Can the financial authorities compel private debt holders (and also regular bank account owners) to give up their rights to make claims for the full value of their asset when a default takes place?
The answer to this question has huge implications worldwide as the risk of sovereign debt default has never been higher.
People have always assumed their bank accounts were protected at least up to the amounts that are supposed to be “guaranteed” by entities like the FDIC in the US, but the IMF and others are attempting to stake out the position that “bail-ins” can be imposed by force in a default crisis situation.
It appears they want to be able to change the rules if they think they need to. Even including bank depositors
In a ground breaking case that has MAJOR potential ramifications on the legality of future bail-ins in the US, the US Supreme Court has ruled in favor of some hedge funds that will be paid the full value of the debt they owned (Argentina debt).
While this ruling only applies to bond holders, it might apply as a precedent to any future default situation.
This is one of those stories that will not draw much attention. Most people will never read this news story. But it is one of those “little” stories that could have a lot of signifigance. It relates to what we follow here because it involves what happens when a nation defaults on its sovereign debt. It’s a court ruling by the US Supreme Court that has the IMF concerned.
First let’s get the background from the article:
“The South American country (Argentina) defaulted (on its bonds) in 2001 following its economic crisis, and has been in a legal battle with bondholders led by hedge funds NML and Aurelius Capital Management.
Argentina argues that the funds bought most of the debt at a deep discount after the default, and has since tried to impede the country’s efforts to restructure.
Investors holding more than 92% of the defaulted debt agreed in 2005 and 2010 to write off two-thirds of their pre-crisis value, providing Argentina with time to re-build its economy.
But the hedge funds owning the remaining 8% held out against the restructuring.”
The answer to this question has huge implications worldwide as the risk of sovereign debt default has never been higher. Nations and Central banks like the US FED
have been preparing “position papers” on this very issue. Some are taking the position that private debt owners and bank account owners can be “bailed-in” by compulsion.
This is something Jim Sinclair and SilverDoctors have been trying to alert people about for some time now. People have always assumed their bank accounts were protected at least up to the amounts that are supposed to be “guaranteed” by entities like the FDIC in the US, but the IMF and others are attempting to stake out the position that “bail-ins” can be imposed by force in a default crisis situation. It appears they want to be able to change the rules if they think they need to. Even including bank depositors
In this case, we have the US Supreme Court ruling in favor of some hedge funds that will be paid the full value of the debt they owned (the Argentina debt). While this ruling only applies to bond holders, we wonder if it might apply as a precedent to any default situation? Here is that part of the story from the article:
“On Monday, a US Supreme Court ruling sided with bondholders demanding Argentina pay them 1.3bn.(£766m).”
“The Supreme Court rejected Argentina’s appeal against an order to pay the full value of bonds that some hedge funds bought after the country defaulted more than a decade ago.
Also, the bondholders won the right to use the US courts to force Argentina to reveal where it owns assets around the world. The court’s decision means that bondholders should find it easier to collect their debts.
Some analysts believe it is possible that the Supreme Court’s ruling could encourage investors to hold out in other restructurings of sovereign debt.”
Not surprisingly, the IMF was concerned about this ruling and the possible precedent. What if this means other creditors (and perhaps bank account owners) can challenge the bail-ins that many nations and the IMF have been trying to establish as a tool to deal with a crisis?
Here is the IMF reaction in the article:
“The IMF said it was concerned about “broader systemic implications“.
“The Fund is considering very carefully this decision and, as we have said before, we are concerned about possible broader systemic implications,” the IMF said. The Fund is usually closely involved in the financial restructuring of countries in trouble.”
I would imagine the IMF, the US FED, and many other Central Banks are very much concerned about the “possible broader systemic implications” of this ruling.
I think these institutions pretty much take it for granted that they will be able to step in and impose whatever conditions they want in a debt default crisis. I don’t think they expected a Supreme Court ruling that could either negate that or at least make it more difficult legally to implement. Those to be bailed-in might be more willing to fight after seeing this ruling.
This very much impacts what we follow on this blog. We have noted that a sovereign debt crisis is a very real possibility given all the debt and instability in the world. We have noted that a crisis could cause people to be willing to go along with allowing the IMF to step in. They might accept an increase in IMF authority to deal with the crisis. But if we now have an incentive for various parties to fight solutions that might be imposed, that adds another layer of complication to things. This ruling suggests they might win or at least tie things up in court for an extended period of time. This this ruling could make it harder for the IMF to step in.
So, even though most people will probably never see this article, it may be of great signifigance to them one day. And something readers here should know about.
update: Here is an update on the story. Argentina wants to try and negotiate some kind of settlement under Argentina law.
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