By Nate Raymond and Jonathan Stempel
NEW YORK Aug 23 Argentina on Friday lost its
appeal of a U.S. court order requiring it to pay $1.33 billion
to hedge funds that refused to accept steep discounts when the
nation restructured its debt.
The decision by the 2nd U.S. Circuit Court of Appeals in New
York is the latest in a standoff between U.S. courts and the
Argentine government that some investors fear could lead
Argentina to default. The court stayed the decision pending
review by the U.S. Supreme Court, giving Argentina a reprieve
and nervous investors some relief.
While Argentina and its supporters have said a ruling
against it could threaten future sovereign debt restructurings,
the court said the case was an "exceptional one" that would have
little impact on future transactions.
The court also had harsh words for the government of
Argentine President Cristina Fernandez, which has called the
hedge funds vultures and vowed not to pay them.
"Argentina's officials have publicly and repeatedly
announced their intention to defy any rulings of this Court and
the district court with which they disagree," Circuit Judge
Barrington Parker wrote for a three-judge appeals panel.
Argentina did not comment on the decision on Friday. Economy
Minister Hernan Lorenzino, asked about the decision during a
trip to Chile, declined to comment.
The case stems from Argentina's $100 billion default on its
debt in 2001. In two subsequent restructurings, in 2005 and
2010, creditors holding about 93 percent of the debt received 25
cents to 29 cents on the dollar.
Dissident bondholders led by the hedge funds NML Capital
Ltd, which is a unit of Paul Singer's Elliott Management Corp,
and Aurelius Capital Management refused to go along with the
restructurings, arguing in court that they should be paid in
The case came to a head in November 2012, when U.S. District
Judge Thomas Griesa in New York ordered Argentina to pay $1.33
billion into a court-controlled escrow account for the dissident
He also ordered Argentina not to pay its other bondholders
without making the payment, raising the prospect that Argentina
could go into default.
The U.S. Supreme Court starts its new term in October and,
if it agrees to take the case, may not rule until the next June.
Initially, investors in Argentine assets breathed a sigh of
relief, but by the end of the day the Merval index of
Argentine blue chips had closed lower.
For the longer term, investors signaled continued worries.
The cost to protect $10 million of Argentine sovereign debt
against default for five years rose to $2.53 million annually
from $2.28 million on Thursday, according to Markit. The cost
suggests that many investors consider it likely the debt will go
"The court's decision against Argentina is what we have been
expecting," said Stuart Culverhouse, head of research at Exotix
in London. "Market disappointment may be tempered though by the
continuation of the stay with the Supreme Court appeal."
In the decision, Parker wrote that the court believed "it is
equitable for one creditor to receive what it bargained for, and
is therefore entitled to, even if other creditors, when
receiving what they bargained for, do not receive the same
"Because the district court's decision does no more than
hold Argentina to its contractual obligation of equal treatment,
we see no abuse of discretion," Parker added.
'NOT ABOUT THE LAW'
Friday's ruling rejected Argentina's arguments that the
order to pay the holdout bondholders would unjustly hurt itself,
participants in the bond payment system and the public.
It also rejected a claim by bondholders who agreed to the
restructuring that Griesa's ruling would prevent them from being
paid, based on Argentina's refusal to pay the holdouts.
"This type of harm - harm threatened to third parties by a
party subject to an injunction who avows not to obey it - does
not make an otherwise lawful injunction 'inequitable,'" Parker
Sean O'Shea, a lawyer for a group of bondholders including
Gramercy Funds Management LLC who participated in the debt
restructuring, said the opinion "unfortunately glosses over" the
impact on his clients.
But Theodore Olson, a lawyer for NML, one of the dissident
hedge funds, said the ruling "confirms that Argentina is not
above the law."
At times, Friday's ruling reflected seeming frustration of
the court with Argentina.
Parker said that in light of the "unusual nature of this
litigation," the court had invited Argentina to propose an
alternative payment formula that it was willing to commit.
Argentina put forward "no productive proposals," he wrote.
The opinion quoted Jonathan Blackman, Argentina's lawyer, as
even telling the court during arguments that the country "would
not voluntarily obey" Griesa's injunctions if they were upheld.
NEXT STOP: SUPREME COURT
Argentina has already sought Supreme Court review of a
ruling by the 2nd Circuit in October last year that Argentina
had broken a contractual obligation to treat bondholders
equally. A footnote to Friday's ruling suggested that the
Supreme Court justices may wait instead for an appeal from the
more recent decision.
That would delay the high court taking action on the appeal,
although it could still potentially decide the case by the end
of the court's next term, which starts in October and runs until
Resolution of the case could be delayed further if the
justices ask the Obama administration to weigh on whether they
should hear the case. Then, the court might not rule on the
case, if it decides to hear it, until the term that starts in
In Friday's ruling, the 2nd Circuit also said that New
York's status as a financial center depended on enforcing the
"We believe that the interest - one widely shared in the
financial community - in maintaining New York's status as one of
the foremost commercial centers is advanced by requiring
debtors, including foreign debtors, to pay their debts," Parker
The case is NML Capital Ltd et al v. Republic of Argentina,
2nd U.S. Circuit Court of Appeals, No. 12-105.