Rattled investors could be forgiven a sense of déjà vu after they were put on notice about the threat of a possible government default after Argentina was ordered immediately to cough up more than $1.3bn (£800m) to hedge funds that held out when it restructured its giant debt pile following a 2001 default.
Pending an appeals court decision, a New York judge has ordered Buenos Aires to pay the money due to the funds, including NML Capital, an affiliate of Elliott Management, a hedge fund, by 15 December. Elliott is often described as one among the so-called vulture funds that buy up debt issued by struggling countries and then pursue interest payments via the legal system. Recently, the fund has been reported to have waded into Greek debt.
NML's lawyers have been aggressive in pursuing the case, most strikingly by winning an order earlier this year to have one of Argentina's navy vessels impounded in Ghana as collateral.
At the heart of the case is the Argentinean debt restructuring of 2005 and 2010, when the country, seeking to put its house in order after enduring a deep economic slump and failing to repay its debts, struck deals with creditors who had lent it money, buying bonds that were subsequently defaulted on. The restructuring offered creditors part of what they were owed.
However, not everyone took part in the restructuring. Among the so-called "hold-outs" the biggest were NML and Aurelius Capital Management, who decided to go to court seeking payment on the bonds.
Years of litigation and much political posturing followed. Argentina's outspoken leader Cristina Kirchner has fulminated against the legal actions and recently said her country would not pay "one dollar to the vulture funds" – until US District Court Judge Thomas Griesa ruled in favour of the funds earlier this year.
Judge Griesa said that Argentina should go ahead and, instead of paying the funds directly, deposit the money in an escrow account by mid-December. "The less time Argentina is given to devise means for evasion, the more assurance there is against such evasion," the judge ruled.
The case could eventually end up in the US Supreme Court. Argentina has already filed a motion asking for a reconsideration of a recent decision by the US Second Circuit Court of Appeals. But for now Judge Griesa has pushed President Kirchner's government into a corner by barring Argentina from paying other bondholders until it has met the escrow requirement. This means that the country could be stopped from paying out the around $3.1bn due next month to creditors who took part in the restructuring. That, in turn, would trigger another default on more than $20bn of Argentinian debt.
Elliott Management said, "we have no comment" yesterday, while a call to Aurelius went unanswered.
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