Argentina is at risk of defaulting on $24bn (£15bn) of debt after hedge funds were awarded more than $1.3bn by a US court, a move which its economy minister called “legal colonialism”.
All we need now is for [Judge Thomas] Griesa to send us the Fifth Fleet,” said Hernán Lorenzino, Agentina’s economy minister.
However, New York District Court Judge Grisa was firm. “Argentina owes this and owes it now,” he said. “After 10 years of litigation this is a just result.”
A deadline for payment was set for December 15.
Cristina Fernandez de Kirchner, Argentina’s outspoken president, had vowed that the government will not pay “one dollar” to the funds. Payment could divert money from other bondholders, tipping the nation into a technical default.
The ruling relates to the previous default cycle. Judge Griesa rejected Argentina’s request to keep a previous order halting payments to so-called “holdout” investors that did not participate in two bond exchanges in 2005 and 2010.
The ruling effectively means that holders of defaulted debt have to be treated the same as those investors who participated in the restructuring.
These investors include NML Capital and Aurelius Capital Management, which have been holding out after rejecting the terms of previous debt agreements. Economy Minister Hernan Lorenzino called the hedge funds “vultures”.
“To pay the vultures is not only unfair but illegal in terms of our internal rules,” he said. “We will continue to defend the position of Argentina in all forums and with all available legal instruments.”
The court victory has sparked fears the country could be plunged into a default spiral similar to the 1999-2002 crisis, which caused widespread unemployment and rioting.
Judge Griesa warned that US bank BNY Mellon would be acting “in active concert” with Argentina if it failed to comply with the ruling because the bank is handling the South American nation’s debt payments to US bondholders.
The decision still has to be confirmed by the appeals court and may also be referred to the highest court in the US.
“We will take all the necessary legal steps” to defend the country’s interests, and will go to the US Supreme Court if needed, Mr Lorenzino said.
Brian Joseph, head of trading at Buenos Aires-based brokerage Puente Hermanos Sociedad de Bolsa told Bloomberg: “This is the worst scenario one could have imagined for Argentina.
“The bonds and warrants are falling because investors are worried Argentina will decide not to pay what Griesa wants and the ratings agencies will declare a selective default, forcing the real money investors to sell.”
If Judge Griesa’s ruling is upheld by an appeals court and Argentina still refuses to pay, US courts could eventually block debt payments to creditors who took part in the debt restructurings out of consideration for investors who rejected Argentina’s terms at the time.
That would trigger a technical default on approximately $24bn worth of debt issued in the 2005 and 2010 exchanges, although Argentina has said it will keep making routine repayments and that funds deposited for creditors within the South American country cannot be seized.