Will the court cry for Argentina?

April 21, 2014

Monday the Supreme Court hears oral argument in Republic of Argentina v. NML Capital, in which Argentina seeks to avoid a lower court judgment enforcing the terms of contracts Argentina willingly entered.

As I discussed here and here, Argentina defaulted on its debt obligations in 2001. Most of the outstanding debt was restructured, but a few creditors refused to go along. They filed a lawsuit, seeking to enforce the terms upon which Argentina had originally issued its bonds, eventually obtaining an injunction that could effectively force Argentina to pay up by enjoining the payment of restructured debt without also making payments to holders of unrestructured debt. Argentina is now challenging a ruling by the U.S. Court of Appeals for the Second Circuit upholding the injunction. Of note, the solicitor general is supporting Argentina, which has also suggested it might not comply should its legal efforts fail.

Yale’s Jonathan Macey discusses what is at stake in The Wall Street Journal:

The way to help sovereigns is by upholding the contracts they sign. By siding with Argentina’s holdout creditors, U.S. courts are helping all borrowers achieve access to credit markets on competitive terms. If courts won’t enforce the promises made by borrowers, investors won’t lend to them or will insist on higher rates of interest as compensation for their increased risk in case of default.

History is littered with examples of governments that renege on their promises to investors. Holding them to their promises should be regarded as a victory for international law and norms. . . .

The claim that sovereigns are not subject to the rule of law fails to recognize that if U.S. courts decline to enforce contracts, sovereign nations and corporate borrowers will be motivated to enter into contracts in places that will enforce them. . . .

It is the willingness of courts to hold people—and governments—to their promises that enables the city to retain its dominance. Indeed, that enables a free economy to operate. We can only hope the Supreme Court keeps that in mind.

Jonathan H. Adler teaches courses in constitutional, administrative, and environmental law at the Case Western University School of Law, where he is the inaugural Johan Verheij Memorial Professor of Law and Director of the Center for Business Law and Regulation.
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