Score two for the gamblers. Today the Supreme Court handed a double defeat to the Republic of Argentina in its effort to default on sovereign bonds issued in 1994. That means a double win for NML Capital, that so-called vulture fund that holds $1.33 billion of those bonds bought for pennies on the dollar in the hopes that the U.S. courts would eventually try to make Argentina pay.
In the first win, the court refused to hear Argentina’s appeal from a decision of the U.S. Court of Appeals for the Second Circuit that required Argentina to treat the holders of the original 1994 bonds the same way it treats holders of the bonds that were swapped for those 1994 bonds in 2005 and 2010. Since Argentina offered a restructured debt obligation to the 2005 and 2010 holders, and wants to pay them off, that means the sovereign country would under U.S. law now have to pay NML 100 cents on the dollar. Now, barring some new creative escape strategy, Argentina will likely have to choose between defaulting on its later bonds or paying off NML.
The second win for NML came in a high-court opinion allowing the lower courts to order discovery of Argentina’s assets -- commercial and noncommercial -- outside the U.S., with an eye toward the possibility of executing judgment on those assets in fulfillment of the debt obligations. Whether those assets could ultimately be captured and converted into payment for bondholders remains uncertain. But the decision tightens the noose around Argentina’s refusal to pay NML. It therefore increases the odds of the settlement that, presumably, is NML's best chance of a payoff.
Were these important decisions correct legally, financially and internationally? The court’s refusal to hear Argentina’s appeal in the underlying bond case is legally surprising, financially worrisome, and internationally questionable. Consider that the general view among international lawyers and financial professionals is that countries have an inherent sovereign right to default on their debts whenever they feel like it – provided they are willing to pay the market price of increased cost of capital future. This right to stiff your creditors goes back at least to the Middle Ages. It’s grounded not in morality, but in the raw power of the sovereign and the wish of the international community -- made up of other sovereigns – to recognize that power reciprocally.
NML, which is run by the billionaire Paul Singer, was able to get good odds on its bet because most financial observers quite reasonably thought it couldn’t make Argentina pay. Allowing the lower court’s ruling against Argentina to stand has the effect of shifting those expectations. It means that countries issuing debt in the U.S. will not only have to be careful about not promising equal treatment to bondholders -- the key issue in the lower court’s decision -- but will also have to think long and hard about being blocked by creative American lawyers hired by risk-taking American hedge funds and supported by moralistic American courts.
As an international matter, it’s not only Argentina that is likely to be miffed. Other countries that are interested in limiting the sovereign immunity of the U.S. in various ways will take the decision as an inspiration, if not precisely a precedent. The investigation in Germany of unnamed U.S. agents who tapped Angela Merkel’s phone is the kind of symbolic action that is likely to proliferate, and in which the new U.S. approach on bonds may well be cited.
The plausible rationale for the Supreme Court not to take the underlying NML case is that the court didn’t relish the thought of being under the spotlight of intense financial speculation about the high-stakes outcome. It takes the court at least a year from agreeing to hear a case until resolution -- a long time to be the subject of constantly changing market judgments, some of it publicly visible and covered by the press. At a personal level, the justices likely want to avoid being thought of as cogs in an outcome-generating machine that resembles the Belmont Stakes.
As an institution, the contemporary Supreme Court barely ever leaks. But the financial stakes of a single decision are rarely this high, and no one at the court would wanted to increase the temptation to breach confidentiality. The fact that the justices considered the petition to hear the case only last week and immediately decided not to take it suggests the court saw it as a hot potato.
The court’s actual decision on discovery is surprising as well. In essence, Justice Antonin Scalia explained that the Foreign Sovereign Immunities Act, which confers immunity on any execution of Argentina’s non-commercial property in the U.S., doesn’t extend to property outside it. If the decision has international consequences, Scalia wrote, those are for Congress to confront, not properly a concern of the court. Justice Ruth Bader Ginsburg dissented alone, condemning the fishing expedition into property held by Argentina outside the U.S. that very likely could never be converted into assets for NML.
The court’s opinion on the discovery issue can be understood as a standard piece of formalistic statutory interpretation: If no law expressly bans the discovery, then it can be ordered. And perhaps this best explains why so many justices across the political spectrum joined the opinion. But given that the decision was issued at the same time as the order denying hearing of the underlying case, it’s tempting to see it as a further shot across Argentina’s bow. The defaulting sovereign didn’t get any respect at the court today. The consequences will be lasting -- and won't likely always be in Americans' interests.
To contact the writer of this article: Noah Feldman at email@example.com.
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