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More on an Argentine debt swap (and why it doesn't matter whether the "no workaround" injunction is stayed)

posted by Mark Weidemaier

Just a few additional thoughts about reports that Argentina might allow exchange bondholders to swap into Argentine-law bonds. The injunction, remember, has essentially two parts (over-simplifying): There's the ratable payment part, requiring Argentina to pay NML if it pays on the exchange bonds, and there's the no-workaround part, forbidding Argentina to take steps to evade the injunction. As reflected in my last post (link above), there is some confusion about whether this no-workaround part of the injunction is itself stayed. The Second Circuit's decision stayed "enforcement of the amended injunctions" (see the last paragraph). Presumably, that includes the no-workaround part, too. However, in a separate order not under appeal, entered on March 5, the district court imposed a similar no-workaround injunction "during the pendency of the appeal." If "pendency of the appeal" means something like "until the Second Circuit issues its mandate" (and paragraph 1 of the order suggests that this is what it means), then there is a no-workaround injunction that remains in effect for the short term only (basically until 7 days after the Second Circuit denies rehearing, assuming a petition for rehearing is filed).

As Felix Salmon notes, whether or not the no-workaround injunction is stayed seems to be a big deal. If it is stayed, then Argentina can take steps to evade the order without risking contempt sanctions. However, I don't think the question is as important as it seems - and not only because the March 5 injunction will soon expire by its own terms. I explain why below the jump.

Focus first on Argentina. To be blunt, Argentina doesn't care about contempt sanctions. The court has little to no power to impose contempt sanctions on Argentina. Conceivably, it could impose a monetary fine, but that's about it. And you can guess the odds of collecting that fine. So... whether the no-workaround part of the injunction is stayed or in effect is pretty much irrelevant to Argentina.

Now focus on the intermediaries necessary to structure a debt swap, process payments, etc. They can be held in contempt, but only if the injunction is in force. Even here, however, it doesn't matter that much if there is a stay, because a court can lift its stay very quickly. Unless a third party will provide very brief, one-off services, it has reason to fear that the stay will be lifted at any moment, exposing it to the possibility of contempt thereafter. One way or the other, then, Argentina won't get much help in implementing a debt swap from third parties who are subject to the court's jurisdiction.

The important question isn't whether the no-workaround part of the injunction is stayed. The important question is whether there is a stay of the ratable payment part of the injunction. There is, now that the Second Circuit has granted one. That stay gives Argentina what it needs most - time in which it can pay exchange bondholders in the usual manner. But if the Second Circuit were to lift that stay, then I doubt that payment system participants will process those payments. So to return to the question in my original post: Why would Argentina announce this now? It will be very hard, and will certainly take time, to implement a debt swap. Right now, Argentina has plenty of time. Why put that at risk by tempting the Second Circuit to lift the stay on the ratable-payment part of the injunction?

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