By Nate Raymond and Daniel Bases
NEW YORK Feb 27 Argentina faced tough questions
on Wednesday from a U.S. appeals court over its stance toward a
group of dissident bondholders, a legal showdown that has
sparked fears the country could have its second massive debt
default in 11 years.
The 2nd U.S. Circuit Court of Appeals in New York heard more
than two hours of arguments as it weighs whether to reverse an
order that the Argentine government pay $1.3 billion to the
so-called holdouts, led by Elliott Management affiliate NML
Capital Ltd and Aurelius Capital Management.
The court's decision could have wide impact on global debt
Circuit Judge Reena Raggi, one of the three judges on the
panel, peppered Argentina's lawyers with questions.
The court's role is to enforce contracts, "not to rewrite
them," she said, adding it "hardly seems appropriate for a court
not to enforce one of its orders because a party will breach
another of its obligations."
The arguments came 11 years after Argentina defaulted on
about $100 billion in sovereign debt. About 92 percent of its
bonds were restructured in 2005 and 2010, giving holders 25
cents to 29 cents on the dollar. But bondholders who did not
participate in those debt swaps have sought full repayment.
If ordered to pay the small group of holdout creditors,
there are fears that Argentina could default again on $24
billion in previously restructured debt.
A lawyer for Argentina stood by the position of its
government, led by President Cristina Fernandez, that the
holdouts should not be paid in full, and that the country could
end up ignoring a court order requiring payment.
"We would not voluntarily obey such an order," Jonathan
Blackman, a lawyer for Argentina, told a three-judge panel.
He nonetheless said the country is open to a solution that
is "workable and doesn't create a terrible confrontation."
Raggi, who dominated the questioning, responded that
Argentina was trying to dictate what the court should order.
The holdouts investors have long argued that they are simply
attempting to hold Argentina to its obligations and that the
government has plenty of reserves to compensate them.
There is "no question" the country has the capacity to pay,
Ted Olson, a lawyer for NML, told the court.
"This is a lawful obligation of Argentina," he said.
ARGENTINA OFFICIALS IN ATTENDANCE
As a sign of the importance of the case, Argentine Vice
President Amado Boudou, Economy Minister Hernan Lorenzino and
several other high-level Argentine officials attended the
Lorenzino, at times slumped in his chair surrounded by
Argentina's lawyers and at others resting his chin in his hands
as he listened intently to the arguments, made no statement as
he was whisked from the courtroom to a waiting vehicle,
surrounded by security.
"When you have good arguments, when you have faith in those
arguments and you're accompanied by different parties who say
the same as you do, you have faith that common sense will end up
prevailing," Lorenzino later told Argentine television.
The arguments drew a large crowd as roughly 100 lawyers,
analysts and journalists waited for over three hours for a
chance to watch the hearing from inside the court.
Two rooms were provided for a spillover audience and a
private service streamed the arguments via webcast.
Argentina's local debt market had closed before the hearing
began, with bonds closing up 0.2 percent on average in light,
In a sign of investors' growing concerns about a possible
default on Argentina's debt, the cost to insure its restructured
sovereign debt rose more than 65 basis points late Wednesday to
2,162 basis points, or more than $2.1 million
annually for five years for every $10 million of debt held in a
portfolio, according to data provider Markit.
In February 2012, U.S. District Judge Thomas Griesa in
Manhattan ruled that Argentina had violated its contractual
obligation to treat all creditors equally. That meant the
country would have to pay the holdouts if it also wished to pay
bondholders who agreed to two giant debt swaps.
In October, the 2nd Circuit largely upheld Griesa's ruling
on equal treatment for bondholders. On Wednesday, the
three-judge panel said it would not revisit that ruling.
Argentina had sought a rehearing by the panel or all of the
judges of the 2nd Circuit. The fate of its request for a
full-court review remains unclear.
The arguments on Wednesday centered on a subsequent order by
Griesa last November that the next time Argentina made an
interest payment to the exchange bondholders, it would have to
pay $1.3 billion owed to the holdouts into a court escrow
The appeals court is also examining treatment of Bank of New
York Mellon, which acts as trustee to the exchange
bondholders, and the impact from the ruling's injunction on
other third parties.
James Martin, a lawyer for BNY Mellon, said the court's
injunction against it violated its rights, since the bank was
not a party to the case.
"It fundamentally violates the Constitution," Martin said.
David Boies, a lawyer for a group of bondholders who
participated in the restructurings, told the court his clients
had been held "hostage," and that their participation in the
debt exchanges "should not count against them."
"We care that if there is going to be an injunction, that
binds us in terms of what we're going to receive, that it will
be equitable," he said.
The case is NML Capital Ltd et al v. Argentina, 2nd U.S.
Circuit Court of Appeals, No. 12-105.