The Argentina vs. Vulture Funds court case has been making front page, international headlines for what feels like three boring lifetimes. But even with so much press, I discovered this week that many people can’t answer an important question correctly: Why is the vulture funds court case in New York in the first place?
The answer is simple: Argentina chose to issue the debt in New York.
Countries borrow money by issuing bonds, which are agreements to pay back the borrowed money plus interest. Argentina, like many other countries, chose to borrow US dollars rather than its own currency. It also chose to borrow that money under New York law rather than under Argentina law. That means that at the time of borrowing, Argentina explicitly specified that in the event of a problem, all arguments would be heard and problems decided by the courts of New York.
The following are NOT reasons why the vulture funds case is in New York:
- The bondholders are US citizens
- The US Government lent the money to Argentina
- Judge Griesa is mean
The media coverage of the vulture funds case can seem like a competition in writing legally confusing and/or emotionally compelling prose where you get bonus points for being long-winded, so the confusion is understandable.
But regardless on your opinion on what SHOULD happen with the case, it’s important to understand the reason why the case is in New York in the first place.
Bond contracts are like any other contract — they explicitly say what court will hear the case if there’s a problem. It’s like a job contract — if my employer doesn’t pay me, I can’t just decide to sue him in New York because Judge Griesa is mean — I have to dig out the contract I signed, see what law it is under, and sue him there.
Many people think that this system is wrong or unfair when it comes to sovereign debt and put considerable time and effort into creating new future mechanisms for more humanitarian resolution processes that cause less pain and difficulty for nations undergoing economic problems. I salute their efforts, because countries going bankrupt and then having to fork over billions to New York legal teams is probably not the most efficient use of funds. But even then, many countries may still decide to borrow money under New York law to pay a lower interest rate because investors see it as less risky. And until countries no longer have the sovereign right to make independent decisions, they will be free to do so.
And now I am off to loan money to a friend and write the IOU on a napkin specifiying that if he doesn’t pay me back, I will take him to an Iranian court of Shariah Law, just to keep life fun.