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Bad Omens for Greece in Argentina

With Greece slowly circling the drain, the Greeks and the European officials charged with rescuing it badly need some good news. Instead, they get this: Quartz reports that the recent case in which an American hedge fund successfully sued Argentina for the full value of its bonds may set a precedent for similar actions by Greek creditors:

In 2001, Argentina defaulted on its debt. It eventually went through two restructurings, in 2005 and 2010, to begin paying consenting bond holders between 25 and 29 cents on the dollar value of its bonds (i.e., a “haircut” of up to 75%). Elliott, earning the moniker of “vulture fund,” had bought up the country’s debt on the cheap and did not participate in these restructurings, holding out and suing the country in US court for the $1.33 billion face value of its bonds.

While Elliott stews in legal limbo, Argentina pays restructured bondholders through a New York-based trust. The Oct. 26 decision essentially says that if Argentina is paying anyone, it has to pay Elliott, too, thanks to a (key vocab alert) pari passu clause in the bond’s contract. The Latin phrase means ” in equal step,” and says that Argentina will treat the bonds in question on equal terms with all of its external loans. Basically, the court says, pay everybody or pay nobody. . .

Particularly, Salmon worries—as does the United States’ government, which sided with Argentina in the case—that the precedent in this case could make it exceedingly difficult for countries to modify debt in the future. Argentina explicitly warned that Euro crisis-related restructuring both on-going and expected in Portugal, Italy, and Greece (the “PIGs”) will be made exceedingly complicated by the decision.

When countries end up in financial crises, they usually end up getting “bailouts” from the International Monetary Fund and other countries, but a key component of any rescue is usually some kind of “bail in,” which essentially means coercing or convincing bondholders into accepting the kinds of haircuts that Elliott is trying to avoid here.

It’s still too early to see how this will shake out, but if the case passes muster in the Supreme Court, it will set a precedent that will totally restructure how sovereign debt functions. More immediately, it make Europe’s sovereign debt crisis considerably more difficult to solve, removing one of the tools that governments have traditionally used to fix their finances after a default. Neither Greece nor the IMF nor Europe will be happy if this tool is removed from the toolkit.

Read the whole thing.

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