Fact Check: Argentina

958 days, 18 hours, 30 minutes ago


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Draft Letter to Members of Congress that Marc Weisbrot is Peddling to Economists

Dear Member of Congress,

We note with concern the recent developments in the court case of Argentina vs. NML Capital, etc.  The District Court’s decision – and especially its injunction that is currently blocking Argentina from making payments to 93 percent of its foreign bondholders —  could cause unnecessary economic damage to the international financial system, as well as to U.S. economic interests, Argentina, and fifteen years of U.S. bi-partisan debt relief policy.  We urge you to act now and seek legislative solutions to mitigate the harmful impact of the court’s ruling.

For various reasons, governments sometimes find themselves in situations where they cannot continue to service their sovereign debt. This was Argentina’s situation at the end of 2001. After years of negotiations, Argentina reached a restructuring agreement with 93 percent of the defaulted bondholders, and has made all agreed-upon payments to them.

The court’s decision that Argentina cannot continue to pay the holders of the restructured bonds unless it first pays the plaintiffs mean that any “holdout” creditor can torpedo  an existing agreement with those bondholders who chose to negotiate. While individuals and corporations are granted the protection of bankruptcy law, no such mechanism exists for sovereign governments. As such, the court’s ruling would severely hamper the ability of creditors and debtors to conclude an orderly restructuring should a sovereign debt crisis occur. This could have a significant negative impact on the functioning of international financial markets, as the International Monetary Fund has repeatedly warned.

Those who invested in Argentine bonds were compensated with high interest rates, to mitigate the risk of default. There are inherent risks when investing in sovereign bonds, but the court’s ruling creates a moral hazard, by allowing investors to obtain full repayment, no matter how risky the initial investment.

The plaintiffs in the case purchased Argentine bonds on the secondary market after default, often for less than 20 cents on the dollar. While these actors could have accepted the restructuring and still made a very large profit, they instead have fought a decade-long legal battle, seeking exorbitant profits in excess of 1,000 percent and creating financial uncertainty along the way.

The recent developments will also directly impact the United States and its status as a financial center of the world economy. While much of the developing world’s debt is issued under the jurisdiction of New York law and utilizing New York-based financial institutions, the court’s ruling will make it more likely for sovereign governments to seek alternate locations to issue debt. Britain and Belgium, for example, have already passed legislation aimed at preventing this type of behavior from “holdout” creditors.

In addition, the court has put restrictions on New York banks, preventing them from distributing regularly scheduled interest payments to holders of the restructured bonds. Already, banks have faced lawsuits from investors, creating greater uncertainty for U.S.-based financial institutions.

Argentina has expressed a willingness to negotiate, and has recently reached agreements with the Paris Club as well as claims by international investors.  However, with an imminent deadline that would see Argentina enter into technical default with serious repercussions, there is little room for a real negotiation.

We hope that you will look for legislative solutions to prevent this court decision, or similar rulings, from causing unnecessary harm.