Argentina’s drama in the U.S. courts is at an end. The U.S. Supreme Court has declined to hear its case, which means that the lower court ruling stands: Argentina cannot make payments to bondholders who accepted an earlier restructuring deal unless they also make payments to the holdouts.
As Tyler Cowen notes, this is not a good policy outcome. Argentina has threatened to default again or somehow move the bond payments out of U.S. jurisdiction rather than pay the holdouts, and I’m pretty sure it intends to follow through. So the folks who negotiated in good faith and took a haircut are going to be made worse off. More broadly, this strengthens creditor rights, giving investors more incentive to hold out, which will hamper the orderly restructuring of debt in cases where countries are simply unable to pay. If you’ve been following Argentina’s belligerent history of telling creditors and courts to go … um, do something anatomically unlikely, then this may seem like just deserts. But as Tyler points out, ultimately this increases the ability of irresponsible governments to borrow too much money, then extracts the debt payments from poor people in hard economic times. That’s not anything to be happy about.
Nonetheless, it’s not a surprising outcome. Argentina was determined to show the world that no one could mess with it. Unfortunately, so were the U.S. courts. And they’re the folks who get the final word.
Argentina’s almost-reasonable argument is that it can’t afford to negotiate with the bondholders who sued them, because if it does, other holdouts will crawl out of the woodwork and demand to get paid. But Argentina’s history of intransigence goes way back. It demanded huge haircuts from creditors in the original negotiation, defaulted to the International Monetary Fund to make a point, and refused to negotiate with the holdouts. When the holdouts sued, Argentina tried to play hardball with the U.S. courts. It’s not easy to play hardball with a judge; judges don’t like that, and they have incredibly broad powers to make sure you’re the one who ends up getting whacked.
Advantage: judges. You can mount a policy argument that judges ought to be above this sort of petty machismo, but you can also mount a policy argument that judges need to send a strong signal not to play games with the court.
Unlike the judges, Argentina will be the one to suffer from its determination to be the toughest kid on the block. It has been cut off from international markets for more than a decade, its foreign reserves look pretty anemic, and while this latest round won’t trigger an out-and-out financial crisis, Argentina will be kept from much desired economic normalization. Maybe national pride and not giving into the vultures are more important than rejoining the international financial markets. But it’s a high price to pay.
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