Argentina will seek on Wednesday to persuade a U.S. appeals court to reverse an order that it pay $1.3 billion to a group of dissident bondholders stemming from the country's 2002 default, a showdown that could have wide impact on global debt markets.
The arguments at the 2nd U.S. Circuit Court of Appeals in New York are being closely watched amid fears of a new Argentina debt crisis if the court rules the country must pay the so-called holdout investors.
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For years, the holdouts have demanded full payment after spurning two debt exchanges. Led by Elliott Management affiliate NML Capital Ltd and Aurelius Capital Management, they say they are simply attempting to hold Argentina to its obligations and that the government has plenty of reserves to pay them.
Argentina, however, calls these investors "vultures," and has vowed not to pay. A victory by the holdouts, Argentina argues, would harm those investors who agreed to the debt restructurings as well as banks that handle its payments. The country also says such a ruling could make future debt crises "unresolvable," and spur further investor litigation.
A decision against Argentina would deal a major blow to President Cristina Fernandez. As a sign of the importance of the case, Argentine Vice President Amado Boudou, Economy Minister Hernan Lorenzino and several other high-level Argentine officials planned to attend the court hearing.
A three-judge panel is set to hear arguments from lawyers for Argentina and for the holdouts, as well as several other parties.
Argentina defaulted 11 years ago on about $100 billion in sovereign debt. About 92 percent of its bonds were restructured in 2005 and 2010, giving holders 25 cents to 29 cents on the dollar.
If ordered to pay the small group of holdout creditors, there are fears that Argentina could default again on $24 billion in previously restructured debt.
U.S. District Judge Thomas Griesa in New York ruled in February 2012 that Argentina had violated a key provision of its bond contracts which required the country to treat all of its creditors equally by paying the holdouts if it also paid investors who had agreed to the two debt swap deals.
In October, the 2nd Circuit largely upheld that ruling and is now reviewing Griesa's plan for how the payments would work.
Griesa has said the next time Argentina made an interest payment to the exchange bondholders, it would have to pay $1.33 billion owed to the holdouts into a court escrow account.
The appeals court is also examining treatment of Bank of New York Mellon, which acts as trustee to the exchange bondholders, and the impact from the ruling's injunction on other third parties.
In their appeal, Argentina's lawyers have contended U.S. courts do not have the authority to order a sovereign government to turn assets over to bondholders.
But Henry Weisburg, a lawyer at Shearman & Sterling who has followed the case, said Argentina made similar arguments during its last hearing before the appeals court. He also noted the appeal will be heard by the same panel that issued the October ruling backing Griesa.
"You have to wonder what traction they'll have the second time around," he said of Argentina.
In court papers, lawyers for Argentina have said the country would be willing to reopen its restructuring offer. Such a move, though, would require legislative approval and is likely be rejected by the holdouts.
Argentina is separately awaiting a decision on whether the court will grant a rehearing of the October decision that required equal treatment of the holdout investors.
The U.S. government has backed that appeal, saying if the ruling is upheld, it could undermine the ability of other governments to negotiate future debt restructurings.
The appeals court's ultimate decision after Wednesday's hearing could be the final word on the matter. Although the court could end up rehearing the case or the Supreme Court could ultimately take up the case, such reviews are rare.
The case is NML Capital Ltd et al v. Argentina, 2nd U.S. Circuit Court of Appeals, No. 12-105.