Billions in legal losses are set to push Argentina closer to the brink

A pair of back-to-back court losses stand to push Argentina’s already precarious finances to the brink.

The country’s dollar bonds are sinking Wednesday after courts in the United States and United Kingdom sided with investors in a series of lawsuits — which separately enforce payouts tied to growth-linked securities and the nationalisation of an oil company a decade ago.

The judgments are just the latest challenge for Argentina, which is struggling to control 100 percent inflation as foreign reserves dwindle, a drought ravages export crops and a presidential election looms in October.

“This is one of those cases where history repeats itself,” said Sebastián Maril, managing director at Latam Advisors, a Buenos Aires-based consultancy. While the courts have yet to release details on how much Argentina is liable to pay in either case, he expects the settlements to be in the billions of dollars.

The two cases are an indication that Argentina’s long history of legal trouble is far from over. In the past two decades, the government has been forced to pay at least US$17 billion in settlements to investors in expropriated companies and to holdouts on defaulted bonds, Maril estimates.

“Imagine what could have been done to fund education, highways, or the electric grid since the year 2000 with US$17 billion,” he said.

Argentina’s bonds extended losses Wednesday after the latest ruling out of the UK, which holds the nation liable for losses in so-called GDP warrants after the country changed its method of calculating growth.

A third US-based court case will be heard later this year over a similar dispute involving Argentina’s dollar-denominated warrants, being led by hedge fund Aurelius Capital Management.

The nation’s debt due in 2029 fell as much as 1.6 cents to around 26 cents on the dollar, the lowest in a week.

Such deep distress is raising the stakes for whichever administration is in power after Argentines head to the polls in October. That government stands to inherit both the potential legal payouts, as well as a US$65-billion pile of overseas bonds that begins maturing in 2025.

“Where the new administration will source the hard currency cash to meet these legal claims is an open question, and this morning a few aggressive traders are shooting first and asking questions later,” Portfolio Personal Inversiones analysts led by Pedro Siaba Serrate wrote in a note.

Lawyers representing Argentina’s government say they will seek permission to appeal the UK court’s ruling on the nation’s euro GDP warrants case, according to an emailed statement from law firm Sullivan & Cromwell.

Argentina “believes that the London court has wrongly interpreted the terms of the securities and intends to seek permission to appeal,” Sullivan & Cromwell co-chair Robert Giuffra Jr. said.

The country is no stranger to lengthy court battles, with Vice-President Cristina Fernández de Kirchner a staunch critic of what she called “vulture funds.” Argentina spent more than a decade at odds with hedge funds including Paul Singer’s Elliott Management Corp, which seized a naval ship as collateral to force the country to pay defaulted bonds.

Former president Mauricio Macri finally ended up paying the creditors around US$5 billion in 2016 to lift a court injunction and pave the way for Argentina’s return to international capital markets.

“An appeal will only buy Argentina time, so negotiations on the size of the compensation and the payment scheme will take place in the next administration,” said Ramiro Blazquez, head of strategy at BancTrust & Co in Buenos Aires.