Contract law and sovereign debt never sat well together, as states cannot be wound up. A US court this week may have broken the informal structures developed for state insolvency.
Argentina has been the subject of a classic legal battle. US hedge fund Elliott Associates, run by Arsenal fan and billionaire Paul Singer, hoovered up Argentine bonds on the cheap after the country hit crisis and defaulted on its debts in 2001.
Elliott then refused to take part in debt restructurings that saw 93 per cent of bondholders accept new bonds worth only a third of their previous value.
Instead, Elliott fought in the courts. On Wednesday, New York Judge Thomas Griesa made a radical order: Elliott must be paid $1.3bn (the face value of its bonds plus interest) before holders of restructured bonds are paid interest due next month.
In addition, the US bank acting as trustee for restructured bonds (as well as Belgium-based Euroclear) was ordered not to help Argentina.
There will be last-minute appeals, but Argentina might well default again rather than pay Elliott.
The judge argues it is fair for Elliott to be paid in full, while others take big losses because they chose not to go to court.
“[It] is hardly an injustice to have legal rulings which at long last mean that Argentina must pay the debts which it owes,” Mr Griesa wrote.
He would have been better off quoting Billy Bragg: “This isn’t a court of justice, son, this is a court of law.”
The ruling increases the incentive to reject future restructurings, even those with collective action clauses. Countries that find themselves unable to pay their debts will be locked out of the international financial system until they somehow come up with the money.
Argentina deserves little sympathy, having behaved atrociously towards its creditors.
But future borrowers would be well advised to avoid issuing bonds under New York law, unless they are happy to run the risk of ending up in the sovereign equivalent of a 19th-century debtors’ prison.
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