Argentina’s feisty president is not giving thanks today. Not only were many of the country’s cities closed down earlier this week by unionists unhappy with the increasingly discredited economic policies of the embattled Kirchner government; US courts are pushing the country to the verge of yet another sovereign default.
The problem of Argentina is that creditors who refused to accept the terms Argentina sought to impose as part of its most recent default have gotten American courts to agree to their claim that Argentina still owes them the outstanding debt, and that they have the right to a share of the payments Argentina is making to the creditors who accepted the settlement. Since by the terms of that earlier deal, Argentina’s payments are being made through American banks, American court rulings requiring the holdout creditors to get paid can in fact be enforced. Under the terms of the court order, the holdout creditors will get a substantial slice of the December 15 payment of $3.4 billion Argentina plans to pay the creditors who accepted the restructuring. Argentina will either have to stiff the restructured creditors and redefault on its debt or fork over more than a billion to the holdouts in addition to the money it has already set aside.
The government in Buenos Aires is seething over what it considers a grotesque humiliation; imagine, being required to pay ones debts. Other countries and other creditors are eying the court case warily. There are plenty of European countries thinking at least hypothetically about defaults and restructurings as their euro woes mount, and creditors are trying to game the various scenarios to figure out whether they do better by accepting a restructuring and a haircut up front, or by fighting the deal, holding out, and perhaps ultimately getting paid in full.
Problems like this used to be settled, literally, by gunboat diplomacy. Creditor countries sent the navy to the harbors of defaulting countries to make them pay up. These days, creditors seem to have discovered something even more threatening: lawyers.