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A Sort of Special (Sovereign Debt) Language

posted by Mark Weidemaier

I thought I'd write a quick follow-up to Anna's thorough post about the latest in the Argentine bond saga. A lot happened at Friday's hearing, which was convened after NML requested that the judge hold Argentina in contempt for transferring funds to Bank of New York Mellon and others. The transcript reveals an exasperated judge without a great deal of interest in parsing the separate parties and interests at stake. The result was one clear loser (holders of English-law bonds denominated in euros) and one clear winner (holders of Argentina's local-law bonds).

Let's begin with the losers: Euro bondholders asked to have their payments exempted from the injunction, arguing that a US court has no jurisdiction over the foreign entities involved in their payment chain. This is a serious argument, and none of the courts involved in this case have ruled on it. Readers may recall that the Second Circuit ducked the question, leaving it to Judge Griesa to clarify later. Here is the "clarification" from Friday's hearing:

THE COURT: ...I'm telling you that ... there may be a need for a sort of special language in any order. But I am not departing from the basic proposition that the Republic cannot make the payments..." (p. 31-31 of the transcript, linked above).

It's not exactly clear what kind of "special language" the court had in mind. The court could obviate the jurisdictional concerns by forbidding Argentina to pay its euro-denominated bonds but exempting non-US financial institutions from the order. But given Argentina's willingness to violate the injunction, this seems to be a non-starter. But then there really isn't any "special language" that will address the concerns of the Euro bondholders. Sure, in theory non-US parties can defend against contempt sanctions by raising jurisdictional objections, but in practice they will simply decline to pass on the funds rather than risk contempt. So the Euro bondholders lose because of... reasons.

Odd, then, that the judge allowed payments to our big winner: holders of local-law, local-payment bonds (including those denominated in USD). Here is the judge's order allowing an Argentine branch of Citibank (Citibank Argentina) to accept payment. But what distinguishes Citibank Argentina from, say, Bank of New York Luxembourg, which occupies a roughly analogous position in the payment chain to Euro bondholders? Both are non-US financial institutions. If one can be enjoined, so can the other. Certainly nothing in the text of the amended injunction supports the distinction. But when counsel for some of the plaintiffs tried to point this out, here is the court's response, in its entirety: "I simply disagree with everything you're now saying." (p. 27). Perhaps the jurisdictional considerations are different, but one would have to rule on the jurisdictional questions to decide. This is a rather surprising development, and a rather major distinction, made without any clear justification. A good day to hold local-law debt, I suppose. (If you were wondering, no - this doesn't make it any easier for Argentina to execute a swap into local-law bonds...)


The local Law debt is not pari passu with plaintiff's debt. It is as simple as that. The original pari passu clause specifies external debt, excluding debt issued under Argentine law. Jurisdiction has nothing to do with it

Isn't the distinction with Citibank Argentina that they are unquestionably under Argentina's sovereign authority? In principle, Argentina could do almost anything it wants (imprison employees, seize property, etc.) to force compliance (even if that sometimes might require changing Argentine law) and there's nothing the court could do about it. Citibank Argentina would be trapped between a rock and a hard place, so the court is yielding.

However, if that's the right analysis, I wonder what happens if (when?) holders of euro-denominated English-law bonds sue in an English court for their payments? Is there some reason they can't do that? Otherwise, presuming they win, what does a non-US financial institution do?

While EUR debt does unquestionably fall under the pari passu language. The plaintiff's bonds are NY law, so NY is the proper jurisdiction. I agree with you that non US parties could try to defend against contempt but no way will risk it.

PlasmaJeff: The injunction applies to debt issued as part of the exchange offers, and this includes some local-law debt.

Ravi: Totally agree with your very pragmatic distinction. (Although I do suspect that if push came to shove a Citi affiliate would comply with a US court order.) But the court didn't make that distinction; it made no distinction at all. As for litigation in Europe, there is litigation in Belgium along the lines you mention. It's precisely to avoid these kinds of conflicts that courts generally honor their jurisdictional limits. Or at least explain why they aren't transgressing them.

The injunction does, yes. But the injunction was poorly worded in that regard (maybe intentionally as it was written by NML). Judge Griesa is fixing it here. The local law bonds do not fall under the pari passu clause and never should have been included.

Reading Citi's original arguments from last May, you are right. Most of the discussion revolves around the Court's ability to restrain payments within Argentina. They only briefly mention the pari passu issue. I am surprised the scope of which instruments do fall under pari passu has not fully been addressed. For example, the GDP warrant holders raised the issue but have not yet been answered (though since there wont be a payment on them for several years yet, it probably does not matter)

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