Supreme Court’s Argentina Debt Ruling Will Reverberate in Emerging Markets

Supreme Court’s Argentina Debt Ruling Will Reverberate in Emerging Markets

As the top judicial body in the American justice system, the U.S. Supreme Court is no stranger to setting legal precedents that reverberate for generations. However, more often than not, those rulings have little impact outside of U.S. borders. Last Monday, however, the high court reached a decision that might very well change the face of international finance for years to come. By ruling that Argentina must repay $1.3 billion to a group of persistent creditors, the nine justices potentially delivered a blow to emerging market economies dependent on international debt markets and put America’s global financial power on display yet again.

This story is more than a decade in the making. In December 2001, Argentina—then in the midst of an economic collapse—halted payments on $81 billion in public debt. In an effort to reduce its debt burden, the Argentine government issued an ultimatum to bondholders: Hand over your existing bonds in exchange for new ones worth about 35 cents on the dollar or walk away with nothing. The vast majority of creditors accepted the “haircut.”

However, some creditors opted to sell the old bonds on the secondary market, where a handful of so-called vulture funds scooped them up at a deep discount. Where most creditors saw enormous risk, these hedge funds saw an opportunity for profit. They also had a plan and a bunch of lawyers. Determined to recoup 100 percent of the old bonds’ value, a group of these “vultures” took Argentina to court. These efforts culminated in last week’s decision, in which the Supreme Court upheld a lower court ruling siding with the hedge funds over Buenos Aires and ordered the government to pay up in full.

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