Argentina Is Rebuffed by U.S. Supreme Court. Now What?
What’s unspoken in all this is why exactly Argentina can be driven into default by an order of US Courts that they don’t agree with. Suppose Argentina just says they’ll do what they want based on their own courts and laws. What happens next?
There are a lot of other countries that have defied the US over all sorts of things. What’s different here?
Argentina could certainly defy the court here. The problem is that, if it did so, it would worsen its credit rating, and possibly lose whatever assets it may have in the US to its judgment debtors.
The difficulty starts when a country attempts to borrow money from outside the country. The punishment for refusing to pay it back is an inability to borrow money in the future, at least, without paying ruinous interest.
I think Argentina is hoping to use the US financial system to refinance its debts. If they refuse to comply with the court ruling, they’ll be locked out of Wall Street.
Just guessing, but the fact that Argentina has to keep coming back to U.S.-based financiers means that if Argentina defies U.S. courts, it may find itself without any source of capital
Argentina has previously agreed that it would accept United States legal decisions as a condition for receiving new loans.
So legally, Argentina should be bound by the Supreme Court’s decision. The problem will be if they decide not to comply. The Supreme Court doesn’t have the same enforcement procedures in place it would have against a party in the United States.
I have a feeling that control of the purse strings is the only enforcement procedure needed and a most efficient one.
Recall that when Salvador Allende’s government nationalized the big copper mines in Chile in the 70’s, the US company fighting that (Anaconda? Kennecott?) went to Europe and impounded shipments of copper ore. In one case, they took Chile to court in the Netherlands claiming they owned the ore. For a year or more while the case went through the courts, the copper was tied up in dock and Chile got no money for it - with the threat that this would happen to any other shipments to neutral third countries. It effectively deprived Chile of significant revenue and probably hastened the Pinochet revolution.
Similarly, Argentina may be able to ignore US court orders, but only at the expense of having their judgements enforced anywhere in the world that recognizes these judgements as valid. Money payable to foreign companies may be impounded. (I.e. try to pay, let’s say, French or German bondholders, and the bank doing the transfer is served with an order to impound that Argentine government money). With this risk, nobody wants to buy bonds that may encounter major obstacles getting repaid. Plus, what are the biggest financial centers? New York, London, Singapore, Hong Kong? What are the odds the financial centers will be more sympathetic to Argentina rather than the New York financial community?
If you want to be part of the international financial community, you have to make an effort to play by their rules.
The only saving grace is the old saw “if you owe the bank $10,000 that’s your problem. If you owe the bank $10,000,000 that’s their problem.” It may also be in the interest of the creditors to come to an arrangement and get some money now, rather than stretch out the argument for years - although it looks like this is what happened and now those years are up.
A link to my thread on this issue, with a brief explanation of why this situation arose and how the courts may enforce it: The "Argentina Get Pwned in Court" Thread - Great Debates - Straight Dope Message Board
I don’t suppose that boots on the ground is an option?
The problem is you get into an international pissing match. And there’s no overall authority to decide where it ends. Let’s say the United States government seizes Argentinian assets in order to pay off these bonds. And then the Argentinian government seizes American assets in order to compensate for what it calls illegal confiscation. Who’s going to stop them? The Argentinians are going to say “If American law lets you take Argentinian assets, then Argentinian law lets us take American assets.”
Some people have suggested we should seize assets belonging to other countries or corporations that do business with Argentina. While that might be legal under American law, it would also be a diplomatic disaster. You can just hear people saying “Hey, you guys loaned Argentina money and they stiffed you. That was the risk you took. But don’t get us involved in your argument with them.” If the United States pushes the point, you could see the same kind of retaliatory seizures as I described above.
Actually most of the creditors have come to an arrangement. They’ve reached a mutual agreement of restructuring the bond payments.
The issue is over a minority of holdouts. In most cases, they’re not the original lenders. They’re people who bought up the bonds at a discount when they looked risky. And now they’re insisting they be paid off under the original terms rather than the restructured terms.
Little Nemo, there are two major problems I have with your post, one an issue of definite fact, and another a matter of interpretation of the facts. On both points, you are simply wrong.
The first is that the Federal government is not doing this to Argentina. The judicial shystem is, and there’s a key difference. This is not a matter of foreign policy, but of domestic contract law. This is precisely what the courts have been saying. The Executive and Legislative branches have not intervened in this matter.
Argentina agreed to certain restrictions of its activities in regards to a specific contract, for which the other parties duly upheld their end. The courts are simply saying that Argentina, having agreed to be treated a certain way, cannot later ignore it. And this is a necessary view for the court; there is not other option for a legal body. The facts of the case are so one-sided that Argentina cannot carry any points under the law. Instead, it simply wants to ignore the laws it agreed to be treated under because it can.
Actually, seizure of assets belonging to Argentinian companies may be legal under certain circumstances; seizure of assets of other countries would not be. However, going back to the above, it is not “we” who would be doing this. The Judiciary is, and it is legally required to execute its valid orders. The judicial system does not have the right to ignore them because it might make things uncomfortable. Yes, it might cause an unpleasant consequences, but Argentina specifically and knowingly invited this situation upon itself.
No, they did not. The agreements were voluntary only in the way a loan shark’s demands are “voluntary”. Argentina made demands and threats, but the courts have very clearly stated that it has no right to demand anything. Further, this bond issue must be paid off to all holders, so Argentina cannot pay off the ones who agree to “negotiate” and ignore those who require their full payment.
If you accept Argentina’s position, then you must also accept if any other person or organization does exactly the same thing. I suspect you’d rethink your position completely when your employer decided it just wasn’t going to pay you, or when your bank decided it was going to keep your money unless you “negotiated” for pennies on the dollar.
This is completely irrelevant. The holdouts have no legal obligation to renegotiate the terms or accept anything less than full repayment.
This is completely irrelevant. Debt is a transferrable instrument, and it does not matter who holds a bond when it comes time to pay out. In fact, the courts are saying very clearly that the current holders of this debt who refused to negotiate are completely correct in their stance, and they have a right to full repayment.
Because they have a legal right to. This would roughly be like a corporation just ignoring the legal rights of the people who hold its stock because they bought it from somebody else. And the judiciary can, and have, come down hard on corporations who tried such things.
Hence why you are wrong. Your position is not logically consistent and consists of raising specious objections. Argentina loses both on the facts and the principles. If you want to involve foreign policy, that’s a different objection, but one that the government parties responsible for have largely ignored. Argentina explicitly agreed to abide by the judiciary on this one, and is now having to live with the consequences of such. Ultimately, they have far more to lose on this than we do, however.
I don’t think Argentina can afford to invade the United States.
Let’s face it, they can’t even afford to invade the Falkland Islands!
The USA can rely on the 800-lb-gorilla principle. I.e. being bigger than anyone else, it can demand that others play ball. They did this with reporting requirements for Americans living abroad. As mentioned in another thread or two here, many foreign banks are dumping any US citizens as customers, because if some bureaucrat in Washington decides they did not report properly, the government will mandate that anyone transferring funds to that bank withhold 30% as a tax - basically then the bank might as well not do business with any bank that does business with anyone in the USA. This would effectively divide the worldwide banking system into the ones who deal with international finance and those that don’t. Nobody wants to be the cheese that stands alone.
The USA could conceivably do that to Argentina - anyone in the banking community transferring funds to or from the government of Argentina (no matter how circuitous the route) would be obliged to send the money to the US bondholders or face penalties basically meaning they were no longer part of any America-centric banking system.
That would work until the US economy is sufficiently irrelevant to the world system. It seems both the USA and China are progressing toward that goal.
(Note we are talking about the government of Argentina and its debt, not some corporations or individuals. Thoseassets are no more relevant than if the Argentines wanted to seize your bank account to pay a US government debt.)
Smiling bandit, I agree that this is a matter for the courts. But it’s also a matter for the diplomats. This is an issue of both domestic contract law and foreign policy. And the final decision hasn’t been made yet of where the balance between these possibly conflicting interests.
I don’t see why you seem to be saying that the court system is not part of the federal government. It obviously is. When the Supreme Court issues a decision, it’s a branch of the United States government that issues that decision.
The Supreme Court has, correctly, focused on the legal issues. That’s the area which it has responsibility for and authority over. So they looked at the law and made a decision on what the law stated. They’ve done their job.
But the process is not over yet. The Supreme Court has the final word only on the questions of law. Now the questions of foreign policy must be considered. And that’s a decision that will be made by the State Department and the President. It’s their role to decide the foreign policy question just as it’s the Supreme Court’s role to decide the legal question.
And this isn’t some defiance of the law. As I noted in the other thread, the law gives the power to decide if foreign government assets shall be seized to the Executive Branch not the Judicial Branch. The law tells the Executive Branch that it can overrule the legal decision if it feels there are foreign policy reasons to do so. So this is an issue where the President can legally overrule the Supreme Court.
But take that to its logical conclusion if the President just effectively cancels the debts. (OMG, the Republicans would collectively assplode!) No (American-backed, at least) private investors/banks will take the risk the next time Argentina or some other country with already terrible credit is in dire straits and wants, no NEEDS, a loan under strict terms in order to prevent/end a complete breakdown of their financial system and chaos in the streets. Not only would Argentina’s failure to honor its debts screw over their creditors, it would screw over other countries who could be helped by such loans in the future, when nobody else will want to take the risk, considering the complete lack of any enforcement mechanisms against a sovereign nation that can just easily handwave away their commitments.
*Everyone *benefits from a system that *everyone *can have confidence in. In fact, the *more *confidence in the system there is, the *more *benefit everyone will derive from it. (If there were no doubt of eventual repayment, loan terms would be more favorable.) As soon as that confidence breaks down, no one benefits from it anymore. If the US government wants to effectively cancel the private debt for diplomatic reasons, next time no private investors will step up and it will be completely left to other governments (or the IMF) to be the only such creditors of last resort.
To reiterate, Argentina getting away with not honoring its commitments does a lot more damage than to just the people they owe money to. It damages the whole system and everyone who would benefit from it. Argentina being forced to honor its commitments does the opposite - it strengthens the system, which benefits everyone.
The right decision seems pretty clear. Argentina should have to honor its commitments, or if they can’t, otherwise negotiate new terms that their creditors want to agree with. Under no circumstances should the Executive branch step in, as it would cause permanent damage to an already shaky financial system. (Unless they’re going to provide some sort of bailout/guarantee, which is highly unlikely to fly, of course.)
As I’ve noted, most of the plaintiffs in this case never loaned any money to Argentina. They went to the people who did actually loan money to Argentina and bought up their loans at a discount when it looked like Argentina wasn’t going to be able to pay. And now they’re asking for the American government to act as their collection agency.
So who would benefit in the future if we did what they wanted? The Argentinian government? No, these investors didn’t loan money to them in the past and they’re not going to loan money to them in the future. The original lenders? No, they won’t make any of the money we collect. They already sold their loans at a loss to the plaintiffs. They’re unlikely to make a similar loan in the future.
This is classic vulture capitalism. The plaintiffs in this case didn’t do anything of worth. They just jumped into the middle of an economic crisis and picked over the remains. They’re bottom feeders. Helping these guys out is never going to lead to any future economic growth because they’re not interested in economic growth - they invest in economic collapse.
Now I’m not saying they’re doing anything illegal. I wouldn’t stop them from doing what they do. But I don’t see why we should put any major effort into helping them do it. They weren’t looking to help anyone except themselves. So why should anyone else step forward to help them?
I’m a little tired of hearing some capitalists talk about the burdens of government and how everyone should be more self-reliant - right up to the point when they want the government to do something for them. Hey guys, here’s your chance to show that self-reliance - Argentina owes you money, go figure out a way to collect it. But Argentina doesn’t owe the American government any money so don’t expect the American government to get involved in your problems.
Surely the Argentinian’s would have known of this possibility beforehand. That the debt could have been sold on. You say these vulture capitalists didn’t do anything of worth. Well, they did take a risk. A risk that entailed paying X-1 for X amount of debt. I have no idea who they bought this debt from. If it were a pension fund then it can be argued they did benefit that pension fund.
I can understand why this is frustrating. On the other hand it does show the folly of a government borrowing more than is good for them. It does help to keep other governments from falling into the same trap - at least in theory.
I would imagine that other than their embassy, the Argentine government does not have much in the way of assets the USA can seize. In the good old days, the national airline belonged to the government and you could impound their planes - but I don’t think that’s the case for most airlines any more. You can’t seize a private company’s (or person’s) assets because they are from Argentina to make up the government debt.
I suppose they could terminate relations with Argentina, expel their embassy staff and then seize the embassy… But terminating diplomatic relations is a very serious step, and the US government probably doesn’t care about the vultures enough to do that (which party do they donate to?) Assuming Argentina doesn’t sell their embassy to a shell corporation and lease it back. (There’s an interesting case - the title changes hands before the embassy is closed, so the transaction happens on Argentine soil, can a US court reverse the action? It could take another decade to resolve that case, meanwhile the creditor vultures get nothing. )
All the court has done is say that if Argentina passes any laws nullifying debt, that has no effect on a contract in the USA.
As others have pointed out, the Argies have pressured many creditors into a deal. Long term, welching on a contract means you will find it a lot harder to borrow money anywhere else in the world. When Egypt was in economic turmoil, Saudi and the Gulf states chipped in with what were essentially gifts. Argentina has no friends with the money and concern to help it - it needs real, commercial loans. Willingness to pay debts is an essential component of getting credit. It will have to deal with this debt problem, or stop borrowing money.
The ability to resell an asset if things go pear shaped is a valuable thing.
Think of it like two used cars of the same model and year. You don’t know their condition but if one breaks down you can sell it to the junkyard for half price. If the other one breaks down you have to sue the manufacturer for your money back. Anyone in his right mind would choose to buy the first car rather than risk having to fight a long and expensive legal battle in court.
Having a secondary market for debt means more people will participate in the primary market which is good for all issuers of debt.
The idea that we should get government out of the court business seems off topic and frankly bizarre.