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New York judge's ruling sparks nationalist surge in Argentina

Stakes are high for Argentina's President Kirchner in a legal tug-of-war over full repayment of bonds from the country's 2002 default. Kirchner says her country is the victim of 'judicial colonialism.'

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“Argentina had the luxury to not need to have to ask for outside funding without any major consequence, but with YPF, it’s obligated to look for foreign investments,” Berensztein says.

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More leverage to holdouts

If sovereign nations were treated as companies, a bankruptcy court could divvy up assets to satisfy claims, forcing bondholders to come to accept terms by majority rule.

In the case of the US, contracts regulating government sovereign debt establish that the US retains irrevocable rights that shelter it from foreign jurisdictions.
Nevertheless, laying claim to sovereign assets has been done before. Besides the Navy frigate held by order of a court in Ghana, in previous years, Chilean and Zimbabwean aircraft have been seized at foreign airports in lieu of debt repayments.

Argentina has asked its Congress to reopen the 2010 exchange for outstanding creditors.

However, having rejected the deal in 2010, arguing that Argentina has the capacity– if not the will – to pay its debts in full, NML Capital is not likely to accept those terms now.

Strengthened by global commodity prices and a hugely depreciated peso, Argentina’seconomy grew at an average annual rate of 7.7 percent from 2004 to 2010. Tempered by the economic crises in Europe and the US, however, Argentina is employing an import-substitution strategy to save its reserves of US dollars for paying off the country’s debt.

In NML's case against Argentina in Ghana, Argentina appealed to the court on the basis of a 1976 sovereign immunities act, but a judge ruled that the country had explicitly waived its sovereign rights in the language of the contract it signed with NML in 1994. Argentina has since brought a separate case before the United Nations International Sea Tribunal in Hamburg, Germany

On Dec. 15, Argentina is scheduled to pay $3 billion on warrants issued as part of its regularly scheduled payment to creditors who participated in the restructuring. Griesa’s ruling sent credit-default swaps of Argentine debt on a tear, but the markets normalized after the country won its appeal, quelling investor concerns about a default – at least for now.

The Fitch ratings agency downgraded Argentina’s sovereign debt to junk status last month, calling the risk of default “probable.” Argentina’s foreign minister Hernan Lorenzino questioned the agency’s credibility, citing the global credit crunch of 2008, and said the strength of Argentina’s reserves ($45.4 billion) demonstrate the country’s capacity to pay.

Whether it is willing is a question creditors do ask, says Berensztein.

“There’s a difference between can’t pay and won’t pay,” he says.

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