The international community reacted with perplexity and alarm to the debt conundrum created by an unprecedented decision of the US judicial system. Amid overwhelming global support, Argentina is facing this extravagant ruling as every responsible nation would: defending its sovereignty and reaffirming its willingness and capacity to honour its debts with 100% of its creditors under fair, equitable, sustainable and legal conditions. In fact, it has a fair and reasonable offer on the table that would put an end to this litigation.

Due to this ruling, good faith bondholders unrelated to the litigation are being blocked from collecting regular payments duly made by Argentina – which are rightfully theirs. At the same time, the litigant vulture funds are holding the 92.4% of creditors hostage and demanding a profit we estimate at 1600%. This position is unreasonable and is a direct threat to the stability and predictability of the global financial system. It would also mark the definitive divorce between risk and yield, violating one of the basic pillars of modern capitalism.

Steps to normalisation

These are the facts. In 2001, after decades of over-indebtedness, Argentina defaulted on its sovereign debt. Since 2003, under a new government, the country has been taking the necessary steps toward normalising its financial obligations. Argentina paid its debt in full to the International Monetary Fund ahead of schedule; cancelled outstanding International Centre for Settlement of Investment Disputes awards; reached an agreement with the Spanish oil company Repsol; and, in a landmark deal, reached an agreement with the Paris Club creditor nations.

Without a doubt, the most complex challenge was to reach a deal with the bondholders of $81bn of defaulted debt. After extensive negotiations, Argentina successfully restructured 92.4% of its debt in 2005 and 2010, which it has faithfully serviced ever since. Argentina’s offer was determined based on its real payment capacity. By incorporating gross domestic product (GDP)-linked bonds, creditors became partners in the country’s prosperity. As Argentina grew, so did the returns for its bondholders.

For the past 10 years, Argentina has been honouring its debt commitments, having made payments for $190bn with no access to the international capital markets. A sustainable debt strategy allowed the country to grow steadily with social inclusion. While the economy expanded at an average rate of more than 6% per year, public debt as a percentage of GDP declined from 166% in 2002 to 40% today, with public debt in foreign currency with private creditors standing below 9%.

A small minority led by vulture funds chose not to join the debt exchange. Consistent with their modus operandi, these funds bought the defaulted debt for pennies on the dollar with the sole purpose of suing the country for the face value of the bonds plus interest. They have never lent money to Argentina. They have refused to negotiate and they have systematically rejected all offers. Argentina, in turn, gained credibility for its debt exchanges precisely by having pledged to its bondholders not to reward holdout behaviour.

US courts

On June 16, 2014, the US Supreme Court declined Argentina’s petition thus validating New York judge Thomas Griesa’s ruling. Based on an erroneous and unprecedented interpretation of a standard provision in most sovereign bonds (the pari passu clause), the ruling stated that Argentina could not pay its exchange bondholders unless the litigants were paid in full (face value plus interest), consecrating inequality among creditors.

But it went even further. In a bizarre move that violates sovereign immunity (by circumventing immunities granted by US law) as well as the rights of thousands of US and international creditors, the judgement involved an absurd 'equitable remedy' that brought about the most inequitable result. It empowered a minority of vulture funds (representing 1% of bondholders) with a weapon to sabotage sovereign debt restructurings by allowing them to block 92.4% of Argentina’s creditors from collecting payments deposited by Argentina. The vultures had hit the legal jackpot. They offered their ultimatum: pay us a 1600% ransom or we will hold thousands of other bondholders hostage, creating unworkable conditions for any sort of negotiation.

Argentina cannot accept this extortion. First, because while paying the litigants would amount to $1.5bn, in addition Argentina would have to face payments for more than $15bn in the immediate future to the rest of the holdouts. Second, because offering the vulture funds a privileged treatment over the overwhelming majority of its creditors would be against Argentina’s own legislation and would trigger the Rights Upon Future Offers, or RUFO, clause, in force until the end of 2014. The exchange bondholders would have the right to demand the same conditions as the vultures. This would derail Argentina’s entire debt restructuring and prompt claims for more than $120bn (or up to $500bn according to some experts). Simply put, Argentina cannot pay all bondholders what the vulture funds are demanding for themselves.

Pandora's box

As predicted, the ruling has opened a Pandora’s box of cross litigation, even across jurisdictions. This is because, in overstepping his jurisdiction, Mr Griesa’s orders are also obstructing the collection of payments of bonds denominated in euro and yen issued under European and Japanese laws. Even some Argentine bonds unrelated to the debt exchanges have fallen into further scrutiny. Not surprisingly, bondholders are taking action to defend their rights, for example in the UK courts.

Through expensive media campaigns, the vulture funds have tried to demonise Argentina by manipulating the facts. They have created misleading slogans to frame Argentina as a unique and isolated case. They have insisted that this would never happen to other countries. But their empty arguments have fooled no one.

Multilateral and regional organisations, heads of state and members of congress across the globe, non-governmental organisations, hundreds of world-renowned experts and even the US government, in different briefs filed in the US courts, have rallied to warn about the grave consequences of this ruling for the global financial system and for the rights of sovereign nations. By dramatically tilting the incentives and trampling the rights of the vast majority of creditors, this ruling renders future sovereign debt restructurings impossible. As a consequence, states are granted even fewer rights than corporations: while there is a way out for a company that has gone bankrupt, sovereign nations would have no way out.

Some have also insisted that collective action clauses (CACs) would solve the holdout problem. But experts were fast to call them out. First, there are billions of dollars of existing sovereign debt without CACs. Second, CACs in most international bonds do not prevent holdout creditors from buying up blocking positions in single series of bonds, effectively preventing any debt restructuring of that series.

A new plan

The financial community agreed. In late August, and after lengthy discussions, a group of 400 of the world’s largest banks, investors and debt issuers gathered under the International Capital Market Association (ICMA) released an agreement on a new plan to prevent chaos in global financial markets created by this ruling. The plan would ground holdouts by limiting the ability of a small group of speculators to sabotage sovereign debt restructurings and undermine the interests of the majority of bondholders.

Sovereigns spoke up and took action. In a historical initiative the UN adopted a resolution toward the establishment of a multilateral legal framework for sovereign debt restructuring processes. This much-needed resolution approved by the vast majority of nations in September is proof of the will to move forward in a multilateral effort to ensure an orderly and predictable regulatory approach to sovereign debt restructurings.

Argentina wants to pay to 100% of its bondholders. It has a fair and reasonable offer already on the table that would end this litigation: holdouts can join the debt exchange under the conditions accepted by 92.4% of the bondholders. By accepting Argentina’s offer, the vulture funds can bank an immediate profit with a return of more than 300%.

Argentina will continue to pursue every available course of action to resolve this dispute. It has not and will not repudiate its debt; however, it will not surrender to the extortions of a minuscule group of voracious speculators that seek to endanger the future of the Argentine people and put at risk the stability of the international financial system.

Axel Kicillof is Argentina’s minister of economy and public finance.