'Argentina must pay'

There have already been two instances in which German investors successfully took action against the Argentinian government to demand full repayment of bonds. Despite a far-reaching debt consolidation agreement with creditors who agreed to only partial repayment, a Frankfurt court ordered Argentina to pay full face value to the German plaintiffs. A higher court in Frankfurt upheld the ruling, and now one of these cases has landed before Germany's Federal Court of Justice (BGH).

The case is likely to affect all the other Argentinian bonds whose owners refused to take part in any haircut. Taken together, these bonds have a nominal value of $1.5 billion, plus interest accrued since 1996 at an annual rate of around 11 percent.

The bond markets apparently believe the plaintiffs are set to win the case. Since 2013, the market value of these bonds has risen around tenfold, to about 80 percent of nominal value.

Guido Lenné is a lawyer specializing in banking and capital markets. He has offices in Leverkusen and Munich.

Deutsche Welle: Mr. Lenné, these Argentinian bonds, of which the hedge funds Aurelius and NML Capital hold the largest share, were issued in New York. Therefore, in the event of a dispute, a US judge has jurisdiction. Why does German law apply in this case?

Guido Lenné: Without exception, our clients had bond terms in which the application of German law was agreed to. We are therefore referring to these contractual agreements, under which we can sue in Germany on the basis of German law. This is a good starting point for German investors.

The case that is pending has aroused great interest. Does it serve as a test case?

In February the Court of Justice will hear the case of a single plaintiff. What's special about this case is that Argentina has presented two new legal opinions by German law professors. To put it in simple terms, the defense will try to use them to prove that actions in the various public and financial crises mean it is now "general practice" for a majority of creditors to be able to force a minority to agree to debt consolidation against their will. They say this practice should now also apply here.

We can certainly describe this as a test case, as there are currently several parallel cases against Argentina that are currently waiting for the outcome of our case.

What is your assessment of these legal opinions?

I have led negotiations in cases dealing with Argentina since 2007. This line of defense has never played a role before, but the case has now gone before the Federal Court of Justice because of this new argument.

It is true that there is now a greater variety of experiences with state budget crises than ten years ago. For us Europeans, a sovereign default is no longer something that only occasionally happens to distant lands.

But Argentina did agree to apply German law. And that does not provide for compulsory debt restructuring. The principle applies that contracts are to be adhered to. There is also an internationally valid clause that now explicitly includes this contentious "general practice" in bond terms. But it is not included in the Argentinian bond terms. So I do not think the legal opinions are convincing and I expect a successful outcome.

What are the total amounts involved in Germany?

I can't really say much about the total claim amount. There are hundreds of claims, so it will be a matter of several million euros. We have already represented many of these claimants.

Are German investors who bought Argentinian bonds organized, and do they have any contact with US funds or individual investors?

The investors we represent are organized through a few law firms. We have not yet had any contact with foreign creditors.

What position have the banks that brokered the Argentinian bonds taken? Have banks been sued for mis-selling?

There have been claims for mis-selling. We haven't been involved in any cases like these due to the Argentinian bonds, either because there hadn't been any mis-selling with our clients, or it couldn't be proved.

What likelihood is there that Argentina will actually pay the bonds at face value plus interest?

It will take time, but ultimately I think the chances are good. In my estimation, a state ultimately cannot afford to permanently ruin its reputation on the international financial markets.

If the Federal Court of Justice rules in favor of German investors, what would be the next steps?

We would first continue to observe the situation, take enforcement attempts in individual cases, and continue to hope for a solution through negotiations.

There was no alternative to taking action for German creditors who did not want to agree to only partial repayment, because their claims would otherwise be rejected under the statute of limitations in German law. But judgments are enforceable for 30 years.