Pointing fingers

Is it the US government’s fault if an American judge made Argentina default?

August 8, 2014
August 8, 2014

Argentina wants an international court to decide whether its sovereignty was violated by US judge Thomas Griesa, whose 2012 ruling pushed Argentina to default on its national debt last week.

Griesa’s order blocked the country’s interest payments in an effort to force the country to pay hedge funds who won court settlements for payment on debt issued before Argentina’s previous default, in 2002.

Many legal experts, including those at the International Monetary Fund and World Bank, see Griesa’s ruling as a problem for global finance, since it could make restructuring sovereign debt more difficult in the future. The United Kingdom and Belgium passed laws (pdf) specifically to prevent creditors from blocking payments to generate leverage, after hedge funds used the tactic to squeeze other sovereign borrowers in Europe. The Obama administration even weighed in on Argentina’s behalf earlier this year when the US Supreme Court was considering its appeal; it ultimately was declined.

Now, Argentina is trying to sue (paywall) the US at the International Court of Justice, arguing that blocking Argentina from paying its debt is a violation of sovereignty. While an ICJ case is unlikely—because the US would have to grant the court jurisdiction—there could be other ramifications for the US. For instance, Todd Tucker, a fellow at Cambridge University, argues that the US could be vulnerable to World Trade Organization sanctions thanks to Griesa’s decisions.

In the past, the WTO has ruled that the US government is responsible for its court rulings on the international stage, even though America’s foreign representatives in the executive branch can’t overturn rulings made by its independent justice system. The US, under WTO conventions, is committed to protecting free financial flows without discrimination, and in the past the organization has warned that certain actions—like blocking payments to offshore gambling sites —could lead to sanctions.

There are lots of multilateral machinations that would precede such a response, but the potential consequences underscore the problems with having a US judge settle financial disputes between a sovereign state and a group of private citizens. The US could avoid sanctions if Congress passed a law that would invalidate the Griesa decision, following the lead of European countries previously confronted with this problem, but it would take significant international pressure—which likely explains why Argentina has brought its complaint to the ICJ.

Meanwhile, Argentina remains in default, neither its new nor its old creditors have been paid, and it’s unclear what kind of settlement will emerge.

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