To understand background and potential implication, I found http://dealbook.nytimes.com/2014/07/30/q-a-whats-behind-the-... helpful.
http://dealbook.nytimes.com/2014/07/30/in-hedge-fund-argenti...
"The hedge fund firm of billionaire Paul E. Singer has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, into a position where it now has to contemplate a humbling surrender."
"Argentina on Wednesday failed to make scheduled payments on its government bonds. The country has the money to pay the bonds. But a federal court in Manhattan has ruled that unless Argentina settles its debt dispute with Mr. Singer’s firm, Elliott Management, it is barred from paying its main bondholders." (...)
"“We’ve had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system,” said Joseph E. Stiglitz, the economist and professor at Columbia University. “We don’t know how big the explosion will be — and it’s not just about Argentina.”" (...)
"It is legally challenging for American investors to sue foreign governments in United States courts. But in 2012, Elliott achieved a stunning breakthrough in the Federal District Court in Manhattan. Judge Thomas P. Griesa ruled that whenever Argentina paid the exchange bonds, it also had to pay the holdouts. Argentina could not ignore the ruling and pay the exchange bondholders because Judge Griesa also ruled that any financial firm that distributed payments to the bondholders would be in contempt. Argentina placed $539 million with the Bank of New York Mellon in June to pay its bondholders, but the bank did not transfer it."
If this were a case of leders screwing over the people by having governments re-write laws (see: student loans) perhaps more sympathy would be in order.
This is a case where the borrowers have tried to disregard US law, in its entirety.
In that respect, I'm not sure there is anything bad to imply about the hedge funds who simply made bets on the integrity of US Law.
The president of Argentina obviously has her own view and interest at stake, as well.
From the same article:
"Legal filings indicate that the face value of its Argentine government bonds was around $170 million, but the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than $1.5 billion, which includes years of unpaid interest."
Elliott just blackmails Argentina to extract many times more than it would otherwise be reasonable (without the blackmail condition).
Until I read this, I assumed that international bonds were issued under international law, with the World Bank as the arbitrator. With the US as both lender and arbitrator, it seems to give them a lot of power.
The World Bank itself gives loans, advice, and research. But there are a large number of semi-associated agencies, under their own treaties, that do other things, such as settling investment disputes. But it's important to note, as rayiner said elsewhere, that contracts are private law, and you get to choose how to settle disputes unless some public policy decides otherwise.
My understanding of this type of clause is not that it makes New York the arbitrator, but rather clarifies for whoever does arbitrate that New York laws should be used. This seems important when working across national (or state) boundries do prevent ambiguity as to what set of laws is being used.
I suspect that it is simmilar to copying the relevent laws into a contract and signing that, which is to say that local laws still apply.
I agree, but it would make sense, then that since the New York legal system is the final interpreter of New York law, then that would be where lawsuits would go.
Having the case actually heard in NY simplifies the application of NY law, but it's probably more for convenience: the parties know that if they have to litigate, they don't need to find new attorney's at some random location.
edit: What I'm saying is only crazy within the bubble of this thread. It's also the opinion of the US government and the American Bankers Association.
http://www.bloomberg.com/news/2013-01-04/bankers-group-suppo...
"'Permitting injunctions against these trustees that preclude them fulfilling their pre-existing obligations whenever expedient to enforce a judgment against the debtor will have significantly adverse consequences for the financial system,' the ABA said in its brief."
http://www.reuters.com/article/2012/12/13/argentina-debt-usa...
"U.S. government lawyers reiterated their position that the court's interpretation of the 'equal treatment' clause in Argentina's defaulted bonds 'may adversely affect future voluntary sovereign debt restructurings, the stability of international financial markets, and the repayment of loans extended by international financial institutions.'"
On the other hand, if the US doesn't uphold the law, then the world economy would be damaged because lending would become more unpredictable.
As it stands, though, it's easy to portray this as the US bullying Argentina in the interests of a small group of rich American citizens who behave like loan sharks. It just seems like it would be better to have an international body of law under which all international lending takes place, and when there is a dispute, a judge is chosen from an independent third party. Is there any serious effort to make that happen? I have no idea.
edit: it's important to keep in mind that 93% of bondholders have agreed to the restructuring. The courts look like they're saying that the decision must be unanimous. That's completely unworkable.
Here's another link.
edit: and another - http://www.forbes.com/sites/realspin/2013/12/19/the-real-fac...
How do you change a vote on HN? Any time I upvote or downvote, both arrows disappear, so I always assumed they were permanent.
(I'm assuming that I wasn't bankrupted due to the price I paid, and that I am a professional investor rather than an emotional gambler)
It doesn't mean that there's no reason to issue your bonds in the US, on the contrary - it means that if you have a debt-reputation problem but feel safe in your ability to repay, then you'll want to issue your bonds in US to 'put your money where your mouth is' and get a better price. Or, in cases like Argentina, the potential investors will say 'either US jurisdiction or no deal'.
Every country in the world knows that it is going to be easier to restructure if you issue bonds under local law. No one selects New York law for its bonds out of some naive inertia. Argentina specifically went out of its way to select New York law and deliberately put in a pari passu clause because it had a history of defaulting on debt, and it thought it wouldn't be able to raise money, or at least not at the same rate, if it issued bonds under local law.
I can't think of any possible reason to relieve a country of obligations that were deliberately and knowingly undertaken to tie its own hands in order to make its debt more credible.
If you want collective action on restructured debt put in a collective action clause. If you want a sweetheart interpretation of your debt clauses issue it under local law. Every country that is issuing debt knows these things, they aren't rocket science. The reason they sometimes choose not to is because they want to pay a lower coupon and/or be sure that the whole issue will be purchased.
I have no idea - I wish I knew more about the details.
edit: it's conceivable that Argentina could blink and pay the vultures off, but if they're then liable for all of the debt (which they can't pay) that means that this is going to be a full default, and nobody's getting a dime, right?
The 7% don't seem to have done anything illegal (obtaining and enforcing a court judgment usually isn't), nor they have any agreements or liabilities towards the 93%, they're not obligated to act in the interests of those 93% when negotiating - even if they'd say "ahh we just did it out of spite to screw you guys, trololol" then it's within their rights to do so.
I doubt also that S&P opinion would be ignored - there are overdue payments that aren't being paid, they're simply acknowledging that fact.
I don't know whether I see a claim, but I wondered whether a clever lawyer would. Reading around, I'm positing ideas for what might happen next.
The equal treatment thing being enforced by the court is something Argentina specifically put into the bond contracts, no? Why should we expect the court not to enforce this condition? (I haven't read the contracts, so am only going from memory of what I've read elsewhere.)