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Can Argentina stiff U.S. bondholders? Supreme Court to hear the dispute Monday

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Can a country seeking to welsh on its debts invoke sovereign immunity to evade not just court orders to pay those debts, but also post-judgment discovery aimed at collecting on those judgments? Can it do so to prevent not just discovery directed at it, but also at third-party banks? Most importantly, can it do so even though it contractually waived sovereign immunity? The answer is yes, according to Argentina, which is seeking to stiff many of its bondholders. Thankfully, the U.S. Court of Appeals for the Second Circuit disagreed with this attack on property and contract rights in a 2012 decision.

But amazingly enough, the Obama administration has taken Argentina’s side at the Supreme Court. It is joined by the government of France, which has experienced downgrades in its credit rating due to stubbornly-high government spending that consumes well over half of France's economy under Socialist President Francois Hollande. The willingness of the Obama administration to take Argentina’s extreme position is disturbing given that the Second Circuit’s ruling was unanimous and joined in by judges appointed by presidents of both political parties.

Along with my employer (the Competitive Enterprise Institute), several former State Department officials have filed an amicus brief asking the Supreme Court to uphold the appeals court’s ruling, and reaffirm the availability of the post-judgment discovery needed to protect property and contractual rights. The former State Department officials include counsel of record John Norton Moore, former Counselor on International Law to the Department of State; Robert F. Turner, former Deputy Assistant Secretary of State for Legislative Affairs; Abraham D. Sofaer, a former federal judge and former Legal Adviser to the Department of State; Professor Malvina Halberstam, former Counselor on International Law to the State Department; and Davis R. Robinson, former Legal Adviser to the State Department. John Norton Moore, who teaches international law and national-security law at the University of Virginia, was extensively involved in drafting the Foreign Sovereign Immunities Act (FSIA) involved in the case. Judge Sofaer was appointed by President Carter to the federal bench in 1979.

As attorney Francis Menton notes in his Manhattan Contrarian blog, if Argentina is successful in welshing on its debts, that will help perpetuate its regime of cronyism and corruption, which squanders money that otherwise could easily be used to pay bondholders:

Never mentioned is that the “crisis” in Argentina actually consists of nothing more than that the politicians would rather spend money on various forms of vote buying than on paying their debts. They don’t have to pay for any wars. (The Falklands war was way back in 1982.) They haven’t had any natural disasters to speak of. Whatever crisis they have is completely of their own making, born of incompetent economic policy and waste. Argentina is famous for an economy dominated by crony capitalism and subsidies. Inflation is rampant — they admit to 10.9% for 2013, but everybody knows that’s fake. The real number is more like at least 50%, according to a February article in The Economist here. That gives a great opportunity for the old official exchange rate game, where you let your friends buy or sell dollars at a fake rate, hiding massive payoffs.

Mr. Menton succinctly describes the background of the case:

Argentina defaulted on close to $100 billion of external debt around the end of 2001. Then in 2005 and again in 2010 it put out take-it-or-leave-it exchange offers, and got some 93% of the holders of the defaulted debt to turn them in for new “exchange” bonds with face value of about 25 cents on the dollar, and other less favorable terms. But that left about $7 billion of the defaulted bonds outstanding. Argentina passed a so-called “Lock Law” that flatly prohibits payment on the defaulted bonds, but those bonds by their terms are payable in New York and governed by New York law. Holders of those remaining bonds have been relentlessly pursuing their lawsuits in the Federal courts in New York. Argentina has lost at every turn . . . The Southern District court has not only granted summary judgment to the holders on their bonds, but has also granted equitable relief ordering that Argentina must pay the defaulted bonds any time it makes a payment on the exchange bonds, and further that it may not “take any action to evade the directives” of the court. Argentina wished to keep paying on the exchange bonds and keep not paying on the defaulted bonds, so it then in August came up with the idea of exchanging the exchange bonds yet again for new bonds payable in Argentina, thus outside the jurisdiction of the U.S. judges.

Not so fast! The defaulted bond holders went into court and asked the judge to specifically order that Argentina could not do such a new exchange to evade his prior orders, and he agreed. On October 3 he ordered that such a new exchange would violate his prior orders and was specifically prohibited. . . Might Argentina go into outright defiance of the New York court orders? Here is a clip from the Second Circuit argument earlier this year where the lawyer for Argentina (Jonathan Blackman of Cleary) seems to be saying that they will: “We would not voluntarily obey such an order.”

Given the breadth of the orders the courts have already shown themselves willing to issue, it appears that unless Argentina gives up and pays the defaulted bonds, the courts are heading toward cutting it off completely from the New York financial markets. . . . getting cut off from credit would probably be the best thing that could ever happen to Argentina, finally forcing a reduction in its wildly bloated state sector and out-of-control crony capitalism. But. . .without a doubt the Europeans will continue to lend to them.

Argentina has sought to use sovereign immunity to defeat the contractual rights of its bondholders, even though it contractually waived sovereign immunity. In the words of the respondent bondholders’ brief to the Supreme Court:

While it “irrevocably agreed not to claim” sovereign immunity against its creditors and consented “to the giving of any relief or the issue of any process in connection with any Related Proceeding or Related Judgment,” [quoting a court opinion, Pet. App. 4 n.1], it has continued to assert sovereign immunity as a defense. And to evade its creditors, Argentina has spirited assets outside the United States and structured its finances to avoid attachment under the FSIA or the laws of foreign jurisdictions.

The case before the Supreme Court, Republic of Argentina v. NML Capital, will be argued here in Washington, D.C., this coming Monday.

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