Three U.S. appellate judges hear oral arguments in New York on Wednesday in the case, NML Capital Ltd. v. Argentina. The case has shaken bond markets, worried bankers, lawyers and diplomats, captivated financial analysts and generated enough "friend of the court" briefs to kill a small forest.
Much more is at stake than the future of Argentina's shaky economy, which could collapse if President Cristina Fernandez goes into default rather than pay a judgment of more than $1.3 billion to the plaintiffs, whom she calls "vulture funds."
The U.S. Federal Reserve and the world's largest banks have warned that the smooth functioning of the global funds-transfer system is threatened by U.S. District Judge Thomas Griesa's unusual proposal for forcing Argentina to pay. The same appellate judges hearing arguments Wednesday have already broadly upheld Griesa's plan but want more details on how it would work.
Argentina and the Obama administration both argued that the judge's remedy could make debt relief harder for troubled economies, dooming their citizens to more years of poverty than necessary.
"While the U.S. government does not condone Argentina's actions in the international financial arena," this ruling also could damage U.S. foreign policy, threaten U.S. assets overseas and even harm the U.S. dollar by persuading nations to take their bond business elsewhere, the administration's brief said.
Here are some questions and answers on how so much could be at stake in what seems to be a simple contract dispute:
Q. What was Griesa's ruling?
A. The judge wants U.S. financial institutions to become his enforcers, diverting the payments that Argentina makes to other bondholders if it doesn't first pay an equal amount to the plaintiffs. The Bank of New York, which normally processes the payments, would have to redirect the money to the plaintiffs, and banks say such interventions could threaten the automatic nature of the U.S. electronic funds transfer system, which is vital to the global economy.
Q. Who are the bondholders already being repaid?
A. More than 92 percent of the debt from Argentina's world-record $100 billion default in 2001 was restructured in 2005 and 2010. Argentina gave them new bonds initially worth less than 30 cents on the dollar. These "exchange bondholders" are slowly regaining their original investments: Most already have been paid 71 cents for each dollar invested. This slow recuperation is what debt relief looks like for troubled economies—it has been key to Argentina's recovery.
Q. Who are the bondholders who went to court?
A. A small group refused the debt swaps and filed suit instead. Griesa ruled in their favor, and ordered the Bank of New York to reroute any payments that Argentina makes to other bondholders until the plaintiffs get paid in full, plus interest.
Q. Why go to such extremes?
A. Argentina has ignored a number of court judgments, and Griesa is determined to get satisfaction after many years of litigation. Argentina still hasn't made payments on $10 billion in defaulted debt dating from its 2001 economic collapse. Adding other unpaid judgments, loans and other claims, including $10.5 billion sought by Grupo Repsol for the YPF oil company expropriated last year, Argentina owes as much as $61 billion.
Q. What about NML Capital's position that Argentina's central bank holds enough currency reserves to easily pay the $1.3 billion sought by the plaintiffs?
A. Argentina's dollar reserves dropped to $41 billion this week as uncertainty fueled capital flight. More than half of that is already loaned out or otherwise committed, and Argentina says the reserves can't withstand the demands of creditors for immediate payment of $43 billion that would be triggered if it was forced to pay Singer's group. Graham Fisher analyst Joshua Rosen, however, says: "Argentina is a $450 billion, G-20 economy, and the government has numerous other sources of liquidity" if it decides to negotiate a deal.
Q. What are the arguments over Griesa basing his ruling on the "equal treatment" clause in Argentina's 1990s-era bond contracts?
A. NML Capital says getting paid immediately in full, plus interest, is more than fair, because the plaintiffs spent millions litigating while the holders of swap bonds were getting regular payments. A group of the latter bondholders counters that there's nothing fair about taking other people's property, or getting as much as a 1,500 percent return on debt bought for pennies on the dollar.
Q. What about Argentina's suggestion that "equal treatment" could be provided through a new debt swap giving holdouts the same terms others accepted?
A. Anna Gelpern, an American University law professor who has closely followed the case, says Argentina is arguing for a bankruptcy concept of fairness—that when debtors can't pay, all creditors must suffer, accepting less so that recovery can happen more quickly. Sovereign debt relief depends on this concept, and many of the legal briefs reflect a desire that the courts invoke it while engineering a comprehensive solution to Argentina's debt problems. But Gelpern says the appeals panel is more likely to base its ruling in simple contract terms, as in, "they owe the money, and they need to pay."
Q. What's the end game?
A. Expect the appellate ruling in two to four months. Most analysts predict Argentina will lose and further appeals will be turned down, giving this panel the final word. Since Argentina appears unwilling to settle out of court, J.P. Morgan analyst Vladimir Werning says, "This boils down to a blueprint for an end game where Argentina snuffs N.Y. law, its courts and its payment system and it offers restructured bondholders the option of getting paid fully in Buenos Aires."
Q. Would Argentina really pull out of the U.S. financial system?
A. Economist Rodolfo Rossi, Argentina's central bank president in the 1990s, says ending up "completely isolated and refusing to pay its debts" would only bring more trouble for the country. Like many Argentines who have backed Fernandez's fight against the holdouts, he says she can't show weakness now, but has to settle eventually in order to refinance all of Argentina's debts and bring back investment.