How did U.S. courts get to rule on Argentina?

A financial speculator won a decision in U.S. courts against the government of Argentina which could mean years of unemployment, high taxes, cutbacks in public services in that court.

I am mystified about a number of things in this case, including why the U.S. courts have jurisdiction over Argentina, a sovereign country, and how this decision is to be enforced.

Agentina's economic recovery.  Click to enlarge.

Double click to enlarge.

The background is that Argentina defaulted on its government bonds back in 2001.  Between 2005 and 2010, it worked out a deal with bondholders for them to write off about two-thirds of the debt in return for payment of the rest.

This was a good decision from the standpoint of the people of Argentina and, for the bondholders, better than nothing.

But the U.S. courts have negated that deal by ruling that a speculator who bought some of the original bonds for 20 cents on the dollar is entitled to be paid in full.

Default is a serious matter for nations, just as bankruptcy is a serious matter for individuals and corporations, but sometimes it is necessary.

For a head of state or a head of family, it is better to refuse to pay your creditors than to let people who depend on you go hungry.

Government defaults should, like individual bankruptcy, destroy or greatly harm the credit rating of the defaulter or bankrupt.   In practice, this rarely happens as often as it perhaps should.   Banks have so much more money than good ideas for investing it that they soon start lending again to defaulters and bankrupts.

Click to enlarge

Source: New York Times.  Click to enlarge

But how is it that U.S. courts have jurisdiction over a dispute between sovereign country and its creditors, who are based in many countries?  Is it because the payments go through the Bank of New York Mellon, which is in New York City?

How do U.S. courts propose to enforce their decision on a sovereign country.   Does their jurisdiction over New York City banks give them leverage over the whole world banking system?

It seems to me that this decision is a good reason for Argentina and other countries—including the BRIC group, Brazil, Russia, India and China—to create their own payments system outside U.S. jurisdiction.   Another thing I do not understand is why they have not done this already.  Is it because they fear being locked out of the old system in retaliation, before the new system is in place?

What’s needed is an international bankruptcy court, not under control of any government nor of banks, that could.  Its mission would be to resolve disputes between governments and their creditors when national leaders say they are unable to pay in full, in a way that was fair to the lenders without imposing undue hardships on peoples.

Such a court would have authority to free democratic governments of “odious” debts incurred by previous dictatorships.   Yes, that would make lending to dictatorships risky for banks.  It should be.

LINKS

Supreme Court Dismisses Case Between Argentina and U.S. Vulture Funds by Mark Weisbrot, co-director of the Center for Economic and Policy Research, for US News.  Hat tip for the link to Bill Harvey.

Paul Singer v. Argentina: A Thriller Reaches Its Climax by Ignacio Portes, a Buenos Aires journalist, for Naked Capitalism.

US vulture fund ruling pushes Argentina towards a second bankruptcy by Philip Inman for The Guardian.   [Added 6/28/14]

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One Response to “How did U.S. courts get to rule on Argentina?”

  1. simonandfinn Says:

    Wow, that’s a very good question with quite the implications.

    Like

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