GENEVA (Reuters) - The United Nations trade agency UNCTAD said on Wednesday that the recent U.S. court ruling on Argentina’s debt erodes sovereign immunity and does not comply with the country’s own U.S. Foreign Sovereign Immunities Act.
Buenos Aires has been stuck in a battle with a pair of hedge funds that chose not to take part in two past debt restructurings following Argentina’s 2001-2002 default and held out instead for full repayment.
It has suffered a series of setbacks as U.S. courts have ordered Buenos Aires to pay the so-called holdouts along with its other creditors.
But those rulings "set legal precedents which could have profound consequences for the international financial system", UNCTAD said in an unusual online commentary here
“The rulings could open floodgates to other similar cases depending on interpretations given by courts under New York law, British law or other laws,” UNCTAD said.
“Copycats will abound.”
Argentine President Cristina Fernandez argues that paying the hedge funds in full could potentially trigger demands of up to $15 billion from others who did not participate in previous debt exchanges following the 2002 default on $100 billion.
The country is due to make a bond coupon payment on June 30 to holders of restructured debt. But the 2nd U.S. Circuit Court of Appeals ruled last week that Argentina cannot do so unless it also pays $1.33 billion to the holdouts.
Taking into account a 30-day grace period, this could propel the country into technical default.
Argentina’s Economy Minister Axel Kicillof is due to speak before the UN later on Wednesday about his country’s debt situation.
UNCTAD said the court rulings could have far-reaching future consequences.
“The rulings have made future debt restructuring much more difficult as debtors are left with only moral suasion and foreign relations as weapons to encourage creditor coordination,” the agency said.
“They have also strengthened the hand of creditors even though their behaviour can be among the underlying causes of debt crises.”
The U.N. agency said the “chaotic context” - in which it was questionable “whether the IMF is best positioned to give timely and fair judgements” reinforced the need for a globally agreed sovereign debt workout mechanism.
Eventually the cost to Argentina could go well beyond the potential $15 billion in claims, UNCTAD said, pointing out that if Argentina paid the holdouts, it might have to also give the same terms to creditors that accepted the previous debt swaps.
“This would amount to an estimated cost of over US$120 billion,” it added.
Additional reporting by Sujata Rao; Editing by Jon Boyle