The government today faces a key decision against the vulture funds in the U.S.

El Cronista

The government today faces a key decision against the vulture funds in the U.S.

Monday, July 23, 2012

By Juan Cerruti

The big creditors are asking that the country pay the bonds in default like they have those from the restructuring. The U.S. government supports Argentina

Today will be a crucial day for the legal battle that has been going on in recent years with the Argentine government against the vulture funds after the default on the debt in 2002. The Court of Appeals in Manhattan will receive the attorneys for the country, the creditors and the U.S. government to listen to arguments from each, in a lawsuit that was filed against Argentina by the large holders of bonds in cessation of payments.

Months ago, the lower court judge from the Second District of New York, Thomas Griesa, ruled in favor of the creditors in this case. But the ruling was suspended until the Court of Appeals rules. Now this body must make a decision.

The creditors presented a legal recourse called “pari passu’ through which they demand the same treatment as the rest of the bondholders that entered the debt swap. That is to say that if Argentina periodically pays (as it does) the restructured bonds, they ask that it also pay interest and principal on the bonds in default, and to not discriminate.

The move – led by the two large vulture funds, Dart and Elliot – involves bonds in default for an estimated sum of US$2 billion. In this context, the government of the United States also intervened in the case, and in favor of the country. Not because they sympathize with the Argentine position before the creditors, but over the risk that they say it poses to the international financial system should the “pari passu” action advance, as pushed by the vulture funds.

The United States argues that if this position is upheld, incentives would be lost to conduct voluntary debt restructurings in the future. Since the creditors would know that even if they didn’t enter any debt swap (of a country or a company) they could then demand all forms of payment on coupons and capital of the old bonds. “This induces friendly restructuring processes to not succeed,” explained an official source about the United States’ position.

Anyway, the U.S. Court of Appeals will not rule today on the case. It will limit itself to listening to arguments from the three parties: the vulture funds, the Argentine government and the U.S. government. It will then make a final decision in the coming months. Argentina, of course, has the key backing of the U.S. government, so it seems, running with an advantage after the setback in the lower court.

In 2005, Argentina conducted a restructuring of the debt in default that at that time came to around US$100 billion. It achieved a haircut of around 65%. And after smaller subsequent reopenings the majority of the creditors accepted the official proposal. But there remain funds, called vulture funds, whose strategy consists of buying bonds at default prices and then joining a legal battle – which could take years – to try to collect on most of those bonds.