MANHATTAN (CN) – Argentina’s central banking authority has immunity from the hedge funds seeking payment on defaulted bonds worth billions, the Second Circuit ruled Monday.
The Latin American country was in the middle of a severe financial crisis in December 2001 when it declared that it would stop making principal and interest payments on more than $80 billion in sovereign debt.
Though the country hammered out two restructuring deals in 2005 and 2010 that allowed it to repay 91 percent of bondholders for pennies on the dollar, some bondholders like EM Ltd., NML Capital Ltd. and Aurelius Capital Management held out.
About 11 years after these firms filed suit in Manhattan, U.S. District Judge Thomas Griesa found the country in contempt of court for not repaying $1.3 billion it owed to hold-out bondholders.
The debt has ballooned to $2.4 billion since Griesa first rejected Banco Central de la Republica’s bid for sovereign immunity.
A three-judge panel of the Second Circuit sided with the bank Monday, finding “no dispute that [the bank] is an instrumentality of Argentina and … is entitled to invoke its sovereign immunity as a defense.”
In reversing for the bank, the judges emphasized that the ruling is “not intended to allow [Argentina] to avoid its bargained-for obligations, or to continue shirking the debts it has the liability pay, although we suspect that this will be a predictable and unfortunate outcome of our decision.”
“We do not condone or excuse Argentina’s continuing failure to pay the judgments duly entered against it by the District Court,” Judge Jose Cabranes wrote for the court.
The bondholders’ thrice-amended complaint hinged on claims that the bank is an “alter ego” of the South American nation and thus liable for its debts.
The bank was founded in 1935 as a “self-administered institution” to act as the country’s agent and depository before international monetary banking and financial entities, as well as with regulating the Argentine banking system and financial sector, the circuit noted.
“Governments commonly exercise some measure of control over their instrumentalities,” Cabranes wrote.
Lacking from the bondholders’ arguments, however, are any claims that such appointments dictated how the bank did business.
“Ensuring that a board of directors of the instrumentality shares the sovereign’s goals and policies for the instrumentality is not, by itself, extensive control,” Cabranes wrote. “The sovereign must instead use its influence over these directors in order to interfere with the instrumentality’s ordinary business affairs.”
Cabranes called it “irrelevant” that Argentina and the bank are accused of coordinating efforts to implement an “inflationary” monetary policy.
“It is not our role to second-guess monetary policy decisions made by foreign governments,” the 43-page ruling states.
The bondholders likewise failed to advance claims it would be an injustice for Argentina to pay certain “preferred” creditors while “stiffing” them, a plan Griesa green-lit in June.
“There is nothing irregular or fraudulent about Argentina recognizing a preference for repaying one set of creditors over another,” Cabrenas wrote.
The bondholders worry about how Griesa’s decision will hurt international financial relations, but Cabranes said “adopting plaintiffs’ theory for jurisdiction here would dramatically expand the scope of the commercial-activity exception to sovereign immunity.”
“Any allegation of the wrongful use of dollars outside the United States would conceivably lead to a sovereign immunity waiver, so long as the plaintiff could show that these dollars were acquired in U.S.-based transactions,” the decision states.
“Given New York’s role as a financial center, every country and every central bank would be at risk of losing their sovereign immunity on this basis.”
Carmine Boccuzzi Jr., an attorney for Argentina, did not immediately respond to a request for comment.
Earlier this month, the Second Circuit slapped Griesa, 84, on the wrist for twice ignoring its instructions on how to handle the case.
Griesa’s ruling last year had led other bondholders to take aim at Argentina with lawsuits of their own in November.
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