griesa said the order applied to BNY Mellon and other third parties and said Argentina must pay the full $1.3 billion when it makes its next scheduled payment on the restructured bonds.

At the hearing today, Olson said BNY Mellon would help Argentina violate the order.

The court “cannot give in” to Argentina, Olson said, adding that the country’s stance “threatens” all U.S. courts.

The lower court case is NML Capital Ltd. v. Republic of Argentina, 08-06978, U.S. District Court, Southern District of New York (Manhattan). The appeal is NML Capital Ltd. v. Republic of Argentina, 12-00105, U.S. Court of Appeals for the Second Circuit (New York).