Bad Precedent

Judge Thomas Griesa of the Federal Court of New York has put Argentina in a difficult position by seating a precedent that could be worrying for other countries that need to restructure their debt. Between 2001 and 2010, Argentina negotiated various rebates of up to 65 percent with 93 percent of its creditors. It sought agreements with the remaining 7 percent of its creditors, including two initially supported funds, which President Kirchner later dubbed “vulture funds,” which have turned to the courts to get what they are owed. And it has done so before the American justice because the government of Buenos Aires accepted it like this when it negotiated the rebates.

The judge has decreed that Argentina should deposit the more than €1 billion that these funds demand before Dec. 15 and pay them before paying for anything else. Despite Minister of the Economy Hernan Lorenzino’s inaccurate claim that this is sending “the Fifth Fleet,” [http://www.telegraph.co.uk/finance/financialcrisis/9697724/Argentina-at-risk-of-default-after-US-court-ruling-on-debt.html ], the error could raise the price of export financing and hurt investors, risking taking the country to a technical suspension of payments.

Argentina has three options: Continue to the Court of Appeals and, if necessary, appeal to the United States Supreme Court, observe the sentence, which it clearly rejects reach an extrajudicial agreement with these funds. Given the aforementioned precariousness of foreign financing and the need to clear up doubts regarding the state’s reliability, Argentina may ultimately end up having to reluctantly choose this solution.

In any case, it is not only Argentina’s fate that is at stake. The case has triggered alarms in other countries that have renegotiated or intend to renegotiate their debts, such as Greece. If justice favors those who reject an agreement against those who accept the rebates, the IMF and World Bank’s strategies will become apparent.