But intrinsic in the definition of “taking a risk” is the possibility that you might not be paid back. If one is always rewarded for taking a risk, then it’s not a risk.
The agreement that Argentina entered into to borrow money (issue government bonds) with investors (primarily US banks) is most likely governed by US law and provides that all disputes will be under US jurisdiction. I haven’t looked at their specific bond indenture, but this is very common. As they are in default with their investors the issue is being handled by US courts per their agreement.
If they buck this, as it appears they are planning to do, they will have a very hard time issuing debt again in the future with US investors.
True, but while the risk includes the possibility of default it also includes the option of going to court. Going to court is in itself a risk. A risk these creditors deemed worth taking. One of the reasons we have signed contracts is to hold both parties to account. The group taking over this contract for Argentinian debt would, I assume, have looked over the contract with a fine tooth comb before buying the debt.
Absolutely. They very clearly agreed to that.
Here is one key point, Argentina did want to pay back the bonds… except for anybody who didn’t agree to a massive reduction. This accomplishes two things. First, it makes everyone come to them or get nothing, and second, it would nominally preserve their credit rating. In fact it looks like their credit has already gone back down the tubes (IIRC, they got downgraded to something like triple C or something ridiculous).
The court didn’t say they couldn’t pay back those who agreed at a lesser rate. They just said they also had to pay back those who didn’t “voluntarily” accept reductions at full value. Implicitly, this removes both advantages and forces Argentina back to the table. This would not be allowed with any other creditor under any remotely conceivable circumstance, so it cannot be allowed here. Note that from my view, the only real moral issue is that Argentina has behaved very badly in public and flagrantly broke its word, which is a very shady thing for anyone and specifically a very bad thing for a government. That they wanted to leverage an advantage isn’t a problem; it’s just that they went out of their way to hurt themselves and others in the process.
No, that is my point. The Judiciary is a part of the federal government and not the whole. It’s a common place to confuse a major branch of the government with the whole, but it can be misleading and is very much so in this case.
Actually, no, it may not involve foreign policy at all. The courts can, and do, act on their own and can send orders to do certain things without any support from the executive. In fact, in this case it may be possible for the State of New York to do so. All they have to do is make it very clear that bondholders cannot accept payment without judicial or state approval. They may not need to make any demands abroad at all.
Exactly. The loan and repayment procedure is very specific - the circumstances under which you cannot pay back a debt are specific under law. “I don’t want to” is not one option. Typically, bankruptcy is not an option for sovereign countries - they can always raise taxes, sell government assets, etc.
The Argentines tried to be an 800-lb gorilla, and the courts have ruled they are a 50-pound chimp. They tried to be heavy-handed and use threats (“settle or you won’t get paid”), and some people refused to knuckle under. the court has agreed with those debtors. Argentina now has to come up with a plan B, or stop borrowing. Plus, if they do pay up full value, every other creditor going forward will expect the same treatment. Argentina has a serious decision to make.
I guess I don’t have any sympathy for the vultures. Argentina’s been a financial basket case for ages now. Anyone who bought their debts knew full well that they were dabbling in junk bonds. They gambled and lost. Suck it up.
The idea that we should get the government out of the foreign policy business is equally bizarre but that seems to be what some people are arguing here.
I’m not saying the government shouldn’t consider the contracts. What I’m saying is that the government also needs to consider other issues as well and those other issues might outweigh the contracts.
But some people have a blindspot. Once money enters the picture, they refuse to think about anything else.
So if I get you right, if two parties have a contract and that contract is breached, in your opinion the court who is supposed to settle these contract disputes can and should look past the contract and relative laws of the land that presides over that contract and say, well I don’t care what you two agreed to I going to consider broader issues that I think are more relevant and make my decision based upon those. I think we call that judicial activism.
One of the gambles is what happens when you take them to court. For all we know, at the moment, those gamblers may have had a good plan and they’ll reap it in, in a few years.
It must be understood that the great challenge that the Argentine government is facing is to make payments in the US dollars to the holders of the restructured bonds.
It is a problem because the great majority of payments in US dollars go through the New York banking system because it is the largest dollar centre.
If the Argentine bonds were not in US dollars this would not be the same problem it now poses for them.
It is the problem of paying the holders of the debt that was restructured that is the serious problem for the Argentina.
I think the point is that the courts have ruled the creditors are entitled to repayment. They are only expected and entitled to consider law and precedent, as they have.
The decision on how to collect, and how vigorously to pursue collection, is then up to the Administration branch. For example, Obama may want Argentine cooperation on Antarctic resource treaties, or law of the Sea, or stamping out mad cow disease, or they may be in line to buy some expensive military hardware or vote on some UN resolution.
The US government is not the collection guy with the baseball bat jumping into action when some US vulture or normal creditor says to. If the creditors do happen to find assets of the Argentine government sitting out in the open (say, an account in BankAmerica, or a government jet belonging to the Argentine state department, maybe?), the courts and the usual law enforcement will ensure they get seized. The state department might spend some time and effort lobbying Buenos Aires to get their butt in gear and negotiate a solution, but they are not going to devote night and day in the state department to retrieving the money for some American. they are extremely unlikely to break of diplomatic relations and seize the embassy if there’s no other provocation.
I don’t know about you but I wouldn’t call it judicial activism. Because I’m not as confused as you appear to be.
As I said, in this thread, “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.”
I don’t how you got from that to “in your opinion the court who is supposed to settle these contract disputes can and should look past the contract and relative laws of the land that presides over that contract and say, well I don’t care what you two agreed to I going to consider broader issues that I think are more relevant and make my decision based upon those” but it was clearly a long and difficult journey and you got lost along the way.
I’m not confused about anything, I was asking you to clarify your statement above.
A recent article from The Economist that covers most of the particular issues.
As Omar Little suggested, the jurisdiction of US courts is determined by the fact that bond agreement specifies that disputes are to be settled under US law. Argentina agreed to that when they issued the bonds. So there’s no need for silliness about the US being a bully or coercing anybody. Sometimes international financial transaction issues specify disputes to be settled under English law, or more rarely in other countries’ courts. Investors aren’t politicians or politically oriented web board commenters. They know that disputes are possible, need to know upfront in which country’s courts they’ll be settled if they arise, and are likely to say ‘no thanks’ to begin with in case of a country like Argentina if the bond agreement specifies that disputes be settled under Argentine law.
The reason is lack of confidence that politics won’t dictate the judicial outcome in a country like Argentina, which is exactly why the US Supreme Court is correct to focus 100% on the contract and not on ‘other considerations’, and why it has nothing to do with the US Executive Branch (or the Congress). Once the rule of law becomes arbitrary in the face of ‘other considerations’ you end up like Argentina, which 100 yrs ago was one the highest GDP/person countries. The rule of law isn’t perfectly upheld in the US or England (it’s not ‘UK’ in this case because Scottish law and courts are separate) or anywhere else. But the less rigorously it’s upheld, the worse for everyone in the long run. Argentina’s history is an excellent example of that.
Actually, I was the one who originally pointed that out in this thread.
What people are ignoring is that this issue is being handled under US law. The Foreign Sovereign Immunities Act is an American law, enacted by Congress in 1976. And that’s the law that says the Executive branch has the final authority to decide if the assets of a foreign government can be seized by an American court order.
And the US Supreme Court decision specifically found that upholding the creditor rights in this case doesn’t violate the Foreign Sovereign Immunities Act, and in the US system the final say on a law’s meaning is the Supreme Court. And in any case seizing of Argentine government assets in the US is not directly at issue. The basic problem for Argentina is simply that it’s been declared that if they pay holders of restructured debt without settling first with holders who refused the restructuring, they are in default.
The Obama administration filed a (misguided) brief in favor of Argentina’s position in the case, but the USSC found otherwise. And the executive branch isn’t being asked to seize any assets. So it’s really nothing to do with them anymore.
Sure, they gambled and lost. But the pain they can inflict does more damage to Argentina than simply paying it back under less favorable circumstances would.
Think of it like it’s your finances. You assume a debt, you fall behind, and your debt gets sent to a collection agency who pays pennies on the dollar for it. They hassle you until you pay, or you can simply refuse. In this example, under certain circumstances and in certain states, they can have your wages garnished and the like, but in other states they can’t touch you. They gambled that they could make you pay and they lost. nobody’s all broken up about it.
Except, that is, for you. They put a hit on your credit rating. Now, after defaulting, try to go and get a loan. Any loan. You can’t, of course, because now nobody believes you’ll pay it back. Or maybe you can, at 20% or some astronomical rate, from some high-risk lender. It would have been better for you had you negotiated a small(er) payment than if you had defaulted.
International finance is necessarily different from personal finance, but it’s not that different. You still have to pay your bills or suffer the consequences. These creditors, by virtue of being able to default Argentina’s government, are in the position of being able to wreck their finances. It doesn’t matter that they didn’t issue the original debt. They paid money to maybe get more, and given the alternative they probably will get their money.
Found a useful summary Q&A on Bloomberg: