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.

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The Brexit Beartraps, #2: Could dropping out of the open skies agreement cancel your holiday?

Flying to Europe is about to get a lot more difficult.

So what is it this time, eh? Brexit is going to wipe out every banana planet on the entire planet? Brexit will get the Last Night of the Proms cancelled? Brexit will bring about World War Three?

To be honest, I think we’re pretty well covered already on that last score, but no, this week it’s nothing so terrifying. It’s just that Brexit might get your holiday cancelled.

What are you blithering about now?

Well, only if you want to holiday in Europe, I suppose. If you’re going to Blackpool you’ll be fine. Or Pakistan, according to some people...

You’re making this up.

I’m honestly not, though we can’t entirely rule out the possibility somebody is. Last month Michael O’Leary, the Ryanair boss who attracts headlines the way certain other things attract flies, warned that, “There is a real prospect... that there are going to be no flights between the UK and Europe for a period of weeks, months beyond March 2019... We will be cancelling people’s holidays for summer of 2019.”

He’s just trying to block Brexit, the bloody saboteur.

Well, yes, he’s been quite explicit about that, and says we should just ignore the referendum result. Honestly, he’s so Remainiac he makes me look like Dan Hannan.

But he’s not wrong that there are issues: please fasten your seatbelt, and brace yourself for some turbulence.

Not so long ago, aviation was a very national sort of a business: many of the big airports were owned by nation states, and the airline industry was dominated by the state-backed national flag carriers (British Airways, Air France and so on). Since governments set airline regulations too, that meant those airlines were given all sorts of competitive advantages in their own country, and pretty much everyone faced barriers to entry in others. 

The EU changed all that. Since 1994, the European Single Aviation Market (ESAM) has allowed free movement of people and cargo; established common rules over safety, security, the environment and so on; and ensured fair competition between European airlines. It also means that an AOC – an Air Operator Certificate, the bit of paper an airline needs to fly – from any European country would be enough to operate in all of them. 

Do we really need all these acronyms?

No, alas, we need more of them. There’s also ECAA, the European Common Aviation Area – that’s the area ESAM covers; basically, ESAM is the aviation bit of the single market, and ECAA the aviation bit of the European Economic Area, or EEA. Then there’s ESAA, the European Aviation Safety Agency, which regulates, well, you can probably guess what it regulates to be honest.

All this may sound a bit dry-

It is.

-it is a bit dry, yes. But it’s also the thing that made it much easier to travel around Europe. It made the European aviation industry much more competitive, which is where the whole cheap flights thing came from.

In a speech last December, Andrew Haines, the boss of Britain’s Civil Aviation Authority said that, since 2000, the number of destinations served from UK airports has doubled; since 1993, fares have dropped by a third. Which is brilliant.

Brexit, though, means we’re probably going to have to pull out of these arrangements.

Stop talking Britain down.

Don’t tell me, tell Brexit secretary David Davis. To monitor and enforce all these international agreements, you need an international court system. That’s the European Court of Justice, which ministers have repeatedly made clear that we’re leaving.

So: last March, when Davis was asked by a select committee whether the open skies system would persist, he replied: “One would presume that would not apply to us” – although he promised he’d fight for a successor, which is very reassuring. 

We can always holiday elsewhere. 

Perhaps you can – O’Leary also claimed (I’m still not making this up) that a senior Brexit minister had told him that lost European airline traffic could be made up for through a bilateral agreement with Pakistan. Which seems a bit optimistic to me, but what do I know.

Intercontinental flights are still likely to be more difficult, though. Since 2007, flights between Europe and the US have operated under a separate open skies agreement, and leaving the EU means we’re we’re about to fall out of that, too.  

Surely we’ll just revert to whatever rules there were before.

Apparently not. Airlines for America – a trade body for... well, you can probably guess that, too – has pointed out that, if we do, there are no historic rules to fall back on: there’s no aviation equivalent of the WTO.

The claim that flights are going to just stop is definitely a worst case scenario: in practice, we can probably negotiate a bunch of new agreements. But we’re already negotiating a lot of other things, and we’re on a deadline, so we’re tight for time.

In fact, we’re really tight for time. Airlines for America has also argued that – because so many tickets are sold a year or more in advance – airlines really need a new deal in place by March 2018, if they’re to have faith they can keep flying. So it’s asking for aviation to be prioritised in negotiations.

The only problem is, we can’t negotiate anything else until the EU decides we’ve made enough progress on the divorce bill and the rights of EU nationals. And the clock’s ticking.

This is just remoaning. Brexit will set us free.

A little bit, maybe. CAA’s Haines has also said he believes “talk of significant retrenchment is very much over-stated, and Brexit offers potential opportunities in other areas”. Falling out of Europe means falling out of European ownership rules, so itcould bring foreign capital into the UK aviation industry (assuming anyone still wants to invest, of course). It would also mean more flexibility on “slot rules”, by which airports have to hand out landing times, and which are I gather a source of some contention at the moment.

But Haines also pointed out that the UK has been one of the most influential contributors to European aviation regulations: leaving the European system will mean we lose that influence. And let’s not forget that it was European law that gave passengers the right to redress when things go wrong: if you’ve ever had a refund after long delays, you’ve got the EU to thank.

So: the planes may not stop flying. But the UK will have less influence over the future of aviation; passengers might have fewer consumer rights; and while it’s not clear that Brexit will mean vastly fewer flights, it’s hard to see how it will mean more, so between that and the slide in sterling, prices are likely to rise, too.

It’s not that Brexit is inevitably going to mean disaster. It’s just that it’ll take a lot of effort for very little obvious reward. Which is becoming something of a theme.

Still, we’ll be free of those bureaucrats at the ECJ, won’t be?

This’ll be a great comfort when we’re all holidaying in Grimsby.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Brexit. You can find him on Twitter or Facebook.