Joseph Cotterill writes:
Pari passu will now be enshrined as a powerful enforcement device in New York-law sovereign debt.
The Supreme Court declined to hear the case, meaning the current ruling will stand. The bottom line is that if Argentina tries to bypass a holdout debtor and make a payment somewhere else, the denied debtor has a potential legal claim to those funds. To expand on that a bit:
This law supports courts in deciding that ratable payment could be a remedy to use against sovereigns who refuse to pay their debts, and that third parties — settlement banks, clearing systems, other bondholders — may be sued if they are seen to handle funds in violation of such orders.
In more practical terms, that raises the cost to banks which are still dealing with Argentina or other defaulting nations. Most likely, this means creditors have a stronger incentive to be holdouts in the first place. I take that to be a negative and welfare-decreasing. If creditor rights were weaker up front, as I would prefer, it would be harder for nations to over-borrow in the first place, and ex post less of the cost of that over-borrowing will fall on the taxpayers and citizens of the poorer citizenry. Furthermore this could mean that associated financial institutions will be quicker to run for the exits once trouble materializes for a country, and that may worsen “sudden stop” and “runs” problems with lending to sovereigns.
In a separate but related judgment yesterday:
Ruling seven to one, the justices decided that the holdouts are allowed to “seek information about Argentina’s worldwide assets generally” to enforce judgment debt.
You can think of both judgments as telling Argentina they cannot default in the manner in which they had attempted to. And what might Argentina’s response be? They might once again…default. The country has two weeks to try to make it work under the current arrangements.