* Argentina treated bondholders unequally-court
* Bondholders who did not join swaps deserve payment
* Decision could affect future sovereign restructurings
* Argentina says court battle not over; bond prices fall
By Jonathan Stempel and Guido Nejamkis
Oct 26 A U.S. appeals court said Argentina
improperly discriminated against bondholders who refused to take
part in two massive debt restructurings, setting back the
country's efforts to recover from a roughly $100 billion default
a decade ago.
The 2nd U.S. Circuit Court of Appeals in New York said on
Friday that Argentina's decision to pay holdout bondholders
later than bondholders who agreed to participate in the 2005 and
2010 debt swaps, violated provisions that required the country
to treat bondholders equally.
Argentina vowed to fight the ruling. Finance Secretary
Adrian Cosentino told Reuters the country would take all the
legal steps necessary to contest the decision, adding that it
did not affect debt payments in any way because the original
judicial order was still suspended.
Prices of Argentine government debt nevertheless sank, and
the cost of protecting the debt against default surged higher.
"This complicates debt restructurings generally and could
impede them outright because no restructuring gets 100 percent
acceptance," said former Argentine Finance Secretary Guillermo
Nielsen, who helped oversee the 2005 swap. "It appears to be
cornering Argentina into a new default," potentially forcing it
to pay holdouts while it services restructured debt.
Friday's decision largely upheld injunctions issued in
February by U.S. District Judge Thomas Griesa in Manhattan in
favor of holdout bondholders, including Elliott Management Corp
affiliate NML Capital Ltd and the Aurelius Capital Management
funds, which owned $1.4 billion of defaulted debt.
NML has been particularly aggressive. This month it won a
court order to detain the Argentine naval ship ARA Libertad in a
Ghana port, demanding that it be paid some of what it is owed.
REJECTING ARGENTINA'S WARNINGS
Writing for a unanimous three-judge panel of the 2nd
Circuit, Judge Barrington Parker said he had "little difficulty"
in finding that Argentina breached its bond obligations, citing
efforts by the country's officials and legislators to ensure
that holders of restructured debt had priority.
Parker also rejected the contention that an adverse decision
would wreak havoc.
"Nothing in the record supports Argentina's blanket
assertion that the injunctions will plunge the republic into a
new financial and economic crisis," he said. "Argentina makes no
real argument that, to avoid defaulting on its other debt, it
cannot afford to service the defaulted debt."
Griesa was asked to clarify how the injunctions' payment
formula is intended to work, and how the injunctions apply to
third parties such as intermediary banks. The 2nd Circuit
returned the case to his court to address those issues.
Friday's decision could make it harder for other countries
to extricate themselves from sovereign debt crises and fend off
angry creditors that may sue in U.S. courts.
In oral arguments in July, Argentina said such a decision
could threaten the ability of countries such as Greece, Ireland,
Italy and Spain to undergo debt restructurings.
The U.S. government, moreover, had warned that Griesa's
ruling could undermine federal efforts to encourage consensual,
global efforts to address sovereign debt crises.
"There is no way a government can restructure its debt and
be shielded from litigation, apart from exercising sovereign
immunity," said Anna Gelpern, a law professor at American
University in Washington, D.C. "Argentina's shield now seems to
have a hole in it, and this ruling signals that every
sovereign's shield could now have a hole in it."
Aurelius, Elliott, their lawyers and the U.S. Department of
Justice either declined to comment on the ruling or were not
immediately available for comment.
BOND PRICES FALL
Argentine bond prices on average fell more than 5 percent in
local over-the-counter trading, while dollar-linked discount
bonds issued during the debt swaps fell 12.5
The cost of protecting Argentine government debt against
default rose by more than 350 basis points to 1,325 basis
points, according to Markit.. This means it
costs $1.33 million annually to protect $10 million of debt
against default for five years.
"Any possibility that Argentina will have to make extra
payments in dollars will hurt its finances at a time when the
economy is decelerating and (the government) can't put the
brakes on capital flight," said Marcelo Paccione, an analyst at
Griesa has awarded several billion dollars to holdout
creditors, but they have been largely unable to collect because
of U.S. sovereign immunity laws.
The case is NML Capital Ltd et al v. Argentina, 2nd U.S.
Circuit Court of Appeals, No. 12-105.