BREAKINGVIEWS-One $16 bln Argentina risk is perilously misjudged

By Jeffrey Goldfarb

NEW YORK, Oct 31 (Reuters Breakingviews) - Argentine President Javier Milei’s electoral victory at home might be overshadowed by a legal loss overseas. Days after his La Libertad Avanza party defeated rivals in midterm congressional ballots, the country’s lawyers appeared in a Manhattan courtroom desperately seeking to overturn a ruling that upends sovereign debt norms and threatens to disrupt the free-market libertarian’s novel efforts to guide his country out of economic crisis.

Milei now finds himself, oddly enough, on the same side as his Peronist political opponents. In 2012, then-President Cristina Fernández de Kirchner seized 51% of oil producer YPF YPFDm.BA, whose American depositary receipts trade on the New York Stock Exchange. At the time, her administration claimed the company’s Spanish owner, Repsol, was not investing enough in its subsidiary.

Argentina paid $5 billion for the stake, but small investors Peterson Energia and Eton Park Capital complained they were short-changed because YPF’s bylaws required any owner obtaining control to make a tender offer for remaining shares. Hedge fund Burford Capital BURF.L bought their rights to litigate and funded the case. U.S. District Judge Loretta Preska in 2023 decided a breach of contract had occurred.

This summer, she took the equally unusual step of ordering Argentina to transfer its YPF holdings into a BNY Mellon custody account to help cover the verdict. The award swelled to $16 billion after Preska used a 2012 exchange rate, rather than one from her judgment date, and tacked on 8% in interest instead of the 0.76% Argentina says would have applied under its laws.

Robert Giuffra, the Sullivan & Cromwell co-chair representing Argentina, told a three-judge appellate panel on Wednesday that the ruling was “life-threatening” for the country. Its net international foreign exchange reserves were negative $5 billion in mid-June, according to the International Monetary Fund. U.S. President Donald Trump has offered a provisional $40 billion lifeline as Milei seeks to tame runaway inflation while contending with more than $100 billion of debt coming due over the next few years.

Preska rattled financiers and lawyers by interpreting Argentine law instead of showing deference to a foreign government and directing plaintiffs to Argentine courts, as legal doctrine generally prescribes. U.S. banks, fearful of one day getting dragged into similar international legal spats as BNY Mellon, expressed concerns to the court. The decision also gives state borrowers good reason to seek legal bases outside New York for debt issuance.

Two of the appellate judges seemed skeptical about the choice of venue, and Burford's shares tumbled during the proceedings. If the firm prevails, however, Milei will be just one of many losers.

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CONTEXT NEWS

A U.S. court on October 29 heard an appeal from Argentina to set aside a $16 billion judgment against the country relating to a dispute over the 2012 seizure of a majority of oil and gas supplier YPF. Lawyers representing Argentina have argued that the United States was an improper venue in which to try the case.

One of the three judges on the U.S. Court of Appeals for the Second Circuit panel, Denny Chin, questioned lawyers about the choice of venue.

“It does have a feel like this should have been in Argentina.” He added, “If you were to flip it and put the United States in their shoes in Argentina, how would we be feeling about letting an Argentine court decide issues against the United States under American law?”

A U.S. district court in 2023 awarded two former YPF investors $16 billion for losses related to the company being nationalized. Burford Capital bought the litigation rights from Petersen Energia Inversora and Eton Park Capital, which alleged that Argentina neglected to make a tender offer to minority shareholders as required under the company’s bylaws.