WASHINGTON (AP) – The International Monetary Fund said Wednesday it had dropped a proposal to back Argentina in its legal battle with holdout investors who refused to take losses on debts in the country’s $100 billion default in 2001.
But the international lending agency said it remains concerned the case could set a precedent that would make it hard for other countries in financial distress to get relief on overwhelming debts and return to financial stability.
The IMF said it was wary of taking sides in a U.S. court case after the American government said it would not support the move. Without that support, the IMF could leave itself open to criticism from Congress that it is interfering in the American legal system. The IMF also said it does not want to be seen as taking sides in a dispute over financial claims involving its member governments.
Managing Director Christine Lagarde had been expected to recommend the IMF executive board file an unprecedented “amicus” or friend-of-the-court brief this week with the U.S. Supreme Court supporting Argentina’s petition to reverse lower court rulings in the case brought by NML Capital Ltd. Elliot Management, the parent firm of NML, had no immediate comment.
The lower courts are seeking to force Argentina to pay $1.3 billion owed to investment funds trying to collect on bonds rendered nearly worthless in the default.
The IMF said Lagarde had decided against recommending the filing after the U.S. made clear it opposed it.
The U.S., while critical of Argentina’s handling of its debt, backed it earlier in the legal process because like the IMF, it was concerned about the precedent the case could set. There was some expectation it would do so again and file a brief in the Supreme Court.
However, the Treasury said Wednesday that in line with its usual practice, the Department of Justice has decided not to file an amicus brief in the Supreme Court at this time.
“We understand that the IMF has serious concerns about the impact of the ruling on its ability to meet some of its core responsibilities,” a Treasury statement said. “We do not think that the IMF should file a brief with the Supreme Court at this time. “
The Treasury said the U.S. will continue to consider whether and when to participate in this litigation and may express its views if the Supreme Court invites it to do so.
The IMF and the U.S. have been critical of Argentina on a number of fronts. The Treasury said it strongly disagreed with Argentina’s actions in the international financial arena. In particular, the U.S. has repeatedly expressed concern about Argentina’s failure to honor its international obligations to the IMF and others and its failure to pay past due sums to the United States.
The IMF censured Argentina earlier this year for issuing inaccurate inflation data.
Argentina is awaiting the decision of the appeals court in the case. But the court already gave some indication of the direction its ruling will take when in March it ordered the country to explain how it would structure a compromise proposal to issue new bonds rather comply with a $1.3 billion cash judgment to resolve the unpaid debt.
President Cristina Fernandez had long vowed never to pay anything to the plaintiffs she calls “vulture funds,” which she accuses of trying to ruin Argentina’s recovery from its 2002 economic collapse.
But she has endorsed the compromise offer of a new debt swap. She said Argentina would pay the plaintiffs, but at terms no better than those the vast majority of Argentina’s defaulted debt holders accepted in two previous debt swaps. Those exchange bondholders agreed to provide Argentina with significant debt relief in exchange for new bonds, which her government has always paid.
The case revolves around clauses in the original 1990s bond contracts that promised “equal treatment” for all bondholders. A U.S. district judge ruled that the plaintiffs, who refused to accept the previous swaps, deserve 100 percent of face value plus interest on the defaulted debt, in part because they have had to spend millions on litigation in a thus-far fruitless effort to force Argentina to pay.
And the judge proposed an unprecedented mechanism for forcing Argentina to pay: Using the U.S. funds transfer system to reroute the payments Argentina has faithfully made to all the other bondholders if it hasn’t already paid the plaintiffs beforehand. That mechanism prompted a flood of legal briefs from U.S. banks, the Federal Reserve, the U.S. government and other institutions, warning that forcing Argentina to pay this way could do serious collateral damage to its interests.
Argentina’s previous swaps offered new bonds initially worth less than 30 cents for each dollar of bad debt. But since then, these “exchange bondholders” have been gradually made whole. Those who took the deal in 2005 have already received 71 cents for each dollar they invested in the 1990s.
Associated Press writer Stephen Braun contributed to this report.