There are no good guys in the story of Argentina’s debt default, which pits President Cristina Fernández de Kirchner’s erratic populist government against bare-knuckled Wall Street hedge funds.
The hedgies bet they could persuade U.S. courts to force Ms. Kirchner to honor a small percentage of Argentine bonds that were left out of the country’s two previous restructurings of $100 billion in debt, on which it defaulted in 2001. She bet that U.S. courts, whose jurisdiction Argentina accepted in issuing the debt, would enable her to repudiate the bond owners as “holdouts.”
Speculators or not, the hedge funds have the law on their side. Their case took years and went all the way to the Supreme Court, which let a lower-court order in favor of the funds stand. Ms. Kirchner nevertheless continues her massive propaganda campaign against the hedge fund “vultures” and refuses to pay — a stance that, under the terms of the order, makes it impossible for her to pay interest on the restructured bonds. Hence the default.
Argentina has been out of the market so long that its mess has few implications beyond its borders. Argentines won’t be so lucky: Until Ms. Kirchner accepts her defeat and gets back in the good graces of creditors, her countrymen are likely to face more inflation and unemployment.
There’s still time to cut a deal with the funds in the next few days. Argentina’s private banks have offered to put up enough cash to make it happen.
The broader question is what precedent this case might establish for other indebted sovereigns and those who lend them money. Critics of the hedge funds argue that a ruling in the funds’ favor would encourage would-be holdouts, thus obstructing the debt restructurings that are a regrettable but necessary feature of international finance.
Others warn that a pro-lender stance by U.S. courts might cost Wall Street business, because sovereigns would market their bonds in more borrower-friendly jurisdictions in Europe.
A growing percentage of sovereign debt already includes collective-action clauses, which essentially allow a majority of bondholders to overrule holdouts. But it will be years before such innovations become standard.
Meanwhile, the strict interpretation of borrower responsibilities that U.S. courts endorsed in Argentina’s case probably won’t burden sovereign debtors. Few of them face anything like the predicament into which Argentina has mismanaged itself. The outcome may encourage lenders to provide funds and debtors to use it wisely — rendering debt restructurings less necessary.
Markets thrive on transparency and clarity. The battle between Argentina and the hedgies has clarified U.S. law: If you borrow money, sooner or later you have to pay it back.
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