BUENOS AIRES (Reuters) - Argentina is right to fight the U.S. court ruling that pushed it into default in July, Nobel prize-winning economist Joseph Stiglitz said on Tuesday as the United Nations agreed to move ahead on a multilateral plan for handling bond restructurings.
Its economy shrinking and currency hitting record lows, Argentina is in a punishing legal feud with hedge funds that rejected the country’s 2005 and 2010 debt restructurings. The case has implications far beyond the South American country.
Court rulings in favor of the funds could wreck the chances of other countries that need to revamp defaulted bonds unless an international framework is adopted, Stiglitz said in a telephone interview.
Prompted by Argentina and its ally Bolivia, the U.N. General Assembly voted 124 to 11 to negotiate and adopt a multilateral legal framework for sovereign restructurings.
Buenos Aires says this is needed to keep judges from overstepping their bounds, as it says U.S. District Judge Thomas Griesa did when he ruled in favor of the funds. Stiglitz agreed.
“The current situation is unsustainable and all Argentina is saying is we need an international convention for sovereign debt restructuring to resolve these issues,” he said.
The former World Bank chief economist called the lack of such a framework “a key gap in the international architecture.”
Collective action clauses now often written into bond contracts, and meant to prevent a minority of investors from derailing bond swaps, are not a foolproof way of avoiding legal imbroglios similar to Argentina’s, Stiglitz said.
In 2002, millions of middle class Argentines were thrown into poverty when the government defaulted on about $100 billion in bonds. In 2005 and 2010, more than 93 percent of the debt was restructured, giving holders less than 30 cents on the dollar.
A handful of hedge fund experts in distressed debt bought some of the unrestructured paper and went to court demanding 100 cents on the dollar, despite having paid only a fraction of that.
Griesa prohibited Argentina from paying the holders of its restructured bonds without paying the “holdout” hedge funds at the same time. In June, when Argentina deposited its most recent coupon payment on its restructured bonds, payout was blocked by Griesa and the country fell into default.
The holdout funds suing Argentina argue that Griesa’s ruling was merely upholding the law. Stiglitz disagrees, saying Griesa misinterpreted the bond contract’s pari passu clause, which aims to give equal footing to bondholders in line to be paid.
“The intent of pari passu is that if there are two categories of bondholders who look exactly the same, you cannot treat one differently from the other,” Stiglitz said. “The judge stretched it to say that if you pay anything to the bonds that have been restructured you have to pay everything to the funds.”
Four hedge funds holding restructured euro-denominated Argentine debt launched a lawsuit last month against the U.S. intermediary bank holding Argentina’s frozen interest payment,
arguing the money should not have been swept up in the ruling.
“It is still not clear whether Judge Griesa’s ruling affects not only American bonds, but also British and Japanese bonds. So the question is can one country act over the interest of others. What happens if a Japanese judge then says, ‘If you don’t pay us, you are in violation of Japanese law,’” Stiglitz said. “With multiple jurisdictions we have the potential for real chaos.”
Reporting by Hugh Bronstein. Editing by Andre Grenon and Andrew Hay