Ambito Financiero Without changes, will the country default over ‘pari passu’?

Debt Coverage:

 

Ambito Financiero: “Without changes, will the country default over ‘pari passu’?”

 

La Nacion: “How Argentina’s foreign debt was born and how it was resolved”

 

Telam: “Griesa’s ruling generates global controversy and accounts for legal hole in solving sovereign debts”

 

 

Ambito Financiero

Without changes, will the country default over ‘pari passu’?

 

Monday, December 10, 2012

 

By Eugenio A. Bruno, Attorney

 

Questions are floating in the markets in the case of Argentina’s debt and even those in the know are not managing to end up having a clear idea of what is referred to by a contractual clause included in the debt bonds that have brought ill upon investors, money tables, investment banks, stock trading companies, funds, economists, governments, attorneys and judges that are impeded from measuring the risks of default, or not defaulting.  The clause is the “famous” pari passu and the questions include what does it mean really, what are its interpretations and, most importantly, what consequences does it have, and more special and serious yet, if there could be a default in virtue of it.

 

It’s been heard said that this clause is a work in Latin translated literally to mean “equal treatment.”  But all the rest are conjectures and attempts to talk about it.

 

In the financial markets this clause has been used for more than 150 years.  But it’s not a self-explanatory clause and as such it requires judicial interpretation, which is to say, it generates differing legal opinions and in a litigation it can generate different sentences.  Going forward in relation to new bonds the markets will correct its text and will make it self-explanatory.  But for the moment it isn’t.

 

The majority traditional interpretation is that it only means “equality of legal status” which is to say that two debts that are not originally subordinate one to the other cannot be then subordinated through a decision of the sovereign debtor (Congress or Executive branch) in the direction of that one of the two is paid first and only after the payment of that party and if there is money left over, the second is paid.

 

Under this interpretation, the “lock law” would be an example of non-compliance of the clause as determined by Judge Thomas Griesa and the Court of Appeals.  The motive is that, according to the written text from the higher court, it is treated as a law whose effects are even more harmful than a subordination as this legislation establishes that the debt with the holdouts will not be paid, neither under the same terms as the debt from the swaps.

 

According to the minority interpretation, pari passu means “equality of payment status”, which is to say if a country has two non-subordinated debts, you cannot pay one and not the other.

 

Only in one isolated case (precisely that of Elliott against Peru in the year 2000), the broad interpretation had concrete judicial effects but only at the injunction level (achieved by Elliott) in which the fund didn’t get to try since Peru decided to pay when faced with the injunction.

 

In fact, Argentina modified the text of this clause in the swap bonds of 2005 precisely due to that case, and eliminated the “equality in the obligation to pay.”

 

Griesa and the appellate court have said that the clause on the bonds in default has a phrase that has this effect.  For that they’ve said that both debts (swaps and vulture funds) have to be paid jointly.

 

That’s to say they are using arguments under both interpretations, which makes it more difficult to counter their rulings.  If one falls, the other will.

 

So, it shows how difficult it is for the appellate court and eventually the Supreme Court to change the two very rooted legal concepts in the jurisdiction of New York: on the nominal amount of the bond and that the swaps are only extensive to those that entered them in absence of the majority clauses (in another article we will talk about criteria of being just or unjust, how they’re seen in the courts until now and on the applicability of the measures to BoNY).  These two underlying concepts can change if non-legal aspects are used, like the economic convenience of finding a solution, public interest from the financial market of NY, as well as the postures of a political nature from the U.S. Treasury.

 

But in principle, the two issues of the next appeals process will be the payment formula and the application of measures to BoNY and other intermediaries, not about the nominal amount and the extension of the swap.  This is being appealed “en banc” and processed by separate tracks.

 

By that, the appellate court reversing the rulings about amount and extension of the swaps, as well as pari passu, might not be something that happens, except ‘en banc’ or at the level of the Supreme Court.  Or it could happen in case solvent arguments are found related to equality as well as in virtue of the filings from other affected parties like BoNY and the holders of bonds from the swaps, those who will have to redouble their efforts.  In fact, in the coming weeks we will make presentation from Argentine investors.

 

Now, if the latter doesn’t have an impact on the judges, we’d again be at the limit, save some other judicial shortcuts, especially regarding the trust with BoNY or that would be a complete reversal of the current position of the appellate court.

 

But neither can it be ruled out that, even on the amount and the extension of the swaps only to those who entered them, legally a path is taken combining rule of law with equity remedies and with something from the political aspects.  This means that the final ruling of the process would establish a special pari passu, taking, with the goal of the clause, both stocks of equal debt, and determining that the debt from the swaps and the debt with the vulture funds will collect in equal proportions, same amounts and on the same payment dates, but, regarding the vulture funds and other plaintiffs, without them withdrawing their complaints over the difference between what they’ll collect by pari passu and the total amount under the sentences, considering it as “payment on account”.  For the difference, the legal battle will continue with attempts at attachments on other assets.

 

 

La Nacion

How Argentina’s foreign debt was born and how it was resolved

 

Monday, December 10, 2012

 

By Roberto Feletti

 

Speaking of the external debt of our country it is essential to make a brief historical review to understand the situation that we are going through.

 

The debt sailed through a phase, between 1976 and 2002, in which Argentina was consigned to recurring crises, austerity plans and the inability of the state to exercise its role as social distributor.

 

In this process, we can identify two cycles of gestation and resolution.  The first of them originated during the military dictatorship and led to the default of 1988.  Then, there was a restructuring in 1992, known as the Brady Plan, which had as a condition the application of the Washington Consensus.  This plan permitted a new cycle of debt that concluded again in a process of restructuring known as the Megaswap, followed by an immediate default and the crisis of 2001.

 

We are now passing through a third stage, of restructuring, which, different from those previous, is accompanied by an unprecedented economic growth, keeping the whole of the Argentine people away from any negative impact that this process could have.

 

It has to be pointed out, also, that the same was done over jurisprudence of the shared effort.  According to this, the commitment of the debt and creditor is reciprocal, as the first works in good faith and offers the best conditions for payment, and the second accepts, because he knows that he placed his funds under conditions that were not viable to sustain.  It’s worth pointing out that the final restructuring of the total of the debt, through the two exchange offers (2005 and 2010), reached more than 92%.

 

This policy, which showed itself to be successful, cannot be impugned by a miniscule group of speculators that plan to collect the total of the debt.  As a consequence, Argentina has very solid arguments to defense this kind of restructuring.  By the theory of shared effort, by the vocation of payment, by the compliance being done by what was agreed to and by the grade of acceptance that the offer has had on the part of the bondholders.

 

 

Telam

Griesa’s ruling generates global controversy and accounts for legal hole in solving sovereign debts

 

Sunday, December 9, 2012

 

The recent ruling from the U.S. judge that is found stayed in the Court of Appeals of New York until the end of the case generated a controversy at the global level about the current solution mechanisms for countries in crisis that enter processes of restructuring.

 

This controversy involves an unprecedented fight between big risk funds, where on one side are the vultures, which sue for 100%, and the other the ‘hedge funds’ which buy at bargain prices, at the quote floor, but then join the swaps.  It also includes global finance experts who cross words with jurists in the United States.

 

The guru of the moment for economists, Nobel laureate Nouriel Roubini, known for having predicted the subprime mortgage crisis of 2008, joined the expert voices from the international financial system against the attitude that Griesa took.

 

The judge found that equal treatment to creditors (pari passu) was violated and ordered the vulture funds be paid 100% of what they are owed, with funds that belong to those that entered the debt swap of 2005 and 2010.

 

Another voice is no less than that of Anne Krueger, the former number two at the IMF and baptized by Argentines as the “iron lady,” suffered by the successive governments of the Alliance, Eduardo Duhalde and Nestor Kirchner.

 

In recent statements published in the newspaper Financial Times, and far from communing with Argentina, Krueger said that “unless this ruling is revoked, it would open a Pandora’s box that would have to be settled in some manner.” 

 

Krueger proposed a new system for sovereign restructurings warning about problems in the current mechanism (called SDRM) in 2001, and its idea was discarded by former U.S. President George Bush.

 

By then, Republican Bush attended to the strong lobby of the creditors, who denied the existence of an international observer for the market solutions in place.

 

As a consequence, the applications of Collective Action Clauses (CAC) succeeded, around the use of majorities in contracts, which resulted from a “concession” from the funds and investment banks to developed governments, which pushed its application through the G7.

 

With these majorities, which were used first in Mexico and then by Argentina with the new bonds of 2005 and 2010, governments could force those who rejected an exchange offer.

 

Recently, the use of these majority clauses was observed to pull together the Greek swap, to order 100% payment to creditors that enter the offer, in the track of the debt from local legislation (there were betwen US$6 and US$8 billion in holdouts with foreign legislation.)

 

But, for Roubini, the application of CAC doesn’t put the final point on the problem of the vulture funds: it marks a counterpoint with the posture of the Court of Appeals that backed Griesa’s interpretation that Argentina violated the clause of pari passu, equal treatment to the creditors.

 

Here voices have joined from international and local lawyers, who warn that even with the use of CAC a vulture fund could unite a majority of a series of debt emission and block the process of a sovereign restructuring.

 

Just like the Argentine government, Roubini speaks of a “legal hole in the international financial architecture”, by which Argentina maintains an open dispute with the vulture funds for 10 years, despite having successfully restructured 93% of its debt.

 

As a solution, Roubini dusts off the old approach by Krueger, which he calls a “statutory approach”, which he didn’t go into details about.

 

Krueger’s approach envisaged a system for solving sovereign debts in the style of Chapter 11 of the bankruptcy law of the United States, but argued that the observer or judge could be the IMF itself.

 

The Argentine government, which did ascribe to a new solution, rejects outright the IMF being “the judge and party to this story,” according to what the Economy Ministry says.

 

This is because they think that the IMF itself promoted, with the birth of the Brady Plan, the existing mechanism with its flaws, where the debts of the big bank syndicates were turned into bonds, which went on to have unknown creditors disbursed throughout the world. 

 

Through its complaints in the G-20, which were recently reinforced during the last UNASUR summit, in Lima, the government is seeking to put a halt to the assault from the vulture funds, which took maximum advantage of these legal holes to corner governments.

 

There a proposal was promoted that includes the need to create general mechanisms for sovereign debt restructurings; the repurposing of the ICSID; and the review of international bilateral treaties and risk ratings agencies; for that a special meeting is proposed by the block for February of next year.