In the competition for the world's most incompetent and irresponsible economic policy, Argentina struggles for the lead against the likes of Venezuela and Greece. (Cuba and North Korea are in yet another category, an economic fools' lifetime Hall of Fame.) We are soon to see if Argentina can put a few lengths between itself and its rivals.
If you have been following the long-running saga of the Argentina bond default, you know that Argentina defaulted on close to $100 billion of external debt around the end of 2001. Then in 2005 and again in 2010 it put out take-it-or-leave-it exchange offers, and got some 93% of the holders of the defaulted debt to turn them in for new "exchange" bonds with face value of about 25 cents on the dollar, and other less favorable terms. But that left about $7 billion of the defaulted bonds outstanding. Argentina passed a so-called "Lock Law" that flatly prohibits payment on the defaulted bonds, but those bonds by their terms are payable in New York and governed by New York law. Holders of those remaining bonds have been relentlessly pursuing their lawsuits in the Federal courts in New York. Argentina has lost at every turn in the Southern District and the Second Circuit Court of Appeals, and after many years we are coming up on the end game. Most recently Argentina put its hopes on a long-shot cert petition to the U.S. Supreme Court. This morning the Supremes denied cert.
Now it starts to get interesting. It's been some eight years of litigation, but believe it or not Argentina is starting to run out of options. The Southern District court has not only granted summary judgment to the holders on their bonds, but has also granted equitable relief ordering that Argentina must pay the defaulted bonds any time it makes a payment on the exchange bonds, and further that it may not "take any action to evade the directives" of the court. Argentina wished to keep paying on the exchange bonds and keep not paying on the defaulted bonds, so it then in August came up with the idea of exchanging the exchange bonds yet again for new bonds payable in Argentina, thus outside the jurisdiction of the U.S. judges.
Not so fast! The defaulted bond holders went into court and asked the judge to specifically order that Argentina could not do such a new exchange to evade his prior orders, and he agreed. On October 3 he ordered that such a new exchange would violate his prior orders and was specifically prohibited. Back to you, Argentina!
Might Argentina go into outright defiance of the New York court orders? Here is a clip from the Second Circuit argument earlier this year where the lawyer for Argentina (Jonathan Blackman of Cleary) seems to be saying that they will:
"We would not voluntarily obey such an order." Needless to say, this is not an everyday event in the U.S. courts. Yes, parties do from time to time get themselves intentionally held in contempt in the District Court in order to enable an immediate appeal. But here, all appeals have been, or will shortly be, exhausted.
Given the breadth of the orders the courts have already shown themselves willing to issue, it appears that unless Argentina gives up and pays the defaulted bonds, the courts are heading toward cutting it off completely from the New York financial markets. It is possible to operate a country without access to these markets -- Cuba and North Korea already do it. Take that, Venezuela and Greece! While you are merely impoverishing your populaces, Argentina may soon gain entry into the economic fools' lifetime Hall of Fame.
Of course, getting cut off from credit would probably be the best thing that could ever happen to Argentina, finally forcing a reduction in its wildly bloated state sector and out-of-control crony capitalism. But don't worry. Without a doubt the Europeans will continue to lend to them.
UPDATE: Instalanche! Many, many thanks to Glenn Reynolds for the link. New readers, please stay and see if you enjoy other content.