Argentina loses New York court case, owes vulture fund $1.3bn

Elliott Capital Management must now be paid at the same time Argentina pays its normal bondholders.

Fresh off its success in seizing a 100m-long tall ship owned by the Argentine navy from a Ghanaian port, Elliott Capital Management – the biggest and boldest of Argentina's "vulture funds" – has secured what looks like a final victory over the country in the New York courts. Argentina is now caught in the unenviable position of either paying back debt which it thought it had defaulted on a decade ago (and which Argentine president Cristina Kirchner has sworn not to do), or default on entirely new debt, which it has both the will and the funds to stay current on.

The problem Elliott has had is that Argentina, as a sovereign nation, can't be bound by any court judgement. Once it decides not to pay up on bonds – as it did when it defaulted on its debt in late 2001 – there is very little its creditors can do.

As a result, after the default, the value of the bonds plummeted well below face value. Most creditors were happy to swap the defaulted bonds for new, lower-value ones, which ensured they at least got something, but some – like Elliott – decided to hold out for the full payment.

Elliott had pursued a nuisance strategy – seizing Argentine assets which had ended up under other nations' jurisdiction, like the sailing ship ARA Libertad – but at the same time, the hedge fund, which now holds bonds with a face value of well over $1bn, has been attempting to force the country to pay up on the total amount.

Faced with an inability to directly affect Argentina's actions, the fund has instead gone after an organisation it whose hand it can force: the Bank of New York. The bank is responsible for issuing Argentina's present-day debt, issued since the default. The judgement Elliott has won forces BoNY to pay them with the money Argentina hands over to pay its bondholders.

This is legally problematic at two levels. In the specific case, it means that BoNY and Argentina's current bondholders are being penalised for a case which they have nothing to do with. BoNY in particular is caught in a bind – either it breaks its legal obligations to the court, or to its bondholders. And the bondholders are doubly screwed. If Argentina doesn't pay the holdouts – and Argentina has a thing about not paying holdouts – then money which they are legally owed, and which Argentina is legally trying to get to them, will instead go to Elliott (and presumably other holdouts who will follow a similar route in court).

And in general, it's a worrying precedent for future sovereigns hoping to restructure their debt. There is no bankruptcy procedure for nations, but it is still perfectly possible for their debt to pile up to such an extent that they – and possibly their creditors, in aggregate – would be better off restructuring it. That just got slightly more difficult. If the precedent stands, then any sovereign holding bonds administered through the US can expect to have to pay them off, in full, no matter what their finances are. (Greece, are you listening?)

All of which means that we can probably expect Argentina to take the only other route open to it: default – again – and offer new bonds at face value, but issued under Argentine law. Bondholders shouldn't lose too much money, but they will lose a lot of security (if, that is, they haven't already). Argentina's reputation, slowly rebuilding after the initial default, will take another hit. And Elliott – which holds a lot of insurance against an Argentine default – will actually make quite a lot of money. Which makes the whole thing seem rather counter-productive on Argentina's part.

The ARA Libertad, the ship seized in Ghana. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Getty
Show Hide image

Boris Johnson is right about Saudi Arabia - but will he stick to his tune in Riyadh?

The Foreign Secretary went off script, but on truth. 

The difference a day makes. On Wednesday Theresa May was happily rubbing shoulders with Saudi Royalty at the Gulf Co-operation Council summit and talking about how important she thinks the relationship is.

Then on Thursday, the Guardian rained on her parade by publishing a transcript of her Foreign Secretary, Boris Johnson, describing the regime as a "puppeteer" for "proxy wars" while speaking at an international conference last week.

We will likely never know how she reacted when she first heard the news, but she’s unlikely to have been happy. It was definitely off-script for a UK foreign secretary. Until Johnson’s accidental outburst, the UK-Saudi relationship had been one characterised by mutual backslapping, glamorous photo-ops, major arms contracts and an unlimited well of political support.

Needless to say, the Prime Minister put him in his place as soon as possible. Within a few hours it was made clear that his words “are not the government’s views on Saudi and its role in the region". In an unequivocal statement, Downing Street stressed that Saudi is “a vital partner for the UK” and reaffirmed its support for the Saudi-led air strikes taking place in Yemen.

For over 18 months now, UK fighter jets and UK bombs have been central to the Saudi-led destruction of the poorest country in the region. Schools, hospitals and homes have been destroyed in a bombing campaign that has created a humanitarian catastrophe.

Despite the mounting death toll, the arms exports have continued unabated. Whitehall has licensed over £3.3bn worth of weapons since the intervention began last March. As I write this, the UK government is actively working with BAE Systems to secure the sale of a new generation of the same fighter jets that are being used in the bombing.

There’s nothing new about UK leaders getting close to Saudi Arabia. For decades now, governments of all political colours have worked hand-in-glove with the arms companies and Saudi authorities. Our leaders have continued to bend over backwards to support them, while turning a blind eye to the terrible human rights abuses being carried out every single day.

Over recent years we have seen Tony Blair intervening to stop an investigation into arms exports to Saudi and David Cameron flying out to Riyadh to meet with royalty. Last year saw the shocking but ultimately unsurprising revelation that UK civil servants had lobbied for Saudi Arabia to sit on the UN Human Rights Council, a move which would seem comically ironic if the consequences weren’t so serious.

The impact of the relationship hasn’t just been to boost and legitimise the Saudi dictatorship - it has also debased UK policy in the region. The end result is a hypocritical situation in which the government is rightly calling on Russian forces to stop bombing civilian areas in Aleppo, while at the same time arming and supporting Saudi Arabia while it unleashes devastation on Yemen.

It would be nice to think that Johnson’s unwitting intervention could be the start of a new stage in UK-Saudi relations; one in which the UK stops supporting dictatorships and calls them out on their appalling human rights records. Unfortunately it’s highly unlikely. Last Sunday, mere days after his now notorious speech, Johnson appeared on the Andrew Marr show and, as usual, stressed his support for his Saudi allies.

The question for Johnson is which of these seemingly diametrically opposed views does he really hold? Does he believe Saudi Arabia is a puppeteer that fights proxy wars and distorts Islam, or does he see it as one of the UK’s closest allies?

By coincidence Johnson is due to visit Riyadh this weekend. Will he be the first Foreign Secretary in decades to hold the Saudi regime accountable for its abuses, or will he cozy up to his hosts and say it was all one big misunderstanding?

If he is serious about peace and about the UK holding a positive influence on the world stage then he must stand by his words and use his power to stop the arms sales and hold the UK’s "puppeteer" ally to the same standard as other aggressors. Unfortunately, if history is anything to go by, then we shouldn’t hold our breath.

Andrew Smith is a spokesman for Campaign Against Arms Trade (CAAT). You can follow CAAT at @CAATuk.