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Pari Passu Wipeout in the Southern District

posted by Anna Gelpern

Christmas came early to Elliottville. Judge Griesa issued an amended order and two opinions that shoo away just about all the arguments that Argentina, the exchange bondholders, the various intermediaries and fellow travelers tried to fling in the way of his injunction. (A reasonably current set of briefs and rulings is available here.) The Southern District Thanksgiving turkey is here, along with the fixings here and here. First thoughts after the jump.

  • The formula is just what the plaintiffs asked for: if the exchange bondholders get a full coupon payment, the holdouts get full accelerated principal and interest ($1.3bn). Anything else would have no basis "in contract or in policy." (Alas for the equitable creativity hopefuls out there.)
    • ... Except that the court's steadfast refusal to make it up out of thin air comes alongside this: "[W]hat is being done here is not literally to carry out the Pari Passu Clause, as would be done in a normal commercial situation, but to provide a remedy for Argentina’s violation of the Clause." In other words, we are making it up as we stand firmly against making it up.
  • The Judge's decision in the stay opinion to order payments in escrow is unorthodox and seems politically clever at first blush. The funds do not go to either sworn enemy, but sit safely in a neutral and moral place until the judicial process runs its course. The latest rulings suggest that the project here is to make the case about the judicial process--not Argentina, not its creditors, and not the markets. The order dramatically changes the bargaining positions of the parties and complicates matters for would-be intervenors, because it requires them to change the subject after the courts have made it personal.
  • BoNY as trustee, DTC, Cede, and the exchange bondholders are "in active concert and participation," ie, fair game. In theory, so is Euroclear, except that it is shielded from injunctions by Belgian legislation in Belgium.
  • The opinion specifically names "the clearing system" as a potential collaborator.
  • The court dismisses the possibility that payment might be accomplished in Argentina, and observes that BoNY is "surely a United States entity" whatever it is or does in Buenos Aires. 
  • Trash talking ("inflammatory declarations" and "threats of defiance") by Argentine politicians about holdouts violates the injunction. Per se.  Said trash talking amounts to "extraordinary circumstances of the most serious nature" that warrant an early lifting of the stay.
  • Therefore, the stay is lifted in time for the December 15th payment to be shared.

Bottom line: the Judge feels empowered by the Second Circuit, and has thrown caution to the winds. He comes across as a man who has finally gotten his hands on Al Capone. He is not letting go.

Collateral damage TBD. The heretofore half-hearted policy interventions on Argentina's behalf signal that the establishment is not all in. It would be interesting to see whether Judge Griesa's expansive opinion gets anyone off the fence, and whether muscular policy intervention now would be too little and too late. It is almost as if he is testing the limits of all around him -- oddly reminiscent of the Argentine leadership on the other side. 

I am skeptical that the Second Circuit or the Supreme Court would want to mess with this unless the officialdom puts up a giant stink. And the officialdom may have decided that the courts are not the place to fight this battle (see Euroclear law).

One thing for sure -- Argentina has long been the least of it. Even if it settles now, the smoke will take ages to clear.


Could you elaborate on what you mean by this: "And the officialdom may have decided that the courts are not the place to fight this battle (see Euroclear law)."?


Policy responses could include treaty, legislative and regulatory measures (hard), contract reform (long-term and uncertain), or some combination.

Hi Anna,

great post. A couple of follow up questions. Do you have any views as to whether a) the appeals court would issue a stay and b) whether the Supreme Court would take it up given that Argentina has focused a lot of violations of the FSIA and more recently exchange bondholders have focused on a violation of due process? It seems like it might still be a while before this has finished. Also, to what extent do you think that the appeals court may rule that BONY, DTC, etc are not actually aiding and abetting Argentina, because what violates the injunction is the lack of payment to holdouts (which they have nothing to do with) and not the actual payment to exchange bondholders (I believe this was their argument). Fascinating stuff!

Thanks, Cesar - I agree with you and with Mark's post that the Judge ignored huge policy questions. My only explanation, from reading the opinion, is that he sees himself as standing up for an overriding public policy value - the potency and dignity of the judicial system. Therefore, it is up to actors other than Argentina and those making money off transactions with Argentina to tell the courts that the decision is a threat to the broader sovereign immunity regime and the infrastructure of the global financial markets - if that is what they believe. Does the US want to be putting up bonds whenever it gets sued in a foreign court? Should clearing systems be debt collectors? There is plenty in the opinion for appeals courts to consider, but with the debate now framed as it is about the judiciary, and with the official sector quiet, I find it hard to see the incentive to reverse.

Thanks for the response, it seems like we're in for some interesting weeks.

"Shoo away"? More like "ignore". "The potency and dignity of the judicial system"? What about the potency and dignity of the precedent and statutory law the courts supposedly live by? While I may personally find it amusing Argentina is being kicked to the curb, it's being done through a barrel of bad precedent we'll live to regret.

It would be interesting if something like this case would happen to the USA, they would send a) their marines to Ghana to take the libertad and b) Mr. Singer would go to jail for a long time.

I agree with you, Anna, that there will be no push by officialdom for this judge to back down, despite possible bad precedent for the de facto senior status of offical (e.g., IMF and World Bank) loans to sovereigns.

This is because such bad precedent matters little compared to the value of making sure that the process of sovereign remains ad hoc and disorganized.

Indeed, the bigger picture here is that ALL of this is caused by the lack of an international bankruptcy process/court. Such a court -- an obvious and commendable idea if there ever was one -- has been repeatedly proposed, suggested and even planned by numerous scholars, offials and even IMF staff, only to be just as consistently squashed by "officialdom," as you call it.

(More precisely, I think officialdom in this case is the European/American powers -- the imperialist creditor nations -- which placed themselves permanently in charge of the IMF and World Bank when they created them after WWII.)

So officialdom loves making Argentina an object lesson in the dangers of sovereign bankruptcy. From their prespective as creditors, the more unpredictable, uncomfortable and even arbitrary the process of sovereign bankruptcy becomes, the better.

the imperialist creditor nations -- which placed themselves permanently in charge of the IMF and World Bank when they created them after WWII

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