The US Supreme Court on Monday refused to consider a landmark appeal by Argentina of a lower court’s order to pay around $1.5 billion to two hedge funds.
But the decision did not end Argentina’s avenues to challenge the 2012 ruling, supported in August on appeal, that it had to pay back all holders of its defaulted bonds, whether or not they took part in a restructuring of those bonds.
In a case closely watched for its potential impact on other sovereign debt restructurings, Argentina had asked the Supreme Court to review the original “equal treatment” decision that if it makes payment on the restructured debt, it must also pay the hedge fund investors.
The Supreme Court’s decision relates only to that narrower issue.
But Argentina could still appeal to the highest US court the August order by the Second Circuit Court of Appeals in New York to repay the debt restructuring holdouts.
Argentina has argued that the two hedge funds, NML Capital and Aurelius Capital, lost their right to collect when they declined to take part in the 2005 and 2010 restructurings of nearly $100 billion of debt it defaulted on 13 years ago.
Buenos Aires argues that paying the two full face value for their bonds would be unfair to the restructured bondholders.
It also said being forced to pay the two in full could expand its payment obligations to others and force it back into default on all its debt.
Argentina is still fighting on procedural grounds the August appeals court decision, and only after that challenge is cleared can it ask again for the Supreme Court to review the case.
The case has implications for the massive global market for sovereign debt.
Critics say the New York judgment could set a precedent for all sovereign debt restructurings in which a majority of bondholders, but not all of them, accept a “haircut” or writeoff of the debt’s value in order to help the borrower restore financial stability and make good on at least a part of the bonds’ worth.
Analysts have pointed to the risks implicit for the massive restructuring of Greece’s debt, a cornerstone of the international bailout by the European Union, European Central Bank and the International Monetary Fund.
In its August decision, the appeals court insisted it had not opened the way for restructured bondholders to insist on equal payment to those who stayed out of restructurings.
“We believe that it is equitable for one creditor to receive what it bargained for, and is therefore entitled to, even if other creditors, when receiving what they bargained for, do not receive the same thing,” the court said.
“The reason is obvious: the first creditor is differently situated from other creditors in terms of what is currently due to it under its contract.”
In that case, the court added, the burden of the payments the case orders would not force the country into default: Argentina has the money to service all its debts under current contracts.
The court also insisted that the Argentine case is “exceptional” and hinged on the country’s “extraordinary behavior”.
It had “little apparent bearing on transactions that can be expected in the future.”
“Cases like this one are unlikely to occur in the future because Argentina has been a uniquely recalcitrant debtor,” it said.
In reaction to that judgment, in September ratings firm Standard & Poor’s cut Argentina’s already low-level sovereign debt rating by one notch to CCC+.
“If the US Supreme Court does not grant the appeal or if it eventually rules against Argentina, Argentina’s ability to service its debt from the 2005 and 2010 exchange would be compromised,” it said.