The Cable

Argentina Could Default After Supreme Court Ruling

The U.S. Supreme Court dealt a blow to Argentina's already fragile economy Monday when it sided with hedge funds that have zealously pursued the country to repay its debts.

Argentina had appealed to the court in its decade-long legal battle to hold off bondholders seeking to seize the country's assets all over the world.

The court's decision is a win for so-called "vulture funds" that buy up a country's distressed debt, often after other creditors have agreed to a write-down, and then fight to be paid back in full. It's a loss for Argentina's struggling economy, which could be hit with another default. And it could make it harder for other countries to walk away from new debts.

Argentine bonds have fallen 6.6 cents on the dollar to 75.09 cents, according to Bloomberg. President Cristina Fernández de Kirchner is expected to speak Monday evening and could address whether she will talk to the holdout creditors or default.

"The risks are high that they're going to end up defaulting," said Robert Kahn, a senior fellow at the Council on Foreign Relations who has worked for the World Bank and the IMF.

Kirchner faces that stark choice because the Supreme Court declined to hear Argentina's appeal on Monday. The country hoped to overturn a lower court ruling that Argentina pay holdouts at least $1.33 billion. After a financial crisis in 2001, Argentina defaulted on nearly $100 billion worth of debt. Most bondholders -- 93 percent -- eventually accepted that the country wasn't going to pay and agreed to exchange their bonds for new ones worth cents on the dollar. But a small percentage held out. Others bought the bonds while they were cheap and then sought to force Argentina to pay in full. Now, the court's decision forces Argentina to negotiate a resolution with all the holdouts in the next two weeks or face default.

In pursuit of those debts, the hedge fund NML Capital, a subsidiary of Elliott Capital Management, pursued Argentine assets far and wide, even seizing an Argentine naval vessel in Ghana in 2012. The United Nations maritime court eventually told Ghanaian authorities to let the boat go, but that wasn't the end of the hedge fund's treasure hunt. In an effort to find out more about Argentina's money, NML served subpoenas to U.S. and Argentine banks. Argentina tried to stop the fund's snooping by arguing it violated the country's sovereign immunity. Siding with the hedge fund for the second time Monday, the Supreme Court ruled that NML could seek bank records in its attempts to collect on its debts. Political and military assets are still immune, according to U.S. law, but the high court's ruling makes it easier to interfere with the country's payments to other creditors or banks.

"Now it is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina's economy and its international standing," an NML spokesman stated via email.

For critics of the hedge funds' pursuit, who argue countries should be able to seek freedom from unpayable debts just as companies and individuals do in bankruptcy, the ruling was a defeat.

"I am blown away by the decision," said Eric LeCompte, executive director of Jubilee USA Network, a group advocating debt forgiveness for developing countries. "For heavily indebted countries supporting poor people, this is a devastating blow. These hedge funds are equipped with an instrument that forces struggling economies into submission."

Economists say it's not yet clear how far-reaching the impact of the decision will be. Argentina has fought harder against paying its holdout creditors than most countries.

"You have an extremely determined creditor and an extremely determined debtor pushing a dysfunctional system to the limit," said Anna Gelpern, a Georgetown law professor and expert on debt contracts. She said the case raises the question of how far an investor could reach to find a country's assets around the world.

"And the answer is very far," she said.

Douglas Rediker, a former IMF board member and a fellow at the Peterson Institute, said making countries more reticent to borrow a lot of money may not be a bad thing.

"One of the outcomes of this ruling could be that you're unable to issue that much debt without making the hard choices sooner," he said. "You could argue most countries are better off, not worse."


The Cable

Cheese, Banks, and Chemicals Obstacles to U.S.-EU Trade Agreement

This story was updated.

The European Union and the United States are struggling to put their differences aside and ink the world's largest trade deal, leaving proponents and opponents alike worried.

Groups such as the U.S. Chamber of Commerce are trying to goose talks with events, letters, and other cheerleading while almost daily U.S. lawmakers are listing the dangers of free trade agreements.

"Nobody thought these negotiations would be easy," said Miriam Sapiro, who worked on the negotiations as U.S. deputy trade representative until she stepped down in February. "There's a reason that the U.S. and Europe don't have a trade agreement even though it's the most important trade relationship in the world."

The Transatlantic Trade and Investment Partnership (TTIP) aims to increase the amount of goods flowing back and forth across the Atlantic beyond last year's $650 billion. Although on the whole the United States has more in common with countries across the Atlantic than with some of its other trading partners, narrowing the gap between the two economies that combined represent 60 percent of global GDP is proving difficult.

European officials, for instance, continue insisting that financial services regulation be part of the talks, even though U.S. regulators and deal negotiators resoundingly reject the idea.

"I believe that the interoperability of our financial markets is actually key to the success of the rest of the trade talks," Michel Barnier, the EU commissioner responsible for financial markets, said in Washington on Thursday. He was in town to meet with U.S. regulators and trade negotiators, including Treasury Secretary Jacob Lew and Trade Representative Michael Froman. On his ninth trip to Washington in four years, he hoped to sway Lew and Froman but failed.

By Friday, a leaked internal EU draft revealing that the Europeans instead will threaten to exclude financial services from TTIP completely began circulating.

"The EU considers that the ambition of the EU offer is closely linked to the progress of discussions on regulatory cooperation," the document reportedly stated. "Therefore, commitments on financial services will be included at a later stage."*

U.S. officials argue that financial regulation matters are best hashed out bilaterally between regulators and in existing international forums, such as the G-20, rather than by trade negotiators who aren't as steeped in the details.

European negotiators are willing to put trade in financial services back into play if the U.S. agrees to discuss regulations. 

"The situation may change in the future if the US shows willingness to engage solidly on regulatory cooperation," the draft reportedly stated.

The U.S. says it won't budge.

"Unlike the other sectors in TTIP, there are multiple existing forums focused on the co-ordination of financial services regulation, including a bilateral forum," the Financial Times on Monday quoted Froman as saying.

Meanwhile, TTIP faces numerous other obstacles.

Until the deal is sealed, talks are vulnerable to whatever row breaks out between Washington and European capitals. Last week, French President François Hollande pressed President Barack Obama to go easier in a case against his country's largest bank. U.S. authorities are contemplating a $10 billion fine against BNP Paribas for its dealings with sanctioned countries such as Iran and Sudan. Obama dismissed the idea that he could intervene in a case brought by U.S. prosecutors. French Foreign Minister Laurent Fabius said the fine could hold up the trade talks.

"They have their national champions and they want special rules for them and they want BNP to be able to get away with money laundering," said former IMF chief economist Simon Johnson, who has been a strong advocate of tough, post-crisis financial regulations.

Barnier declined to discuss the fine because it's still under negotiation between the bank and the U.S. Justice Department. "We simply want this case to be investigated in a manner which is proportionate, fair, and objective," Barnier said.

The trade agreement aims to bring the two sides of the Atlantic closer on the oversight of everything from cars to chemicals. Cheese has proved to be particularly contentious. Europe has much stronger protections for food products from certain geographic areas. Whereas Europeans think Parmesan should come from the vicinity of Parma, Italy, Americans think it's perfectly OK to shake it out of a green plastic jar made by Kraft Foods.

"It will be one of the issues that is closed out toward the end because there is such a difference between the U.S. and the EU systems," said Peter Chase, the U.S. Chamber of Commerce's vice president for Europe, speaking from Paris.

Chase was in Madrid and Paris recently as part of the chamber's campaign to drum up support for the agreement. Some trade proponents are concerned that the talks, beset by so many obstacles, could stall. The chamber is also holding pro-trade forums in London and Rome in the next few weeks to nudge companies to more vocally and publicly support the talks.

"The opposition is gaining traction, and it's up to the business community on both sides of the Atlantic to counter this by speaking frequently and forcefully about the opportunities that TTIP brings," the Chamber of Commerce said in its announcement of the tour.

Underscoring how big the food fight is, Agriculture Secretary Tom Vilsack heads to Europe this week to discuss points of contention, such as the cheese-name wrinkle.

"The EU is the world's largest importer of food and agricultural products," Vilsack said in a statement. "But despite the continued growth of this market, U.S. market share is shrinking because U.S. producers and exporters continue to face numerous trade barriers. The negotiation of the TTIP offers a major opportunity to address these barriers and expand market access for U.S. farmers and ranchers."

Seasoned trade negotiators say the agreement is still in the early rounds, making it hard to know how many of the big issues will shake out.

"It's a lot of technical back-and-forth right now, but the difficult issues will be put off," said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics.

That is, if the talks make it that far.

"You don't really know until the end whether you're going to get the deal or not," said Sapiro, who recently worked on the deal.

Opponents, such as labor groups and their allies in Congress, are focusing their efforts on the Pacific trade deal with Asian and Latin American countries, which is further along than the European agreement. But the anti-trade sentiment could make it hard to pass either one.

"For as many years I've been in congress I've never seen a trade deal that advantages the American manufacturer or the American worker," said Democratic Rep. Louise M. Slaughter of New York.

*Correction, June 16, 2014: European officials are threatening to completely exclude financial services from TTIP talks. A previous version implied that only financial services regulation would be excluded from the next round of discussions. (Return to reading.)