France is Man Enough to Pari Passu (updated with link to the brief)

Just when you thought the world's economic leaders were a bunch of spineless, viewless appeasers who would sell their nearest and dearest to mollify the scary monsters who would eat them anyway ...  France saves the day! Confirming rumors that have been floating around for some weeks, the French press reports that France has filed an amicus brief with the U.S. Supreme Court urging review of the Second Circuit decision in NML v. Argentina.

The French filing is more significant now that the United States decided not to file uninvited, and dragged the IMF back with it (breaking a lot of china in the process).  With France in, the chances of the United States being asked to express its views go way up. With the United States in, the logic of holding back the IMF disappears.

The substance of the brief is, ironically, less important. The bulk goes to policy, premised on France's role chairing the Paris Club of government-to-government creditors. Like the United States and the IMF, the Paris Club is mad-mad-mad at Argentina for failing to repay billions of dollars, but France is evidently more worried about the impact of the Second Circuit decision on debt restructuring and the rest of the Paris Club business. If France sticks with it--and the Finance Minister himself sounds pretty committed--stay tuned for a wild ride!

HT Isabelle Couet (Les Echos)

Pari Passu Whiplash

The IMF will not ask the U.S. Supreme Court to review lower court decisions in the pari passu litigation--for now. This would not have been news if the IMF's intent to file an amicus brief had not been announced last week, causing a rally in Argentina's bonds. 

By all press accounts, the brief was written and ready to go until U.S. opposition killed it in a Board meeting Tuesday morning. U.S. opposition would not have been news either, had the United States not filed briefs in the case itself--twice--saying everything that the IMF was going to say, and much more. Besides, there is just no way that the brief would have been written and scheduled for Board discussion without U.S. approval. What changed?

Everyone's Got Supreme Court News - Argentina Edition

In a stunning upset of nobody's expectations, Argenitna is seeking Supreme Court review of the October 26, 2012 Second Circuit decision that it cannot pay its restructured debt unless it also pays the holdouts. Argentina has long promised to appeal all the way to the Supreme Court, and did so on the eve of the first deadline for such an appeal. No news here.

The most interesting thing about the filing is what it does not do: it does not ask the Court to overturn the Second Circuit's interpretation of Argentina's pari passu clause, only the injunction based on that interpretation. Argentina's lawyers must have made the tactical decision to focus the intervention on federal law issues of the sort SCOTUS tends to review--the Foreign Sovereign Immunities Act (FSIA)--and avoid distracting it with state law contract interpretation issues of the sort it does not. The result is that even if the Court agreed to review the case (unlikely), and Argentina prevailed (way unlikely), the interpretation of "rank payment obligations equally" as "pay ratably" would remain. This particular injunction against Argentina would fall away as impermissibly extraterritorial (restraining sovereign property outside the United States), but there would still be room to play around with the ratable payment remedy going forward, notably for other debtors, in other restructurings, maybe in other jurisdictions.

To be sure, Argentina will have another go at the Supreme Court after the Second Circuit decides the remainder of the case on the precise scope and effect of the remedy, but by then it could hardly reopen the question of what the clause means.

Otherwise, the petition reiterates the argument Argentina and the United States have made many times before, that telling Argentina to pay or not to pay someone in New York effectively constrains what it does with its treasury funds in Buenos Aires, and contravenes the express intention of FSIA to leave some judgments against sovereigns unenforced. No news here.

 

The IMF is Not/Not - NOT- Reviving Its Sovereign Bankruptcy Proposal

For all the hopers, dreamers, and scaredy-cats out there--Relax. The long-awaited IMF overview paper on sovereign debt restructuring is here, the first since 2005. And it does not revive the Sovereign Debt Restructuring Mechanism (SDRM) proposal, which died in 2003 at the hands of the United States and the big emerging markets (or more politely, "failed to command the majority needed ... due to the members' reluctance to surrender ... sovereignty"). The new paper takes great pains to establish that the core political reality has not changed, even though SDRM would have solved many of the problems with sovereign debt restructuring that have arisen in the interim. O well.

Within its crystal-clear political constraints, the Fund goes on a measured march across sovereign debt restructurings from 2005 to 2012, or from Argentina to Greece, through Belize, Jamaica, St. Kitts and Nevis. I came away thinking that the paper was not particularly radical, generally constructive, and refreshingly precise.  But it does point to potential changes.

Harry's Here! -- Everyone Wants a Piece of NML's Pari Passu Pie [Updated]

Just two sunny weekend days after NML et al. filed their rejection of Argentina's offer, a new batch of defaulted bond holders have come to ask the court for their piece of Argentina's pari passu distribution. The Duane Morris Individual Plaintiffs apparently believe that

[T]he only sensible resolution is a lump-sum payment of all interest and principal that has accrued and become due and payable in eleven years to all the current holders of the holdout bonds ... . Such a payment would be directed through an order for specific performance, which this Court has endorsed as the appropriate remedial device. NML Capital Ltd., 699 F.3d at 261-262.4B. [Emphasis in the original.]

NML et al. disagree and urge the court to reject the proposed amicus brief:

[T]his Court’s March 1 Order directed Argentina to state what it is prepared to pay Appellees specifically, not what it is willing to pay adversaries in other cases.

No, they are not talking about adversaries suing Argentina for unpaid paperclips -- but other bondholders under the very same 1994 Fiscal Agency Agreement that laid the golden ratable payment egg for the plaintiffs-appellees. 

Argentina, Fintech, and two groups of restructured bond holders don't want the court to friend Duane Morris either, but there is more than a whiff of we-told-you-so in their filings:

[T]he Motion demonstrates that the present appeal does not concern “only” the $1.47 billion demanded by NML and the other plaintiffs-appellees ..., but potentially the entire amount of outstanding defaulted Republic debt subject to a pari passu clause. ... [A]cceptance of the district court’s “ratable payment” formula could open the floodgates for over $15 billion in similar pari passu claims.

In retrospect, one wonders why it took Harry as long as it did to join Tom and Dick at the pari passu party. And when will Sally, Sue and Fred wake up?

UPDATE: Things happen quickly in the pari passu world. Apparently convinced that no one wanted Duane Morris at the party, the Second Circuit denied their motion to file an amicus brief earlier today. Hat-tip to Joseph Cotterill at FTAlphaville, who posts the order here.

Pay Dick, Ditch Harry: More on 'Ratable Payment' and Its Implications

Creditors owed identical amounts under identical defaulted Argentine bonds, including identical pari passu clauses, could get very different recoveries under the plaintiffs' theory of ratable payment--unless all such creditors are corralled into a mandatory class action that divvies up Argentina's surplus among them under equitable supervision of the courts.

NML et al Decline Argentina's Offer ... and Ratable, Elaborated

Surprise, surprise -- NML and colleagues would just as soon pass on Argentina's offer of 2010 restructuring terms. Plaintiffs' submission (ahead of schedule) is full of the sort of language I love to learn in this case and deploy on disobedient children: "plainly believes rule of law does not apply to it ... predictably and characteristically defiant ... fails completely ... astoundingly ... has the temerity to claim ... manifests yet again its contempt ... unyielding disregard for the law ..." All this in the first few pages of the filing.

Nothing astounding about this rejection. But one point in the filing is quite intriguing: the plaintiffs explain how one should deal with the prospect of future plaintiffs with the same rights as these coming to claim their own ratable payment, but finding the till empty:

Accordingly, the only amount Argentina would pay as a result of this Court affirming the district court’s Injunction is $1.47 billion, which is a mere fraction of what Argentina paid to the Exchange Bondholders in December 2012 alone. If holders of other defaulted indebtedness later bring equal treatment claims of their own, Argentina will have ample opportunity both to litigate the merits (taking into account any factors that may distinguish those bonds from the ones at issue here, including different contractual language and governing law) and to make a showing of financial need, based on circumstances then prevailing, for the district court to consider in shaping a remedy. [Emphasis in the original.]

In other words, if a sovereign borrower from Tom, Dick, and Harry pays Tom and is sued by Dick on the ratable payment theory, the borrower has to pay Tom and Dick ratably. If Harry happens to be asleep and forgets to sue, that is Harry's loss--especially so if by the time Harry wakes up, the borrower is out of money. There you have it, equitable debt collection outside bankruptcy.

Italy's Pari Passu Scrubbing

Italy does not do things half-way. Of all the pari passu clauses on the planet, it had the one that most definitely, unambiguously, no-two-ways-about-it promised ratable payment to its bondholders. In English. Just search for "ratably" here. This got Italy some bloggy grief.

After the Second Circuit interpreted Argentina's pari passu clause to mean ratable payment, some governments chose to ponder the impact of the decision in the Risk Factors section of their securities disclosure. Heads up, investors--future restructurings might be tricky!--they said. Though apparently not tricky enough to change their own contracts.

In contrast, Belize made the radical move to "clarify" its already-narrow pari passu clause to exclude the ratable payment interpretation. A new domestic law limited the government's capacity to promise ratable payment. Belize then explained in its offering documents that it understood the pari passu clause to mean ranking-only, and had no authority to agree otherwise. Even if a creditor were to tell a court later that she had meant "ratable payment," the court would know that Belize had meant ranking, and that creditors had been on notice. Contract interpretation rules frown on parties who try to enforce their private meanings when they know that the other side means something completely different.

Meanwhile, Italy quietly took the most vulnerable pari passu clause ever, deleted the ratable payment language, and added an exception for seniority conferred by treaty:

The Securities are the direct, unconditional and general and …unsecured obligations of Italy and will rank equally with all other evidences of indebtedness issued in accordance with the Fiscal Agency Agreement and with all other unsecured and unsubordinated general obligations of Italy for money borrowed, except for such obligations as may be preferred by mandatory provisions of international treaties and similar obligations to which Italy is a party. … Amounts payable in respect of principal of (and interest on) the Securities will be charged upon and be payable out of the [Treasury of Italy], equally and ratably with all other amounts so charged and amounts payable in respect of all other general loan obligations of Italy.

The new Fiscal Agency Agreement and Form of Note are here. I wonder if that treaty they are thinking about might be found here. And talked about here.

More Pari Passu Judging Puzzles

I find recent court action in NML v. Argentina much more intriguing than Argentina's proposal last Friday to reopen its 2010 debt exchange.

Recall the super-dramatic  Second Circuit hearing on February 27 opened with the three-judge panel denying Argentina's request to revisit the meaning of pari passu and the propriety of a ratable payment injunction, decided last October. The full Second Circuit had not yet denied Argentina's petition to rehear the case en banc, supported by the United States--leading some to assume that the ruling would wait until the three-judge panel had decided on the scope and reach of the injunction.

After the February 27 hearing, where the judges seemed thoroughly exasperated with sovereign contumaciousness, the panel unexpectedly ordered Argentina to submit a ratable payment proposal by March 29. The March 1 order specifically told everyone other than Argentina to stay out of formula design. I took this to mean either that the judges were bending over backwards to give the sovereign its due process before it self-destructed, or that they were being extra careful and splitting babies to secure unanimous decisions both on the panel and en banc.

Then on March 26, as everyone was dusting off their spreadsheets to analyze what Argentina might propose three days later, the Second Circuit summarily rejected Argentina's en banc request, ignoring the United States for the second time in a year.

Lots of people stayed up late last Friday to see what Argentina had to say. Most were disappointed. But just when everyone had decided that Argentina's ratable payment proposal was old, boring and sure to be summarily rejected, last night the three-judge panel ordered NML to submit a reaction by April 22.

As I am not a litigator and have no clue how judges think, I wonder:

Banks, Governments and Cyprus

A key point is at risk of getting buried in all the din surrounding Cyprus's deposit levy (apparently poised for parliamentary defeat). To me it comes through most clearly in the latest from the tornado-chasing (or front-running?) duo, Lee Buchheit and Mitu Gulati. 

One message of the Cyprus program is that bank liabilities must not become sovereign liabilities. It is consistent with Europe's imperative of breaking the bank-government cycle. The approach implies that banks' creditors may suffer while the sovereign's creditors are spared--even in a systemic crisis. This might happen on purely ideological grounds (No Bailouts, Ever), or when the sovereign has no money/no appetite to nationalize the banks, or when government debt is a huge portion of the banking sector's assets. Proponents of the levy believe that going after the government's creditors here is both pointless and bad for incentives. Best to keep the banks separate, and to attack the problem at the source.

My hunch is that this entire line of argument is farcical, because banks and governments are, and always have been, joined at the hip. The purported separation is an accounting cover-up.  The fact that the separation is accomplished by means of mega-financial repression underlines the irony.

Tea Leaves Two Ways (Pari Passu Prognosticating)

Black smoke ... White smoke? ... Argentina wins! ... Nope, black smoke ... Can you stand the suspense? ... the whiplash? One day, Second Circuit judges slap down Argentina. Two days later, they are opening bilateral restructuring negotiations with Argentina on the ratable payment formula. Then Taiwan attacks Grenada, wielding pari passu (latest here)... Then NML subpoenas Vatican bank statements (just kidding) ...

Two basic scenarios for what happens next have crystallized in the pari passu litigation. The first is simple and boring: the judges know Argentina has no viable payment formula, but are careful to give it all the process it needs to self-destruct. The second is complex and fascinating: the judges realize belatedly that they made a giant mistake in October, and are now willing to impose a bankruptcy-style equitable payment formula to contain the fallout.

Sovereign Bankruptcy, Day One: Market Rallies

Mark makes an immensely important point in his post on the latest in NML v. Argentina; it merits emphasis and perhaps an extension. The fact that a U.S. federal court proposed departing from sovereign bond contract terms is a big deal--even if the range of acceptable departures turns out to be small (de-acceleration?), and even if Argentina declines the invitation. A regime where a court enforces involuntarily modified contracts looks like sovereign bankruptcy, achieved here using the court's equitable powers against the background of the debtor's immunity. 

This echoes the idea that Marcus Miller and Dania Thomas proposed some years ago, when they interpreted the totality of Judge Griesa's rulings as proto-bankruptcy. Of course that was before Judge Griesa got fed up. 

I am not exactly holding my breath for a constructive response from Argentina, or acquiescence from Elliott. But even if nothing happens, my sense is that we have crossed a sovereign bankruptcy milestone. And markets rallied. 

No Food, No Phone, All Heat, Some Light: Dispatches from the Pari Passu Hearing (Updated to Reflect Rehearing Decision)

I am just back from joining 250+ other obsessed (and some paid) persons at the second Second Circuit hearing on the pari passu clause in NML v. Argentina. My first reaction on leaving the courtroom was that Argentina was done for, as was Bank of New York-Mellon, and by implication, the Exchange Bondholders. My second reaction (with the benefit of a glazed donut) was that some odd moments in the argument might point to a surprise outcome. My third reaction (with the benefit of coffee) was that my first reaction was right. More than you want to know below.

Trial of the Century or Private Ceremony? (Pari Passu's Little Mysteries) (Updated)

I am not a litigator, and would never venture to read the scheduling tea leaves to predict case outcomes. That said, two things about next Wednesday's hearing in what some call "trial of the century" strike this civilian as pretty odd.

Don't Fix It, Call It a Risk Factor! (Updated)

NML v. Argentina is seeping into securities disclosure for sovereign debt. For example, Colombia and Paraguay have recently told investors in their bonds that ongoing litigation in the Second Circuit could make sovereign crisis management harder going forward. Following from the Risk Factors section of Colombia's latest prospectus:

Shipping News of the World: Round Two for Argentina

The International Tribunal for the Law of the Sea (ITLOS) in Hamburg has ordered Ghana to release Argentina's tall ship Libertad. The ship has been held in the port of Tema since October pursuant to a Ghanaian court order enforcing foreign judgments for NML. The ITLOS ruling was unanimous, but several judges filed separate opinions. The parties are due to report on compliance by December 22.  Thoughts after the jump.

Et Tu, FT? (Pari Passu Edition)

Laugh, cry, give up: the Financial Times editorial argues for Supreme Court review of Judge Griesa's decision because not enough countries use collective action clauses (CACs) in their foreign-law debt ... and recommends that all do as the Eurozone and adopt CACs (... in their domestic-law debt?). 

Pari Passu Wipeout in the Southern District

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.

Pari Passu Endgames

It was supposed to be a scheduling hearing, and I was supposed to be in New York for a conference. So I popped by Judge Griesa's courtroom on Friday to see about next steps in NML v. Argentina, and stumbled into a rave. Just about every analyst, journalist, and lawyer who has ever had anything to do with Argentina was on hand, along with the protagonists. They even set up an overflow courtroom, but the folks next to me preferred to get subway-cozy just to see it all in person.

The basic outcome is well-known by now: NML will file their brief by tomorrow on all the issues remanded to the District Court; Argentina and any third parties that care to intervene must respond by Friday; NML's reply is due by November 19. There will then be a hearing before Judge Griesa; he promised to rule before December 1 -- though perhaps even before -- with the goal of getting the Second Circuit's final chop in time for Argentina to make (or not make) the payments due to the Exchange Bondholders and NML on December 2. The stay on the injunction is in effect until the District Court rules ("until I have made my ruling"), but could be extended "until the Court of Appeals does further work" ("... but the Court of Appeals will not say nothing!").

Expect amicus briefs from the Bank of New York as trustee (present but quiet in the courtroom) and exchange bondholders. Watch for briefs from the U.S. Government, the New York Fed, the Clearing House, DTCC, international organizations, perhaps others. The expansive list of third-party targets in the plaintiffs' proposed order (Attachment B), and the Second Circuit's enigmatic reference to third parties beyond intermediary banks (p. 28), may have disturbed a hornet's nest. My view continues to be that the outcome depends heavily on the number and strength of third-party interventions. The trouble is that the biggies require quite a bit of process to come in, and would find it hard to turn on a dime in the few days allotted (less holidays and storm displacement). Conceivably the courts could even ask for briefs from the official actors later--so I am not sure what to read into any absences on Friday.

What follows is an attempt to fill in the color and the implications.

Known Unknowns in Pari Passu ... and More to Come

The Friday decision in NML et al. v. Argentina has clearly shaken the sovereign universe. While I am normally more prone to panic than Felix Salmon or Vladimir Werning, these wise folks reasonably point out that the decision may spell the End of the World for sovereign immunity, sovereign debt as we know it, etc. "May" is the operative word in my view. We need more information and analysis (stay tuned) before we dash for the bunker.

Argentina Lost! Elliott Won! Pari Passu Rules! (... or Why I Love Being a Law Professor ...)

The pointy-head caucus can exhale -- the Second Circuit ruled on the pari passu drama, and it did not go as I had expected. Not only did the court rule against Argentina, but it did so on relatively broad grounds, giving a fair amount of meaning to a massively indeterminate bit of Latin, and ignoring the practical challenges of enforcing the ruling. The judges upheld the injunction directing Argentina to pay holdout creditors who refused to participate in its 2005 and 2010 debt exchanges whenever it services the new bonds that came out of the exchange. Ironically, the opinion acknowledged that it was impossible to figure out what proportionate payment would mean under the circumstances, but chucked the question back at the lower court. The judges also remanded the question of how exactly one might enforce this injunction without attaching sovereign property abroad or dragging in third parties (New York banks moving Argentina's money), despite the fact that the holdouts admitted in court that their next step would be to go after the banks on aiding and abetting theories.  But these are all questions for another day. Between this ruling and the Ghana boat mess, October 2012 will go down as a heady month for Elliott and its kind.

Shipping News of the World

Whaddayaknow -- the Ghanaian commercial court upheld the detention of the Argentine tall ship at the request of the defaulted bond holders. The opinion says that there is insufficient consensus to support customary international law on military ship immunity, that sovereigns have virtually unlimited capacity to waive what immunity there is, and that Argentina waived any and all immunity in its broadly-worded Fiscal Agency Agreement (a reading the court supports by citing to subsequent narrower waivers). My sources on Ghanaian law say there are two more possible appeals; meanwhile, an Argentine foreign ministry team has ... ummm ... set sail for Ghana.

At first blush, this decision strikes me as phenomenally wrong-headed, but I want to give the custom angle a bit more thought. Meanwhile, whatever the law, the politics is not all bad for the Argentine leadership -- coming under attack by unscrupulous imperialists has its benefits, especially at home. And whatever the outcome, the biggest impact may be on borrowers other than Argentina, contemplating their contract drafting, payment, and litigation strategies. Even if the decision is overturned on appeal, who wants to take the risk of oddball magistrates in distant harbors? In that sense, the incident may already be a victory for Elliott. Worth ten years and umpteen zillion dollars?  Dunno.

Repo Man Envy, Argentina-Elliott Edition

A court in Ghana has "detained" an Argentine navy ship with over 200 sailors on board, as part of the continuing effort by Elliott Management to get paid on defaulted government bonds. This is so wacky, it should be a movie.

The Libertad is a lovely sailing ship that once held a transatlantic crossing record, and is now used to train Argentine sailors. As a navy vessel, it is likely covered by sovereign immunity. Even if Elliott gets to keep the beauty, selling it would be a whole lot of hassle (do research immunity law before you bid). Even if the ship fetches the high end $15 million, it would be a drop in the bucket to Elliott's holdings. Money is not the point here. The point is to hassle the Argentine government and show those who might be tempted to follow its example that Elliott means business. But would a government as determined as this one to resist Elliott in particular ever cave in?  If anything, the ship caper sets up a testosterone contest. Elliott shows that it is willing to "scour the Earth" for Argentina, and President Cristina Fernandez de Kirchner shows that she can lead the resistance to "bond vigilantes."

Then again, if I were Elliott, I might want to keep the Libertad for sentimental value.

Exit Consents Killed in England?

The English High Court just ruled in Assenagon Asset Management S.A. v. Irish Bank Resolution Corporation Limited (formerly Anglo Irish Bank) that a popular technique used to pressure bondholders to participate in a debt restructuring, as deployed by Anglo Irish in late 2010, violated English law and the terms of the Trust Deed. I have not been able to find a link to the opinion yet, but there is some good reporting here and here, including links and block quotes. This is potentially huge for bank, sovereign, and all manner of other bond restructuring--plus competition among financial jurisdictions.

The Awesome Pari Passu Hearing

The Second Circuit argument in NML v. Argentina was awesome--I was at the edge of my seat the whole time. My takeaway after the hearing is that even though Argentina got the brunt of the yelling, it would be relatively straightforward for the court to rule in its favor (after yelling some more). In contrast, ruling in favor of the creditors would require the court to make some pretty hard new law, and overcome big policy challenges. This does not add up to a projection for Argentina--I think some or all of the judges would love to rule against it if they possibly could--but methinks it would be harder after today than before.

Sovereign Friday Bits: Pari Passu Preview; DRC Wins in Jersey

The panel for Monday's Second Circuit hearing in NML v. Argentina is Judges Raggi, Pooler and Parker (follow link, click on name for official bio). Recall it was the eleventh-hour recusal of Judge Leval that pushed the hearing off a month. Judge Pooler is no stranger to Argentina debt litigation -- she was on the panel that decided the case where the same plaintiffs tried to attach Argentina's central bank funds. (Argentina won, cert. denied, 552 U.S. 818.) Then again, by the time we are done, there might not be a judge left in the world that did not hear an Argentina debt case. Note also that the case is being heard by its lonesome on Monday afternoon--it's that special!

Speaking of central bank funds ... The question of what assets may be used to satisfy claims against defaulting sovereigns vexes judges worldwide. Earlier this week, the UK Privy Council barred collection of old Zaire debts against the assets of a state-owned mining company of the Democratic Republic of Congo (DRC), bolstering the presumption that state-owned enterprise assets are unavailable to pay general state debts. (Opinion here shortly.) In the end, it is good to have the case resolved on the merits. Had it been brought in England--or had Jersey legislated earlier-- it would have been blocked by an anti-vulture law without deciding precedential questions of immunity.

It is also interesting to see the extent to which the distressed sovereign claim universe is occupied by repeat players. The fellow who sued Zambia and inspired the UK anti-vulture legislation also appears to have been involved early in the DRC deal, according to The Guardian. ... And just like the debt in Donegal v. Zambia, the debt in the DRC case appears to have started as a government-to-government claim. I continue to have reservations about trading these: they are political apples to commercial debt oranges, often extended with mixed motives, poorly documented, sold by cash-strapped transition economies, and prone to abuse.

Pari Passu U on July 23 at 3 (unless they change it again)

The NML [Elliott] v. Argentina pari passu argument was rescheduled yet again, to July 23.

While we wait, FT Alphaville gets my semi-annual pari passu usage prize for slipping "the boy who cried pari passu" in its nice piece on Spanish bank bailout confusion. More on the Euro-bank angle on pari passu when Eupdate comes back. With luck, by then we will know what pari passu means. Or not.

Pari Passu Argument Moved to July 18

Alas, we must slog through another month to find out how it ends. The NML v. Argentina argument in the Second Circuit was postponed at the eleventh hour. In other news, one of the panel members recused himself, also at the eleventh hour. And Professor Ronald Mann joined the amicus party on the NML side on a narrow U.S. payments point.

Edge of Reason: Paripassupalooza on Capitol Hill

Like the rest of us, the U.S. Congress cannot wait until the Second Circuit argument on pari passu, now scheduled for June 20th. Unlike the rest of us, the U.S. Congress can do something about it -- and it is.

This Thursday, the House Financial Services Committee is holding hearings on how the Obama Administration is mean to investors, with the U.S. brief in the pari passu litigation as one of three case studies, apparently on par with the mortgage settlement and the auto bailout. Adam and Stephen are both testifying, along with David Skeel and Ted Olson, who happens to represent the creditors in the Argentina litigation (lawyers for Argentina are not on the program).

While people might differ on the merits of all three cases, sticking the pari passu filling in the bankruptcy sandwich strikes me as rather loopy, not least because the U.S. brief this time is a carbon copy of the Bush Administration brief in 2004 on the same issue. (Meanwhile, the Obama Administration slapped trade sanctions on Argentina for ignoring investor arbitration awards.) Maybe they were going for the consumer-corporate-sovereign bankruptcy tour d'horizon effect, but the result is a mashup of apples, oranges, and green lizards.

On the merits, if they do spend any time on Argentina, I expect a replay of the flat-wrong argument that Collective Action Clauses somehow make the pari passu issue go away. The fact that Greece promptly paid its holdouts despite having the most favorable CACs ever is a case in point. I also worry about the hearings getting diverted into the totally intederminate and therefore massively manipulative debate about the meaning of pari passu. The crux of the controversy is not whether Argentina breached a covenant, but rather, whether pari passu can be the basis for a worldwide injunction. This is just too weedy to get straight in a hearing of this sort. 

Then again, if anyone really cared about investors in foreign sovereign debt, they would be talking about sovereign immunity and sovereign bankruptcy, not pari passu. As these things go, we are more likely to double down on the crazy of the pari passu clause with a pari passu statute. Now that's a party I would not miss.

Sovereign Restructuring after NML v. Argentina: CACs Don't Make Pari Passu Go Away

A remarkable number of people are buying the creditors' argument that widespread introduction of collective action clauses (CACs) in sovereign bonds makes the debate about the pari passu clause in the Second Circuit irrelevant to the broader regime for sovereign debt restructuring. This is intuitively appealing, but totally wrong.

Pari Passu: So Passe! (Extractive Edition)

Felix Salmon stays with the Argentina pari passu saga, about which I wrote here. The holdout creditors have now filed their briefs (Felix has the links), and are doubling down on the text. Much of their argument hangs on a creditor-friendly formulation of the second half of Argentina's pari passu clause, which goes to the status of payments, rather than the underlying obligation. The creditors make a point of dissociating the payment half of the clause from the Latin mumbo jumbo before it ("equal treatment", not "pari passu"!), which is kind of silly, since all the parts and flavors go by pari passu. But rhetorically, equality is much more appealing.

Revival on the Head of a Pin: Do U Pari Passu?

Argentina and its most intransigent creditors are duking it out again (or still) in the Second Circuit, reviving the crazy battle over the meaning and import of the pari passu (equal treatment) clause in sovereign debt contracts. For the small but committed contingent of pari passu pointy heads, this is WorldCupOlympicMarchMadnessSuperBowl. For everyone else, this bears watching because an obscure turn in the Argentina story could open the door to enforcement against sovereign debtors in general. (Nope, this is not a closet Eupdate. Pay no attention to the man behind the blue-striped curtain.)

At Last, A Credible Threat of Default: Too Little-Too Late Eupdate?

At long last, Greece is starting to resemble a normal restructuring--you know, the kind where the debtor just might not pay if it does not get the relief it is asking for. Everyone else has done it this way, including the proverbial opposites, mean Argentina and nice Uruguay--but not Greece.

From the start, Europe's crisis management strategy has revolved around flatly denying the possibility of default within the Eurozone. This strategy has given us record-deep yet voluntary haircuts, bizzarre contortions to exempt central bank holdings, and mass confusion around CDS triggers. But even as it denied the possibility of nonpayment--thereby denying Greeks the smidgeon of agency debtors enjoy at the precipice--Europe failed to proffer an alternative "or else." As a result, creditors might be forgiven for wondering whether the alternative to haircuts just might be payment in full. Next to payment in full, the offer of English law in restructured bonds looks like a pathetic consolation prize (they will not survive the next restructuring anyway).

And so a bunch are threatening to hold out on the eve of Thursday's exchange deadline. This is not the long-lost evidence of creditor coordination problems to support calls for sovereign bankruptcy--presumably, countries that do not default do not file either--but rather proof that if you keep swearing you will pay, people will take you up on it.

Now at last, with 48 hours to go, Greece has (sort of) promised to default if the offer fails. With so much on the line, it feels like we are cutting it awfully close.

The Disorderly Default in Your Closet Eupdate

Another day, another Greek deal to end them all (more on that soon). Amid the political din, legal and financial complexity, one thing has struck me: the entire enterprise is being justified as a way to avoid "disorderly default." But what exactly is disorderly default--that scary monster in the closet keeping many Eurocrats, foreign bondholders, and Greeks awake at night--and is it really the sole unthinkable alternative to the mess of the past year and, perhaps, some years to come?

Disorderly default, one that comes as a surprise to the markets, leading to contagion, capital flight, bank runs, a crashing collapse of the Euro, and widespread litigation, is surely unappetizing. But the alternative to disorderly default might also be a priced-in default with minimal contagion, a contentious restructuring with lots of litigation, or a slow-bleed near-default, complete with capital flight and bank runs, which destroys trust and political capital, depletes and redistributes resources that might have gone to finance recovery (see Roubini & Setser) ... and ends in default.

Mind you, I am not advocating disorderly default, but rather suggesting that it is of a piece with order, chaos, and other pure, but under-specified alternatives to messy reality. Disorderly default is evil in the same way that pristinely orderly bankruptcy is good. By taking default (orderly or otherwise) off the table early in the crisis, while refusing to finance a credible alternative, the European political leaders may have chosen the worst of all options.

As grandpa used to say, it is much better to be rich and healthy than to be poor and sick.

Greek Gunboat Diplomacy Eupdate and More ECB/EFSF

Someone who wanted to be very mean to the Germans just leaked this document, where they manage to come off as both desperate and inept. The proposal purports to address Greek failure to meet program targets by installing an EU overlord, whose job it would be among other things to pay off the foreign bondholders before funding public services in Greece.

The strategy goes back to the days when imperial gunboats took over debtors' customs houses to pay foreign bondholders, but has been considered impolite in creditor country circles for a century or so. Now it is back as an EU institutional innovation. As for the business of "absolute priority" for foreign creditors, the statement is nonsensical on its face: Greece will enact a law that would make creditors feel "de facto" senior. At best, this would be "de jure," and without a shred of credibility. The actual phrase used--"De facto elimination of the possibility of a default"--surely qualifies for an Oscar nomination.

All this innovating does follow a pattern: take a program that does not work, double down on it, and ratchet up enforcement to the point where no one would ever dream of it. Genius.

And further to my last post, it looks like Richard Barley and Felix Salmon took sides on the EFSF swap possibility a couple of days ago, except that they seem to operate on the assumption (which I shared last May) that EFSF would have to take the loss up front. Now I think that the swap would be worth it even if it only captured the discount for Greece. Phase Two happens when it does.

The Crisis of Fake Constraints: Greek Denouement Eupdate

Unless Greece and its creditors reach a deal in the next few days, Greece has no money to pay €15 Billion or so due to its bondholders in March.

From the start, this has been a crisis of fake legal and economic constraints masking very real political constraints. In 2010, Greece could have restructured its debt quicker than most sovereigns in modern memory -- or it might have been bailed out, had Europe chosen to go the route of fiscal transfers. Neither of these paths was taken because the European Central Bank was unwilling to countenance the sin of debt restructuring, but member states with money were unwilling to pay for the appearance of collective virtue.

Now that the restructuring is inevitable and the virtue bill unpayable, the fake constraints are back. The ECB holds about €50 of Greek debt, which must go into the restructuring to get enough debt and cashflow relief. But the central bank would not take losses, and remains allergic to triggering credit default swaps (which is more likely to happen if it sits out). Worse, its votes might be needed to (credibly threaten to) amend Greek bonds using retrofit Collective Action Clauses. (See latest from Gulati-Zettelmeyer here.)

There seems to be a simple fix: swap the Greek bonds held by the ECB for bonds of the European Financial Stability Facility at a price that does not cause ECB losses. Then have the EFSF go into the exchange and vote the bonds if it needs to. At a minimum, this captures for Greece the discount at which the ECB bought its bonds. If Europe is unwilling to see the EFSF take a loss from the ECB's purchase price, Greece could conceivably make up the difference with a special bond issue for the EFSF on terms that reflect the specialness of the vehicle and the circumstances.

Greek VoluntaryInvolutary DealNoDealDeal: Convolution Eupdate

Will Greece reach a voluntary deal with its creditors to write down its debt by 50% in the coming weeks? Will it default? ... or will its official patrons blink, pay up, and let the creditors off the hook? I hear at least two uber-expert Euro-watchers have taken opposite sides of the bet on that one. I bet nobody wins.

Financial Institutions Palooza at the Association of American Law Schools Annual Meeting

The Section on Financial Institutions and Consumer Financial Services will have a record four events at this weekend's Association of American Law Schools Annual Meeting in Washington, DC. The theme is rethinking and reviving the field of financial institutions on the ground and in the academy. We will take stock of reforms so far and consider the impact of the crises in the United States and Europe, but also will take a long-term view of the field from diverse theoretical, policy, and methodological perspectives.

The program begins on Saturday morning with a big-think "revival" panel featuring Jill Fisch, Howell Jackson, Kim Krawiec, Pat McCoy, Katharina Pistor, and Annelise Riles, immediately proceeding to the lunch keynote by Governor Sarah Bloom Raskin, introduced by Arthur Wilmarth. Next comes an offsite policy roundtable moderated by Adam Feibelman, with regulators and policy makers from different agencies. The weekend program  features five academic paper presentations on Saturday afternoon and Sunday morning, focusing on the state of financial reform and the way forward. Heidi Schooner will moderate the Call for Papers panel.

Full program details are here. Below are the links to the selected papers, authors, and commentators.

This-Is-It EU Summit Eupdate

A few quick thoughts as the Make-or-Break, Life-or-Death, Now-or-Never EU Summit gets going.

Previews from Merkozy earlier this week got no love, and now that Mr. Draghi has shelved the Big Bazooka idea (HT Hank Paulson), I am not entirely sure what can possibly surprise on the upside. Then again, maybe the dithering is good news--if EU policy makers had really thought this was the abyss, surely they would have done something.

I would not claim summit reading as a specialty. Besides, I am exhausted from trying to unpack decisions that have had the average lifespan of a mayfly. That is why, instead of laboring through substance, this time I will be looking for glaring signs of fecklessness. So far this week I have seen two: Private Sector Involvement and Rule Obsession.

Never Mind Eupdate, Greek Referendum Edition

No more referendum. Still my candidate for the most important moment in this crisis. The possibility of a referendum, and of exiting the Euro, stays on the table -- as well it should. The persistent fog in Europe's Plan A, and the palpable absence of anything resembling Plan B, are chilling.

Eupdate Game-Changer: The Greek Referendum

The Greek authorities' decision to hold a referendum on the new Eurozone rescue package strikes me as the most interesting and potentially consequential development in the crisis in a very long time. Yes, more consequential than last summer's breakthrough and last week's all-nighter.

I may be unduly influenced by the other European referendum experience--Iceland--where the people have now repeatedly rejected the government debt settlement deal, despite substantial improvement in the terms between the two referenda. But with the entire Greek package on the line and much to pick on, I find it hard to imagine a favorable vote. I also wonder about the implications of holding a vote when so much of the package is up in the air. One outcome of a negative vote might be to empower the government to go back and ask for more favorable terms. Even if the ultimate vote is affirmative, the interim  uncertainty must feeze all the Europrocess coming out of last week's summit. And if a better deal emerges after the first one is voted down, would that too be put to a referendum? Much to talk about in Cannes.

Regulatory Bankruptcy

My Jotwell review of Sarah Woo's last article is here. 

Call for Papers: Financial Institutions and Consumer Financial Services Section

There is still time to submit for this Call for Papers -- the extended window is closing on  September 20. In addition to the Call for Papers, the section program at the Annual Meetings of the Association of American Law Schools features a talk by Federal Reserve Governor Sarah Bloom Raskin, and a scholarly panel on reviving financial institutions, their study and regulation -- banks and beyond.

Conference on the Debt Crisis in the Eurozone

If you happen to be in Reykjavik or thereabouts in early October--or scouting the web for papers putting Europe in perspective--this looks like a wonderful conference, not least for bringing economists, finance, policy, and legal types together in one place (and my contribution notwithstanding).

Defies Credulity Eupdate

Bad news: Eupdate is back. The last big fix to the European debt crisis, quietly unraveling since its announcement on July 21, is loudly imploding over collateral.  Turns out that Finland, representing less than 2% of the Eurozone package and 37.876% of the political noise about the package, was promised Euro 500 million in cash collateral for its participation. The side deal makes little sense as an incentive to repay for Greece, or as a source of repayment for Finland. In a world where Greece is willing to default on another European state, Euro 500 million is the least of anyone's worries--the Euro is collapsing, Spain and Italy are going down, bank runs are rampant, etc. The primary purpose of the collateral trick must be political -- to assure Finnish voters that they are not in fact bailing out Greece.

Our D-Word: Ecuador, Not Greece

In the inane and insane case the United States does skip a debt payment, please let us skip the comparisons to Greece. Greece is really out of money and probably should have bitten the D-bullet (restructured, re-profiled, whatever) some time ago. We are not out of money, yet might default anyway--which makes us surreally more like Ecuador circa 2008.  Like Ecuador's recent D-dalliance, a U.S. failure to pay would be purely discretionary, a rare case of unwillingness, not inability, to pay.

Call for Papers: Section on Financial Institutions and Consumer Financial Services

Following is a call for papers to be presented as part of the section program at the Association of American Law Schools Annual Meeting next January.

The program takes place one and a half years after the Dodd-Frank Act was signed into law.  The law left many of the details of financial reform to be filled in by regulators, raising the risk of capture.  Some of the most important rule makings have begun in earnest; others have stalled as reform fatigue sets in. Meanwhile, reform efforts in Europe and international regulatory initiatives remain works-in-progress. What lessons can we draw from the implementation of Dodd-Frank so far?  What have been the greatest achievements and the greatest disappointments as the legislative process has given way to the administrative?  What devils have lain hidden in the details of the Federal Register?  What aspects of reform have been largely forgotten?  What does the path of financial reform say about legislative and regulatory process?  What lessons can be drawn from the reform efforts in Europe and elsewhere?  Does the focus on regulating institutions detract from a focus on regulating financial instruments, markets or economic functions and risks? 

Form and Substance Eupdate (Updated)

After a month spent reeling from DSK whiplash, Eupdate finds the European landscape little-changed, much noise notwithstanding.

Summarizing: Greece has gone through profound political upheaval to enact austerity measures boosting the nominal credibility of its economic program; German banks have continued quietly to unload Greek debt (unto whom?); European politicians have continued loudly to bang the table about bail-ins; and the European Central Bank has continued stoutly to reject all compromise that might reflect on its mammoth holdings of peripheral debt ... that is to say, all compromise on offer. As Adam pointed out last week, the French bank fig-leaf proposal solves none of the problems at hand, though as Wolfgang Munchau pointed out yesterday, it does apply criminal amounts of structured lipstick to the EU bank-sovereign pig.  (No, not PIIG.)

The one curious thing about this slow-motion train wreck is the extent to which the public sector is embracing crude formalism as its preferred method of treading water, while some private market participants are seizing the substantive high ground. 

Central Bank Drift: Eupdate Extra

Now that everyone agrees that Greece will engage in a figleaf operation to extend maturities without inflicting net present value losses on its creditors, it is worth mulling the institutional implications of any such operation. If a debt exchange takes place as rumored, I am most worried about two things: the cost to Greece of paying higher interest rates to kick the can down the road, and the costs to the international financial system of getting central banks formally involved in a debt restructuring (re-profiling, re-coloring, whatever). The Greece piece is a replay of the Latin American debt crisis of the 1980s: Greek debt stock and borrowing costs grow as uncertainty lingers, while its creditors build up a capital cushion to face up to reality. The central bank piece is more complicated, and perhaps more broadly important. It is the subject of today's Eupdate.

Ways of Treading Water II: Eupdate Greece

A year ago, back when the Greek government debt crisis officially became the Eurozone gestalt crisis, I speculated that Greece would not launch a debt restructuring any time soon.  I hereby officially change course.  There may well be a restructuring, and it will do no one any good.  I am skeptical not because I thought then, or think now, that Greece is solvent.  I had and have no idea, though Greek debt numbers look worrisome by most conventional metrics.  Rather, I am skeptical because the dominant proposal on the table--a lengthening of maturities with no net present value reduction (a "light dusting")--does precisely what EU politicians can do and have done perfectly all by themselves:  Tread Water.