Argentina For Sale: Implications of the U.S. Supreme Court Decision on Argentina
By: Otto Raul Tielemans, Research Associate at the Council on Hemispheric Affairs
NML Capital, the investment firm of multibillionaire Paul Singer, proved itself victorious against the Argentine government on July 16, after the U.S. Supreme Court declined the country’s request for an appeal of its decision. The verdict to avoid pursuing further litigation in Republic of Argentina vs. NML Capital reiterated a lower court’s ruling in which the hedge fund group was awarded $1.33 billion USD in assets [1].
The decade-long case between both Kirchner presidencies and the uncompromising group of private investors stems back to Argentina’s 2001-2002 debt default. Unsustainable deficits and lackluster development forced the country to renege on $132 billion USD of loans—the largest default in history behind that of Greece [2]. A depleted treasury forced President Néstor Kircher (2003-2007) and after him President Cristina Fernández de Kirchner (2007-present) to react to their nation’s financial meltdown by rapidly moving to restructure their debts with foreign creditors.
While both administrations succeeded in settling disputes with 93 percent of financers, it was the remaining percentage of holdouts that handicapped the nation’s economic recovery [3]. Known as the Paris Club, this informal and uncompromising group of 19 investors refused to restructure their debt and sued Argentina before international forums [4]. Until this year, such legal proceedings left the country unable to obtain credit on the international market in order to finance its multiple social programs and repay investors [5]. In 2006 Venezuela responded to the lack of international support for Argentina by injecting its treasury with reserves through the purchase of over $2.1 billion USD of Argentine bonds [6].
Although Argentine authorities were successful in renegotiating with the majority of firms, NML Capital was one of the few businesses that was adamant on being fully repaid. President Cristina Fernández de Kirchner wasted no time in labeling the venture capitalists as “vultures”—unscrupulous businessmen who intended on capitalizing off bonds they purchased at deeply discounted prices [7]. Yet, the president’s inflammatory comments have had little impact. The courts awarded the hedge fund group with the judicial approval required to comb through Argentina’s bank records [8]. These legally permissible infringements of privacy, while highly controversial, are a tactic used by companies to track the movement of assets throughout the world as means of “reclaiming” billions of dollars in lost assets [9].
Both Argentina and the United States have claimed that the probing of government financial records is an infringement of sovereignty and a flagrant disrespect of international law. The administrations of President de Kirchner and President Barack Obama bring to mind the The Foreign Sovereign Immunities Act, a federal law that sets limitations on the confiscation of assets from foreign countries, as a means of validating their stances [10]. Nevertheless, Supreme Court Justice Antonin Scalia, joined by six other justices, wrote in a majority decision that “[no provision] forbidding or limiting discovery in aid of execution of a foreign-sovereign judgments debtor’s assets” existed [11]. In essence, NML Capital has the authority to enforce subpoenas against financial institutions it believes to house, or at one point have housed, Argentine assets. With that, it can track and repossess assets it claims to have been legally awarded. Bank of America and Banco de la Nacion Argentina are speculated to be prime targets for the investment group.
Unsurprisingly, NML Capital is not new to the demented games of repossessing Argentine assets. In 2012, the company convinced the Supreme Court of Ghana to grant them an injunction, in which they first detained and later claimed ownership of an Argentine naval vessel for 10 weeks (after which Ghana succumbed to international pressure and released the ship) [12]. The investment firm even went so far as to file an injunction in Germany and the United States, attempting to repossess “Tango 01,” the country’s presidential jet [13].
The high court’s decision sends a clear message to the international community that governments have an obligation to respect the contractual terms of bonds, loans, etc. Argentina will forever serve as the case study for investors who sue foreign states in the hope of receiving a full return on their investment. While some scholars may argue that this decision will incentivize the financially irresponsible country to exercise a greater sense of fiscal responsibility, Monday’s decision increases the probability that Argentina will default on its loans. With the country due to repay an unrelated $24 billion USD debt on June 30, Argentina’s scarce federal reserves are insufficient to repay NML Capital [14]. Argentina has few options for loans at this time since it has yet to regain the confidence of foreign markets, and Venezuela, for its part, is focusing on quelling domestic turmoil.
The refusal of the courts to pursue litigation adds to Argentina’s lackluster development, rising inflation, and chronic commodity shortages. The nation’s hemorrhaging economy, estimated to have lost $35 billion USD in capital flight, is already beginning to experience a devaluation in stocks and bonds, making the chances of a financial comeback slim [15]. Needless to say, Argentina’s monetary woes are not only due to the actions of foreign investors, but also of President Cristina Fernández de Kirchner’s blatant disregard for private property. Her administration has nationalized domestic and foreign industries in sectors ranging from airlines to oil, frightening already timid investors from the Latin American country.
Her constant nationalization efforts, however, do not diminish the fact that the U.S. Supreme Court’s decision will worsen Argentina’s already grotesque economic atmosphere. The further deterioration of the national economy can have the effect of exacerbating social conditions that produce crime and social unrest.
While highly unlikely, there is still a possibility that President Cristina Fernández de Kirchner’s administration can successfully reach a settlement with NML Capital. However, with the courts having awarded the hedge fund group with the rights to be fully compensated and with Argentina scheduled to pay an installment of their debts on June 30, the country faces a greater chance of default than of repayment in the following two weeks.
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References [1] Hurley, Lawrence and Marsh, Sarah, “Supreme Court rejects Argentina appeal in bond fight,” Reuters, June 16, 2014, accessed June 16, 2014 http://www.reuters.com/article/2014/06/16/us-usa-court-argentina-idUSKBN0ER1MT20140616 [2] Rodrik, Dani, “Argentina: A Case of Globalisation Gone Too Far or Not Far Enough?”, January 2003, accessed June 16, 2014, https://www.sss.ias.edu/files/pdfs/Rodrik/Commentary/Argentina-globalization-gone-too-far.pdf [3] Newbery, Charles, “Argentina: Trouble and strife,” Emerging Markets, March, 16, 2013, accessed June 16, 2014, http://www.emergingmarkets.org/Article/3171305/ARGENTINA-Trouble-and-strife.html [4] Horobin, William and Parks, Ken, “Argentina Relaunches Paris Club Debt Talks,” The Wall Street Journal, January 20, 2014, accessed June 16, 2014, http://online.wsj.com/news/articles/SB10001424052702304302704579332710340933806 [5] O’Brien, Rosalba, “Credit markets open to Argentina for first time in years: ministry,” Reuters, March 31, 2014, accessed June 16, 2014 http://uk.reuters.com/article/2014/03/30/us-argentina-debt-goldman-idUKBREA2T0DD20140330, [6] “Venezuela Buys More Argentine Debt,” Venezuelanalysis.com, February 15, 2006, accessed June 16, 2014, http://venezuelanalysis.com/news/1617 [7] Huley, Lawrence and Marsh, Sarah, “WRAPUP 2-U.S. top court rejects Argentina appeal in bond fight,” Reuters, June 16, 2014, accessed June 16, 2014, http://www.reuters.com/article/2014/06/16/argentina-debt-idUSL2N0OX0KJ20140616 [8] Kendall, Brent, “Supreme Court Sides with Holdout Creditors in Argentina Debt Case,” The Wall Street Jorunal, June 16, 2014, accessed June 16, 2014, http://online.wsj.com/articles/u-s-supreme-court-rejects-argentina-appeal-in-sovereign-debt-case-1402926119 [9] Fisher, Daniel, “Supreme Court Hands Billionaire Paul Singer A Victory Over Argentina,” Forbes, June 16, 2014, accessed June 16, 2014, http://www.forbes.com/sites/danielfisher/2014/06/16/supreme-court-hands-billionaire-paul-singer-a-victory-over-argentina/ [10] Ibid. [11] “Republic of Argentina V. NML Capital, LTD.,” Cornell University Law School, June 16, 2014, accessed June 16, 2014, http://www.law.cornell.edu/supremecourt/text/12-842 [12] Smith, David, “Seized Argentinian sailing ship leaves Ghana,” The Guardian, December 20, 2012, accessed June 16, 2014, http://www.theguardian.com/world/2012/dec/20/argentina-sailing-ship-ghana-release [13] Russo, Camila, “Evading Singer’s Dragnet Means $880,000 Flight: Argentina Credit,” Bloomberg, January 10, 2013, accessed June 16, 2014, http://www.bloomberg.com/news/2013-01-10/evading-singer-s-dragnet-means-880-000-flight-argentina-credit.html [14] Wile, Rob, “Supreme Court Dashes Argentina’s Hopes In Bond Case,” Business Insider, June 16, 2016, accessed June 16, 2016, http://www.businessinsider.com/us-supreme-court-will-not-review-argentina-bond-cases-2014-6 [15] Padgett, Tim, “The Reign of Argentina’s ‘Queen Cristina’ Is All But Over – And How Miami Benefits,” WLRN, October 30, 2013, accessed June 16, 2014, http://wlrn.org/post/why-reign-argentinas-queen-cristina-all-over-and-how-miami-benefits