The US Supreme Court tells Argentina that its sovereignty as a state is not above the principle of treating creditors equally in a bankruptcy. The decision helps set a moral norm that can boost the global financial system.
Ever since the Great Recession, nations have worked hard to bring some durable harmony in the global economy. On Monday, the highest court in the United States offered a pillar for that project.
The Supreme Court ruled that a nation-state, in this case Argentina, cannot violate a core principle of finance by treating its investors unequally. A sovereign power, in other words, must live by the same moral rules as individuals or companies.
The landmark legal decision should help bring better discipline and fairness to the world of high finance. It helps shatter the notion that a state has an inherent right to violate a contract to repay its debts, as Argentina argued. Instead, a state must treat all creditors with the same neutral respect as given to individuals, a concept based on the inviolability of their dignity.
Argentina defaulted on nearly $100 billion of debt in 2002. Because some of the debt was sold under New York law, it faced a court challenge after it settled with only some creditors in 2005 and 2010. A few “hold out” creditors sought better repayment terms as well as equal treatment.
The ruling could now force Argentina to either default again or negotiate a new agreement with all creditors. But the most promising effect may be that the ruling pushes countries to internalize the concept of equal treatment in finance and forces states to abide by the same laws as other entities.
The idea that there are universal principles applicable to all – regardless of national identity – has been the basis for the growth of international law over the past century. But despite such laws, enforcing them has been difficult if a nation puts its own interests first rather than upholding this emerging system.
In a second ruling Monday, the Supreme Court gave approval for Argentina’s aggrieved creditors to seize some of the country’s overseas assets as a form of repayment. In the past, a country that defaulted on its financial obligations was punished mainly by being excluded from financial markets or forced to pay high rates. That law of the jungle may now be replaced by rule of law if this ruling becomes the norm.
Coercion, however, is not the best way to persuade nations to buy into international norms. Rather, each country must also learn that the principles that drive a healthy global economy are also good for their domestic economy. What’s right everywhere, is right in Buenos Aires.