It’s hard to decide which is the less sympathetic party appearing before the U.S. Supreme Court today. Is it Argentina, which has repeatedly defaulted on foreign debt? Or is it a hedge fund controlled by billionaire Paul Singer, which sometimes buys up distressed debt on the cheap and then sues for full repayment? Argentina calls Singer’s fund a “vulture,” while Singer’s fund says “it’s time for Argentina to stop trying to evade its obligations and to follow the law.”
The case the high court is hearing today is narrow: Argentina contends that two of its banks can’t be required to disclose information about assets located outside the U.S. But the ultimate issue is much broader, involving big questions about national sovereignty. And it’s creating unusual alliances. The U.S. government has come in on the side of Argentina, while victims of the 9/11 terrorist attacks are siding with the hedge fund.
The background, as reported by Bloomberg’s Greg Stohr, who is covering today’s Supreme Court hearing: In 2001, Argentina defaulted on a record $95 billion in debt. It subsequently offered to pay 25 cents to 29 cents on the dollar. Investors holding 92 percent of the bonds accepted, figuring something was better than nothing. But NML Capital, a Cayman Islands-based unit of Singer’s Elliott Management, which bought some Argentine bonds cheaply, went to court in the U.S. to demand that Argentina pay it in full before paying anything to holders of the new, restructured bonds. It has won a judgment for $1.6 billion.
In one of the more colorful episodes in the long-running case, in 2012, Ghana, acting on the hedge fund’s behalf, briefly seized the ARA Libertad, a three-masted sailing ship that the Argentine navy uses as a training vessel.
Argentina is vulnerable because in order to entice investors to the bonds in the first place it had agreed that any disputes over them would be settled in New York state courts—in effect surrendering some of its freedom of action, or sovereignty. Lower courts have sided with investors against Argentina. While the Supreme Court is hearing the narrow question of whether banks must disclose information about assets outside the U.S., it hasn’t said whether it will consider Argentina’s appeal of the broader case.
Argentina argues that “foreign states are entitled to ‘grace and comity’ in U.S. courts, which is premised on respect for the power, dignity and absolute independence of foreign sovereigns.” The U.S. government, without approving of Argentina’s default, has been sympathetic, fearing that the U.S. government could someday be subjected to the same kind of treatment. “Judicial seizure of a foreign state’s property may be regarded as a serious affront to the state’s sovereignty and affect our foreign relations with it,” the U.S. government said, adding that a ruling against Argentina “would risk reciprocal adverse treatment of the United States in foreign courts.”