A decision by a judge in the Federal District Court in Manhattan, ordering Argentina to pay a group of hedge funds, is being criticized because it rewards vulture investors that purchased defaulted bonds at deep discounts. The ruling encourages defaulted creditors to hold out, which jeopardizes sovereign bond exchanges – which are often used by international credit markets to resolve sovereign insolvency events in the absence of international bankruptcy proceedings. This fosters government moral hazard by granting holdouts full recovery, regardless of the perceived risk of the country's policies, at the expense of the country's taxpayers.

The court ruling opens new fronts of litigation: the payment agent is bound to be sued both by bondholders and by Argentina if it fails to fulfill its duties. It may be impossible to implement and it extends the effect of an American ruling to non-U.S. law instruments and entities.

The ruling can also be criticized on efficiency grounds. Argentina argues that it is willing to negotiate a payment but fears other creditors would then feel entitled to the same terms, bringing down the debt restructuring. By turning down an appeal in June, the U.S. Supreme Court left Argentina in a six-month conundrum. And the holdouts' reluctance to request a new six-month stay, because of distrust of the country´'s willingness to pay, led to a default that is costly to the country, as well as to the holdouts since, once the cost of default is paid, the government's incentive to negotiate should weaken considerably.

Thus, the case may end up being a lose-lose situation with significant economic costs for all parties involved, endless litigation and a disturbing precedent for international credit markets looking forward.

Argentine economy in focus after default

Para la consultora Elypsis, el Gobierno irá por una “salida negociada” con los holdouts