The high-stakes legal fight, which revolves around Argentina's refusal to pay anything to a small group of holdout creditors owed about $1.3 billion, appeared to be reaching a brink Wednesday, as lawyers representing banks, bondholders, and the republic stood before the 2nd U.S. Circuit Court of Appeals.
The intractable nature of the dispute was made clear from the start, when Argentina's American lawyer, Jonathan Blackman, sheepishly issued what amounted to a challenge to the court's authority: He said that if the judges issued a ruling that didn't go Argentina's way, the country would simply refuse to obey.
"We are representing a government, and governments will not be told to do things that fundamentally violate their principles," Blackman said. He said that in this case, Argentina was no more likely to comply with an order from a U.S. court than the U.S. was likely to abide by an order issued by a court in Iran.
The pronouncement visibly irritated one of the judges on the panel, Reena Raggi, who questioned the lawyer sharply about why the court should excuse the country from a debt it is legally obligated to pay.
The dispute stems from Argentina's record $100 billion default on its national debt in 2001. Most of the country's creditors ultimately agreed to new bonds paying far less than what they were originally owed. A few holdouts resisted, including companies controlled by New York billionaire hedge fund investor Paul Singer.
Those holdouts have won a $1.3 billion court judgment against Argentina in New York, but they have been labeled "vultures" by Argentina's president, Cristina Fernandez, who has vowed to pay them nothing unless they accept the same deal as the other bondholders.
Singer's hedge funds, meanwhile, have gone after Argentina's assets around the globe, even temporarily persuading the nation of Ghana to seize a ship in the Argentinian navy.
The two sides have been in court over the issue since 2004, but on Wednesday their argument before the 2nd U.S. Circuit Court of Appeals was being watched closely by bankers because of its potential impact on unrelated debt disputes.
In a creative effort to force Argentina to pay up, a federal judge last year ordered the U.S. bank processing the country's debt payments to begin diverting a portion of that money away from the bondholders who previously settled and into the hands of Singer and the other holdouts.
The idea, hatched by U.S. District Judge Thomas Griesa, was to make it impossible for Argentina to settle any of its debts without also paying the hedge funds, thus putting it under more pressure to abide by the court's judgments.
That solution, though, raised cries of protest from banks, bondholders and the U.S. Treasury Department. They argued that Griesa's solution unfairly penalized bondholders who weren't a party to the dispute. They also warned that, if copied in other cases, the solution of garnishing payments made through custodial banks could inject an element of uncertainty into an electronic funds transfer system vital to the world economy. Right now, money transfers on that system are virtually automatic.
How high are the stakes? The two groups of bondholders were represented in court Wednesday by Theodore Olson and David Boies, the same lawyers who represented George W. Bush and Al Gore in their Supreme Court showdown over the 2000 presidential election.
Boies, who represents the group of bondholders whose payments would be disrupted under Griesa's plan, said it was wrong for the court to halt those payments.
"You can't say to us, 'We are going to hold you hostage,'" Boies told the judges. "We are innocent parties here, Your Honor."
Olson, who represents Singer's NML Capital Ltd., dismissed the idea that the other bondholders were innocent victims or that the court was overstepping its bounds.
"The hostage holding is being done by Argentina," he said. He presented the issue simply: Argentina owes the money, it has the ability to pay, and it shouldn't be rewarded for its defiance. "Argentina would be vastly better off," he said, "if it started to pay its obligations."
If the court upholds Griesa's orders, it might set up a scenario where Argentina would either have to begin paying the holdouts or default on all of its restructured debts—a move that could create a new economic crisis.
Blackman said Argentina would probably opt to default anyway.
"You're going to make it worse," he warned the judges.
The appeals court isn't expected to issue a ruling for several months.