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IMF Abandons Argentina

Argentina was hoping to have some powerful allies in its courtroom showdown with holdout creditors such as Elliot Capital Management, a New York-based hedge fund that was notably responsible for impounding an Argentine tall ship off the coast of Ghana late last year. But now both the US Treasury and the IMF are backing away from earlier plans to file amicus briefs when the case goes to the US Supreme Court.

The US government, which appears to have been responsible for the IMF’s last minute change of heart, isn’t explaining why it is backing away from a case that some said could imperil the entire global marketplace for sovereign debt. But it may be that officials are buying at least some of the arguments made by creditors that this case is too unusual to have the huge knock-on consequences once expected, or in fact that the knock-on effects might run the other way:

In another letter, Gibson Dunn, the law firm representing Elliott, said any attempt to call IMF intervention neutral was “simply disingenuous”. It said the move would encourage more countries to litigate and ultimately lead to “fewer rather than more successful consensual restructurings”.

So as the courts close in, Argentina faces the prospect of defaulting yet again on its international debt even as the national statistics office releases bullish information pointing to a surging economy.

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  • bigfire

    Argentina have a way to go before reaching the financial nirvana that is Bob Mugabee’s Zimbabwe. And so does United States.

  • Kavanna

    The economic “statistics” in Argentina are a total joke and have no relationship to reality. When economists do try to publish something reality-oriented, they get sued by the Argentine government. I don’t understand why any sensible person lives there.

    Americans and other post-developed world citizens: be warned — this could happen to you.

  • John Stephens

    Given Argentina’s open contempt for the very concept of repaying one’s debts, why would anyone be foolish enough to lend them any more money unless someone, somewhere is willing to MAKE them repay it?

    • Thirdsyphon

      Fair point, but if we respond to this with our own display of contempt for the very concept of foreign sovereign immunity, why would any foreign government ever again deposit another nickel in our banks?

      My main concern here isn’t for the fate of the Government of Argentina or that of its many angry creditors, but for the credibility of the U.S. banking system and by extension the U.S. dollar itself. That’s what’s really at stake here, from the American point of view.

      As an aside, if it becomes known to creditors that opting out of a sovereign debt restructuring will buy them a chance to relitigate their case in a U.S. court that can only make upward modifications to the amount they were offered in the restructuring, then our court system will be swamped by cases like this, and we’ll become the de facto appellate tribunal for all global financial disputes.

      • cubanbob

        The lesson is to be very wary of which sovereign you deal with. If Argentina gets hammered it will send a message to other sovereigns who are thinking of pulling an Argentinian style shafting of their creditors. If Argentina succeeds the lesson is to avoid sovereign debt as much as possible.

        • Thirdsyphon

          I think the bond market itself is in a good position to deal out the hammering that Argentina has earned itself by simply not buying its bonds. . . or buying them only at whatever ruinous rate of interest they feel will compensate them for the truly mad risk that they’ll be running by purchasing them.
          Until now, that’s been the de facto contract between sovereign nations and the bond market: the bondholders have always known they have no recourse beyond refusing to lend more money, and the sovereigns have always known that being unable to borrow money would be such a huge disaster that almost all of them go to excruciating lengths to avoid default.
          If the U.S. unilaterally intervenes to tip the scales in favor of creditors on deals that already exist, it’s true that current creditors will benefit. . but it’s also very likely that future deals will be denominated in some other currency, most likely the Euro.
          It would be ironic indeed if the dollar, which is rising back to preeminence because of the E.U.s involvement in stopping defaults among Euro states, were to cede its position back to the Euro because of our insistence on using it to intervene in defaults in other countries that have nothing to do with us.

          • cubanbob

            US history provides an abject lesson in what can happen when sovereigns shaft bondholders. Just look at the Southern States that stiffed foreign bondholders prior to the Civil War. For decades they either couldn’t float GO bonds or had to pay ruinous interest rates until they were deemed responsible and credit worthy.

          • Thirdsyphon

            I’m not an expert on this subject, but I wasn’t aware that the Confederate states had credit problems *prior* to the Civil War. During and after that conflict, of course, Southern credit plummeted along with their fortunes in war.

          • cubanbob

            Yes indeed they did in the 1840’s. They hosed British bond holders among others. The Civil War debt was basically owed by the CSA to Southerners and not foreigners. As a result of the 1840’s default Florida to this date is prohibited from issuing GO bonds although the sub-divisions can issue those.

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