WASHINGTON — A years-long court battle in New York could have major implications for the world’s financial system as investors seek to recover unpaid debts from Argentina’s massive 2001 default.
Global finance officials fear a victory by creditors could make it more difficult to put together an international financial rescue package like the one that pulled the Greek economy from the brink of collapse in the past few years.
Those concerns have put the U.S. government and the Washington-based International Monetary Fund in an awkward position. Both have criticized Argentina’s handling of its economy. But they fear a judgment against the Latin American country in this case could set a dangerous precedent.
“It has nothing to do with Argentina,” IMF spokesman William Murray said Thursday. “It has to do with the principles, the policy implications of a particular legal case.”
The concerns arose again this week as the IMF contemplated formally backing Argentina in the court case. After the U.S. opposed that plan, the international lending agency decided against doing so, saying it was wary of taking sides in a U.S. legal dispute.
But the IMF clearly worries that a ruling against Argentina could make it difficult to craft future rescue packages that call for a country’s creditors to accept less than what they are owed.
The U.S., which supported Argentina at earlier stages of the case, said Wednesday it shares the concerns while opposing IMF involvement in the case. The IMF was considering filing a friend-of-the-court brief in support of Argentina’s petition to the U.S. Supreme Court to overturn a lower court’s ruling against it.
The case stems from Argentina’s financial crisis a dozen years ago when the government could not pay its debts and Argentine bonds became nearly worthless. As the country tried to get its finances in order, it offered creditors new bonds that initially paid less than 30 cents for each dollar of bad debt. More than 90 percent of bondholders agreed and some of them have since recovered three-quarters of their pre-default investment.
But a small fraction of bondholders, some of whom bought the debt securities at cut-rate prices during the crisis, say Argentina should pay them the face value of the bonds, plus interest. Investment fund NML Capital and 18 other creditors sued and a lower court ordered Argentina to pay $1.4 billion.
Normally, it would be difficult for plaintiffs to collect on such a ruling. But the judge granted their request for an unprecedented mechanism to force Argentina to pay: Using the U.S. funds transfer system, which automatically zips trillions of dollars a day around the world, to block the payments Argentina makes to all the other bondholders unless it also pays the plaintiffs.
That worries the United States and the IMF. When a country is basically insolvent, the IMF often steps in and helps craft a package that may force the country to overhaul its finances while pressuring creditors to accept restructured or reduced debt.
If the lower court ruling is upheld, the IMF says that would make it less likely that the majority of creditors in any future bailout would agree to complex debt restructurings like Greece’s. Bondholders would have less incentive to reduce their claims to the levels where payments can be met.
“If this makes debt relief harder, the IMF’s job is made much harder,” said Anna Gelpern, senior fellow at the Peterson Institute for International Economics and a law professor at Georgetown University.