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.

New Statesman
Show Hide image

Quiz: Can you identify fake news?

The furore around "fake" news shows no sign of abating. Can you spot what's real and what's not?

Hillary Clinton has spoken out today to warn about the fake news epidemic sweeping the world. Clinton went as far as to say that "lives are at risk" from fake news, the day after Pope Francis compared reading fake news to eating poop. (Side note: with real news like that, who needs the fake stuff?)

The sweeping distrust in fake news has caused some confusion, however, as many are unsure about how to actually tell the reals and the fakes apart. Short from seeing whether the logo will scratch off and asking the man from the market where he got it from, how can you really identify fake news? Take our test to see whether you have all the answers.

 

 

In all seriousness, many claim that identifying fake news is a simple matter of checking the source and disbelieving anything "too good to be true". Unfortunately, however, fake news outlets post real stories too, and real news outlets often slip up and publish the fakes. Use fact-checking websites like Snopes to really get to the bottom of a story, and always do a quick Google before you share anything. 

Amelia Tait is a technology and digital culture writer at the New Statesman.