Argentina has finally run out of wiggle room in a billion-dollar showdown over foreign debts unpaid since the country's world-record default a decade ago, and the stakes couldn't be higher for President Cristina Fernandez.
Late Wednesday night, a federal Court of Appeals judge in New York ordered Argentina to pay immediately and in full everything it owes to the so-called "vulture funds" she blames for much of her country's troubles. That adds up to $1.3 billion, due by Dec. 15.
The judge also barred Argentina from paying other bondholders until it satisfies this judgment, putting the president's back against the wall: If she doesn't reverse her longstanding position and pay up, she risks triggering another historic Argentine debt default, this time totaling more than $20 billion.
"It is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes. After 10 years of litigation, this is a just result," U.S. District Judge Thomas Griesa said.
Argentina's government did not immediately respond to Griesa's orders, delivered just before the U.S. Thanksgiving holiday, which has closed bond markets in New York.
Argentina's president and economy minister insisted earlier this week that they won't pay a single dollar to the plaintiffs, and said they would appeal to the U.S. Supreme Court. But the judge gave Fernandez no room to maneuver, lifting his stay and ordering that the money be put in an escrow account for the plaintiffs to collect.
"These threats of defiance cannot go by unheeded," the judge wrote. "The less time Argentina is given to devise means for evasion, the more assurance there is against such evasion."
If Fernandez refuses, the judge said that the Bank of New York, which processes Argentina's bond payments, will find itself in violation if it doesn't hold up payments to all other bondholders.
That remedy sent jitters through the legal departments of the most powerful financial institutions in the United States.
The U.S. Federal Reserve and the Clearing House, a trade group representing the world's largest commercial banks, told the judge to make sure his order won't affect the U.S. funds-transfer system, which automatically moves an average of $2.6 trillion a day in half a million transfers among more than 7,000 banks.
The entire system depends on transfers being "immediate, final and irrevocable" when processed. Requiring intermediaries to identify, stop and divert payments according to court orders "would impede the use of rapid electronic funds transfers in commerce by causing delays and driving up costs," the trade group said.
The judge dismissed these concerns Wednesday night, saying among other things that "if Argentina complies with the rulings of the Court of Appeals, there will be no problem."
As with so many other things involving Argentina, this case is rooted in the bloody dictatorship that ruled from 1976 to 1983. The military junta more than tripled the country's foreign debts. By 2001, the burden had become unsustainable and the economy collapsed. Argentina's $95 billion default still stands as a world record.
Sovereign debt is supposed to be paid no matter who runs a country, but Fernandez has always considered this defaulted debt to be illegitimate, forced onto the Argentines by dictators acting in concert with international financial speculators. She and her late husband and predecessor, Nestor Kirchner, who took office in 2003, have never made any payments on the defaulted bonds.
Instead, they offered new bonds paying less than 30 cents for each dollar owed in default, and by 2010, 93 percent of the original bondholders agreed to the swaps. The debt relief granted by these "exchange bondholders" enabled Argentina to climb out of a deep economic crisis, and many analysts have described it as a model for Greece and other debt-burdened countries to consider now.
Hold-outs, led by NML Capital Ltd., an investment fund owned by U.S. billionaire Paul Singer, refused the swaps, insisting on payment in full, plus interest. Singer's lawyers have traveled the world since then seeking to embargo Argentine assets, even getting its navy ship Libertad seized in Ghana as collateral. But they have never collected.
The judge's solution to all this is to force Argentina to pay the holdouts an equal amount each time it makes a payment to the exchange bondholders. And since the latter group is due to get $3.3 billion on Dec. 15, the judge said the holdouts must get their entire $1.3 billion by then as well.
Exchange bondholders who collectively own $20 billion in the restructured Argentine debt had argued that they "already suffered tens of billions of dollars in losses," and that it's not fair to harm their already diminished returns so that a few holdouts can earn up to 200 percent on their original investments.
If allowed to stand, this kind of remedy will make it impossible for other countries to get critical debt relief, they argued.
But the judge said his remedy is fair.
"The exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating," while the holdouts spent years unsuccessfully trying to make Argentina pay, he wrote.
Fernandez sought to calm matters earlier in the week, noting that Argentina has $45.3 billion in reserves and a much lighter debt burden than it did years ago.
If Argentina does comply with the ruling, Moody's Investors Service said it could set a legal precedent for other holdouts who together claim nearly $12 billion in unpaid debts.
But if she doesn't fully meet Argentina's December obligations to the exchange bondholders, they could demand immediate payment on their entire $20 billion.
If this happens, "the injunction will have turned a relatively minor default into a cataclysmic default that will further unsettle the already fragile global economy," the exchange bondholders warned.
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