Fifty Lashes and Hobson's Choice, Argentina Edition

Big day in sovereign debt. After months of kicking the can down the road and a couple of anticlimactic decisions from English courts that made no practical difference in the pari passu injunction, a giant big shoe has just dropped in the Southern District of New York. Judge Griesa ruled that Argentina's dollar-denominated local law bonds were covered by his injunction just the same as New York and English law bonds. In the process, he defined (or redefined?) the injunction super-broadly, effectively blocked Argentina from issuing new foreign currency debt under its own law, potentially expanded the reach of the pari passu clause for other sovereigns, told Argentina that it was all out of comity, and told Citi to choose between New York and Cristina Fernandez de Kirchner.

Judge Griesa's 2012 injunction was styled as a remedy for violating the pari passu clause in Argentina's defaulted bonds. In theory, the remedy could be acceleration (as Argentina had argued), a fine, specific performance, or fifty lashes (ok, maybe not fifty lashes). The judge has lots of discretion in choosing an equitable remedy, which need not mirror the breached clause.

Because the injunction applied to "Exchange Bonds" and described bonds for which Bank of New York Mellon (BNYM) was trustee, it did not track the pari passu clause, which promised equal ranking with Argentina's "External Indebtedness." Exchange Bonds issued in the 2005 and 2010 restructurings include bonds that are not External Indebtedness and bonds not held through BNYM; External Indebtedness includes foreign currency debt unrelated to the restructuring. External Indebtedness excludes "Domestic Foreign Currency Indebtedness" (DFCI) "offered exclusively" in Argentina or issued in exchange for peso debt.

Citi, which is custodian for Argentine law, US dollar-denominated Exchange Bonds, has long argued that they should get paid because they (i) did not fit the description of Exchange Bonds in the original injunction, (ii) were mixed up with and indistinguishable from local law bonds that were not part of the exchange (including bonds issued to settle an investment dispute with Repsol), and (iii) because they were not External Indebtedness. For a while, it succeeded even as New York and English-law bonds have been blocked. No more of that.

According to Judge Griesa, his injunction covers BOTH Exchange Bonds AND External Indebtedness:

[T]he operative paragraphs of the Injunction do not speak in terms of “external indebtedness,” and as a result, Citibank’s participation in making payments on exchange bonds is prohibited. This is true whether or not the exchange bonds are external indebtedness. Nonetheless, the court finds that the vast majority of exchange bonds governed by Argentine law and payable in U.S. dollars would not constitute DFCI, but rather would qualify as external indebtedness of the Republic. Thus, payment on these exchange bonds would violate the Equal Treatment Provision of the FAA, providing an additional reason as to why the Injunction applies. [Emphasis added]

The judge went out of his way to define DFCI narrowly, and External Indebtedness broadly, potentially expanding the reach of the pari passu clause to all foreign currency debt that could be sold to foreigners, using foreign offering documents, etc., even if it is governed by Argentine law. This effectively blocks Argentina from issuing new foreign currency debt under any law, killing Matt Levine's glorious map.

More importantly, other sovereign debtors and their lawyers might have a look at their External Indebtedness and DFCI definitions to decide whether they need tweaking in light of this latest. If it is not DFCI, it might be pari passu.

The judge rejected arguments that Citi was not a participant in the payment process, much of which goes through Argentine entities, reiterating that anyone who is not an exchange bondholder is prohibited from helping Argentina. (Note to Uber: Do not drive exchange bondholders to the airport, they might be catching a flight for Caja de Valores.) 

Perhaps the most colorful language in the opinion deals with comity. Here the judge basically says that Argentina is all out of credit:

When [U.S.] courts issued judgments, the Republic refused to honor them. Comity would have urged the opposite.

... and reminds Citi where it lives:

[...] Citibank’s global headquarters is located in New York. Citibank merely maintains a branch in Argentina. ... By observing the Injunction, Citibank asserts that it risks sanction in Argentina. However, if Citibank processes payments on exchange bonds, it violates the Injunction issued by this court. Neither option is appealing. [... but Citi and other third parties have only Argentina to blame.]

Oh, and the judge thinks that Argentina should really call the Special Master. Then again, this opinion is unlikely to elicit much comity in Buenos Aires.

Comments

[FS]

Hello Anna!

Great to see an update on this issue. One follow-up question: since Griesa defined External Indebtedness broadly, could the Bonar 2024 and Boden 2015 (which mature just before election day!) be defined as External Indebtedness as well, and therefore could Griesa try to block these payments as well? Thank you in advance!

[John]

I have been following this case for a while now, and I am at times offended by both sides. One cannot help but cheer for the underdog (which is now looking like Argentina). Has anything been written about changes stemming from this mess either in sovereign bond markets generally or in US-Argentinian relations?

[Anna Gelpern]

Thank you, FS. For now, they are in the clear, but it could change if the plaintiffs decide to claim they were marketed outside Argentina.

[Richard]

Having read the full 64 page transcript, I see Little or no chance of Griesa being overturned by the Second Circuit so Citi/RoA are just continuing to kick the can ....

Despite all the sabre-rattliing and the mental instability of Kirchner, I don´t believe she will really suspend or withdraw Citi´s Argentine banking licence: a) there are too many local customers and clients who would be affected, and b) it would be an open invitation to Griesa granting NML execution over accounts of the Republic held at the Argentine National Bank in NYC ... something which he has held off from doing so far.