The administration must decide whether to back a foreign government against a group of U.S. hedge funds and other investors who bought Argentine debt, some of which was purchased at a steep discount after the country defaulted in 2002. Argentina says that if the case goes against the country, the investors stand to gain more than $1 billion in profits.
The hedge funds, led by a firm controlled by major GOP donor and billionaire Paul Singer, have been fighting in U.S. courts to force the South American nation to repay what the investor group views as the fair value of the debt. Argentina has reached a settlement agreement with most bondholders to repay a portion of the debt, but Singer and others object to the deal.
Forcing sovereign nations to repay their overdue debts is a controversial topic in the developing world and in the halls of U.S. government agencies. Bondholders who buy defaulted debt at a discount are often derisively called “vulture capitalists” for trying to profit from the financial woes of struggling nations.
At the appeals court level in New York, the Justice Department took the side of Argentina on several issues. The Argentines fared poorly in the lower courts. The department is now weighing whether to file a brief at the Supreme Court focused on defending the concept of sovereign immunity, which gives nations protection from lawsuits, according to people familiar with the Friday meeting.
Justice Department spokesman Peter Carr declined to comment on the case.
The bondholders’ lawsuit is called NML Capital v. Argentina, named after a subsidiary of Elliott Management, Singer’s hedge fund. The subsidiary paid $48 million in 2008 to purchase Argentina’s debt and is now part of a group of 19 investors insisting that the country repay $1.44 billion, including interest, according to Argentina’s court filings.
Jay Newman, senior portfolio manager at Elliott, called the Argentine numbers “a complete fabrication” and said the country has a history of providing inaccurate economic statistics to the U.S. government and others.The investors group declined to provide its own estimates.
In addition to filing their lawsuit, the bondholders have launched a global public-relations war targeting Argentina. Recent ads in The Washington Post and other newspapers depict Argentina as thumbing its nose at U.S. laws, providing a haven for narcotics traffickers and forming dangerous alliances with Iran.
The investors also are getting help from Congress. In a July 10 letter to Attorney General Eric H. Holder Jr., 10 Republicans and two Democrats from the House urged the Justice Department not to side with Argentina in the case.
The Argentines and their allies in the Democratic Party and in the religious advocacy community argue that countries have the right to restructure their sovereign debts.
The controversy has alarmed many diplomats and bankers while captivating the citizens of Argentina. The case was not well known in the United States until the recent spate of ads sought to argue the merits in public.
On the hedge fund side, a nonprofit organization supported by Elliott Management has led a marketing campaign. On its Web site, the group argues that Argentina has become “a rogue state,” permitting narcotics trafficking and terrorism activities within its borders. One recent ad is titled: “Argentina and Iran: Shameful Allies.”
In their own letters and newspaper advertisements in recent weeks, the Argentines have argued that they responsibly restructured their debt years ago. They label Singer and his allies “vulture” capitalists seeking outsize financial gain at the expense of an impoverished country.
“Argentina is committed to a solution in which all bondholders are treated equally,” Argentine Ambassador Cecilia Nahon wrote in a June letter to members of Congress. The funds, she wrote, are making “unscrupulous claims.”
The bondholders say Argentina is misrepresenting their position and allege that the country has amassed its own powerful lobbying force in Washington. Elliott Management says the South American country, rich in natural resources, has recovered from its financial troubles and can afford to pay the fair value of the debt.
Singer was a leading fundraiser for the GOP presidential campaigns of both John McCain and Mitt Romney. He also ranked among the top 20 donors to independent groups hoping to influence the presidential and congressional elections in 2012, giving $2.8 million to the pro-Romney Restore Our Future and other super PACs.
Argentina and some outside observers say the case could test the ability of U.S. courts to compel foreign countries to honor their financial obligations. Some fear it could limit the ability of countries to renegotiate commitments after economic calamities.
“Unfortunately, some members of Congress are not aware that this case has serious repercussions beyond Argentina that affect poor people and ordinary investors,” said Eric LeCompte, executive director of the anti-poverty organization Jubilee International, who has tangled with Singer and other debt holders in the past.
“These funds seek to dismantle more than a decade of Congress’s best bipartisan efforts on poor-country debt relief and debt restructuring,” LeCompte said.
Elliott’s attorney, Theodore Olson, who was solicitor general under President George W. Bush, testified in a recent House hearing that requiring Argentina to abide by court orders to pay the reasonable value of its bonds would make capital more available to developing countries.
“U.S. investors and any investor need to know that [bond agreements] will be backed by the rule of law,” Olson said. He said that an unwillingness to abide by U.S. laws will “send a signal to investors: Stay away from this kind of indebtedness.”