The United States Supreme Court denied Argentina’s request for review of a Second Circuit court order that requires Argentina to pay nearly $1.4 billion by July 30 to certain holdout bondholders that did not participate in debt restructurings after Argentina’s 2001 sovereign debt default.  The Court also issued a 7-1 decision that authorizes the debt holders to subpoena banks in an effort to trace Argentina’s assets and secure payment on their bonds.  Together, these rulings effectively ended Argentina’s 13-year legal battle against these holdout creditors.  These rulings have vast implications, not only for Argentina’s debt holders, but for investors and sovereigns worldwide.

In the underlying case, plaintiffs, comprised of hedge funds and other investors, sought to hold Argentina to the terms of its original bond offering, thus requiring Argentina to pay debt holders who had not participated in Argentina’s 2005 or 2010 debt restructuring plans in full.  Many of the plaintiffs purchased Argentina’s sovereign bonds at a steep discount and, thus, seek to make a substantial profit as a result of the ruling.  In contrast, the 93% of debt holders who accepted the restructuring plans are entitled to only 30 cents on the dollar.  The Second Circuit held that the non-participating debt holders were entitled to full payment, but issued a stay of the order to allow Argentina to seek review by the U.S. Supreme Court.  Although several countries, including France, Mexico and Brazil, filed amici briefs in support of Argentina, the Court, without explanation, declined to hear the case.  Plaintiffs have now requested that the Second Circuit Court of Appeals immediately dissolve the stay and allow plaintiffs to seek payment from Argentina.

Now, both the bondholders and the world anxiously await Argentina’s next move.  It is unlikely that Argentina will pay the full amount owed.  Doing so would likely cause the debt holders who accepted Argentina’s prior restructuring plans to demand full payment of their claims, which could top $15 billion, causing the country to default again.  Similarly, a refusal to make any payments – under the current court order in place — would effectively prevent Argentina from making current debt service payments to holders of performing bonds for which there has not been any default.  A resulting default to current bondholders would be extremely damaging to Argentina and likely hinder future foreign investment  and severely damage creditors’ and banks’ trust in the country.  Most likely, Argentina will have to negotiate payments to plaintiffs, either for less than the full amount owed or structured over time.

On Tuesday, July 22, the U.S. District Court ordered the parties to meet with a special mediator in an attempt to reach an agreement before the July 30 debt service payment deadline for the next regularly scheduled payment under the performing restructured bonds.  The court has refused to grant Argentina’s request for a stay in the dispute until 2015, when the rights upon future offerings (“RUFO”) clause in the exchange bonds expire, which allows the debt holders who accepted Argentina’s prior restructuring plans to demand the same payment terms Argentina reaches with the holdout debt holders.

This decision changes the rules on sovereign debt restructuring in 3 important ways.  First, it confirms the enforceability of sovereign debt.  The court’s ruling makes clear that sovereign debtors cannot be excused from the terms of their original contractual obligations.  Second, debt restructuring may become more difficult for sovereign nations in financial distress by limiting sovereigns’ ability to restructure debt over the objections of non-consenting bondholders and decreasing investors’ incentive to accept reduced and restructured payments.  Third, by granting the holdout bondholders the power to subpoena information from banks concerning a sovereign’s assets, the court’s ruling brings transparency to government transactions that may have previously been hidden.