Argentina’s Debt Crisis and the Politics of Sovereign Debt

The US Supreme Court handed Argentina a stinging defeat on Monday when it declined to hear an appeal from the Argentina government in its dispute with several hedge funds. The issue arose after several hedge funds which had purchased Argentinian sovereign debt refused to enter into an agreement after the country’s 2001 debt crisis. About 93 percent of Argentina’s creditors entered an agreement to accept a lower rate of repayment. However, several leading hedge funds—dubbed Vulture Funds, because they purchase cheap government debt bonds and then hold out for higher rates of repayment—refused to enter the agreement and held out for repayment in full.

The Argentina government had hoped to repay creditors who accepted the deal and refuse to deal while withholding payment from the others. But a US court ruled that this violated the principle of pari passu, which requires equal treatment for all investors. Under this principle, Argentina would be prohibited from paying creditors who accepted the deal if it did not also pay withholding creditors as well.  And if it does not repay its creditors, the country would be in default, possibly causing considerable economic turmoil in global debt markets.

To make matters worse, the Argentine government has already stated that it does not have the funds to pay all creditors in full by the June 30 deadline. If it fails to make that payment deadline, the country would officially be in default by July 30. Interest rates for Argentinean sovereign debt have already jumped from just under 12 percent before the Supreme Court decision, to almost 18 percent today. Several NGOs, including the Jubilee Debt Campaign, are calling for debt forgiveness to avoid an economic meltdown in Argentina. They describe the debt as illegitimate, and argue that “vulture funds” should not be able to profit off of debt they knew to be bad when they purchased it.

What do you think? Should Argentina be forced to repay the “vulture fund” debt criticized by groups like Jubilee? What effect will this standoff have on the Argentine economy?