The disputes between Argentina and her creditors keep travelling the world. They have reached many important courts on their journey. In 2007, the Bundesverfassungsgericht decided that Argentina could not invoke the defense of necessity. The UK Supreme Court held in 2011 that Argentina did not enjoy immunity against its creditors, which the Corte di Cassazione had granted in another case in 2005. A class action of thousands of creditors is pending before an international investment tribunal. In 2012, the International Tribunal for the Law of the Sea stopped the foreclosure of an Argentine naval sailing vessel which lay at anchor in Ghana
The latest move brings the dispute to the Hague-based International Court of Justice (ICJ). On 7 August 2014, Argentina filed a suit against the United States before this court, claiming that certain orders by US courts violated its sovereignty.
From Default to Griefault
Argentina’s disputes originate in its 2001 default. Most creditors who held Argentinean bonds issued before that date have exchanged their old bonds into new bonds and accepted a massive haircut. However, some creditors who rejected the exchange offers now try to tap the payments with which Argentina wishes to service its new bonds. US courts recently ordered banks who act as intermediaries for these transactions to direct proportionate parts of these payments to uncooperative creditors. After these orders, Argentina transferred about half a billion of US dollars due to its cooperative creditors to US-based banks, where they have been withheld since. Payments to uncooperative creditors would trigger contract clauses that give the cooperative creditors a right to equal treatment. As a consequence, Argentina would have to pay up to 15 billion dollars to its cooperative creditors – an amount that would clearly surpass its financial capacity. As a result, Argentina is in technical default: it wants to service its debt, but is legally prevented from doing so. In reference to Thomas P. Griesa, judge at the Federal District Court of the Southern District of New York and an ardent supporter of Argentina’s uncooperative creditors, the hashtag #Griefault has become all the rage on twitter.
The proceedings initiated at the ICJ are a reaction to the US Supreme Court’s denial of certiorari in Argentina’s last attempt to stop Griesa’s orders from taking effect. Will the ICJ be able to dissolve the Gordian knot? That would not be the first time that legal proceedings find the way out of the quagmire in which the political process has been caught. Indeed, the US government seems to be all but happy about Griesa’s orders, as its amicus brief submitted before the Second Circuit testifies. Does it intend to use the international proceedings as a welcome opportunity to mitigate the political turmoil caused by its judiciary? Such a strategy would give the US government a reason to answer to Argentina’s complaint and thereby to enable the ICJ to exercise its jurisdiction – for that would be impossible without the specific consent of the US government.
Mixed Prospects of Success
Should the ICJ be granted jurisdicton, Argentina has some chances to win the case, although some of its claims raise questions. First, Argentina alleges that the respective court orders violate its immunity. However, the once solid armor of state immunity has become more and more permeable. It does not protect from suits relating to commercial activities any more. The US Supreme Court considers transactions related to sovereign debt contracts as commercial activities.
Second, Argentina claims that the US court orders amount to an illegitimate economic intervention. It was during the 1970s and 80s that the UN General Assembly adopted a number of resolutions that support such a view. For example, the 1981 Declaration on the Inadmissibility of Intervention and Interference in the Internal Affairs of States establishes the duty of a state to ensure that its territory is not used to disrupt the economic and social stability of another state. However, having been adopted with the votes of the Eastern Bloc and the Global South, this resolution does not seem to reflect customary international law. Rather, economic pressure is generally considered as a legitimate foreign policy measure, with the exception of some extreme cases. The concern articulated by Argentina in this claim would find a much more stable basis in the International Covenant on Economic, Social and Cultural Rights. It is increasingly recognized that states need to respect their duties under the Covenant also with regard to the population of another state. However, the United States remains one of the few countries that have not ratified this treaty.
More promising seems to be Argentina’s third claim that the US, by supporting abusive creditor behavior, violates good faith, a recognized general principle of law. The abusive character of secondary market purchases of highly discounted defaulting sovereign bonds for the sole purpose of extracting a preferential settlement from the debtor state by suing for their nominal value should be a matter of course. In 2012, the UNCTAD-Principles on Promoting Responsible Sovereign Lending and Borrowing confirmed this view. The UN General Assembly has repeatedly requested the cooperation of such creditors. In general, there seems to be a growing conviction that world society has a public interest in the expedient solution of sovereign debt crises. For example, the International Monetary Fund (IMF) has critically scrutinized its own practice to that effect, and the Heavily Indebted Poor Countries Initiative has brought along concerted efforts to grant debt relief to developing countries. International law should take into account this growing public interest in the application of general clauses like the principle of good faith.
Political Solutions to Political Problems?
Should the US not accept the jurisdiction of the ICJ in this case, the asymmetry between the public interest in the expedient solution of debt crises and the institutional structures available for that purpose would continue. There is no lack of proposals for better institutions, but serious deficits in implementation. However, in the latter respect, Argentina’s complaint might turn out to be a clever move. She stresses that the US has an obligation under international law to reach the peaceful settlement of disputes. Although this does not amount to a duty to accept the jurisdiction of the ICJ, it might open the doors for negotiations on the political level; hence the place where public interests should be debated rather than in backroom dealings between a debtor and its creditors. Perhaps this might constitute a first step in the establishment of a workout mechanism for states? Such a mechanism would not require the creation of yet another international tribunal. It would mean a huge step already to coordinate existing mechanisms for debt restructuring in a comprehensive manner and according to common principles. By contrast, the mere establishment of cooperative relationships among the various courts involved in a sovereign default would not suffice. Such litigation does not only arise out of a disagreement between Strasbourg or Karlsruhe and Luxemburg in respect of one single case. Rather, it involves a wide range of courts of all levels and countries presenting a myriad of claims, defenses, and enforcement measures. Without a minimum of central coordination, legal pluralism would reach its limit here.
While the outcome of this case is pending, the IMF favors improved collective action clauses in bond contracts which would make restructurings and litigation subject to majority decisions. However, besides a number of technical loopholes, such clauses never reach the core of the matter: debt restructuring should not hinge on creditor discretion alone. Even in a pluralistic world society, one cannot contract away recognized public interests.