Argentina’s holdouts: here comes the judge
The day has arrived. The New York courtroom will be packed to the gunnels – even Argentina’s vice president and economy minister will be on hand as the dramatic “holdout” saga nears its finale. The lawyering will be slick, the arguments sophisticated. So who will win?
First a speedy recap: The Second Circuit Court of Appeals will hear oral arguments in the case at 1400 EDT from four parties: the “holdout” creditors who spurned Argentina’s debt swaps and are suing to collect in full on bonds unpaid since the country’s near $100bn default in 2001 (even though they picked up some of the paper cheaply post-crash); the Argentine Republic, which has made never paying the holdouts an article of faith; the holders of “exchange” bonds issued in debt swaps in 2005 and 2010 during which 92 per cent of the debt in default was restructured; and the Bank of New York Mellon (BNYM) the exchange bonds’ trustee. The latter two feel they have been dragged into a fight in which they have no dog but where they still risk being mauled.
How so? New York Judge Thomas Griesa a year ago ordered Argentina to make a “rateable payment” to holdout creditors led by Elliott, a fund, at the same time as it paid the exchange bond holders. The judge had found Argentina to be in breach of a pari passu or equal treatment clause in the defaulted bonds.
Fine, said the Second Circuit in October – just spell out for us please how this works and who is affected. Judge Griesa did so in November and ordered Argentina to pay $1.3bn into escrow for the holdouts.
Third parties got dragged in beause 1) the exchange bond holders fear Argentina would rather default on payments to them than pay the holdouts and they feel held to ransom; and 2) BNYM feared that the judge’s order that no one should help Argentina dodge the $1.3bn payment in fact prevented it from doing its legitimate duty as trustee – kind of damned if it does, damned if it doesn’t.
Why enjoin third parties in this way? Because Argentina is a serial flouter of default-related judgments. The orders were put on ice pending appeal, staving off fears of a technical default in December if Argentina failed to pay the exchange bond holders in order not to pay the holdouts.
At stake, depending on where you stand, are: creditor rights; the future of sovereign restructurings; New York’s hallowed legal and financial status; and Argentina’s ability to pay not just the $1.3bn demanded in this case but any copycat claims which the government says could amount to $43bn. With central bank reserves of under $42bn, it’s not even a question of won’t pay, it really is can’t pay, runs that argument.
Although everyone glued to this saga has been awaiting Wednesday’s hearing for weeks, the high drama – the actual verdict – may not be delivered for many more weeks or even months. Still, some see the very short periods allocated to the four parties – 20 minutes for the holdouts, 15 for Argentina and just seven each for the exchange bond holders and BNYM – as a sign that the judges’ minds are largely made up.
Oceans of ink have already been written on the issues at stake, the legal wrangling and the possible fallout of the case. So let’s cut to the chase:
1. Has Argentina already lost? On pari passu, the consensus is yes, it has (see the amended pari passu clause in Belize’s restructuring – and note that Belize and Argentina share the same lawyer). Since the Second Circuit is focusing on the issues of ratable payment and third parties, and in October affirmed other aspects of Judge Griesa’s ruling, it looks like a long shot to get the three judges on the Second Circuit panel to look again at pari passu all over again. Argentina’s best hope is its request for the case to be reheard en banc by the full 13-member court. But en banc applications usually fail.
2. If the exchange bond holders are “hostages”, would Argentina shoot? The holders fear it would, because they estimate the central bank only has $19bn available to pay what could be a flood of copy-cat claims. Indeed. EM, another big holdout fund, has already made clear it will follow in Elliott’s footsteps if the holdouts win. The rival view is that if Argentina defaults, it will be because it chooses not to pay the holdouts, not because the court ordered it not to pay the exchange bond holders.
3. Will New York’s standing as a financial hub or bond jurisdiction be helped or harmed and what of future sovereign defaults? The ability to enforce contracts may be seen as a bonus, goes one argument, and the wider impact, some veterans of major sovereign restructurings argue, are limited because the Argentine case is so unique. Opinions are split on this point.
4. Could Argentina try to pay the exchange bond holders elsewhere? Tricky (though some in the market see it as not impossible); proving bond ownership would require help from some third parties, and they would be unlikely to want to risk being in contempt of a ruling not to help Argentina.
4. Will Argentina get away with it? If the teeth of the ruling – the enjoining of third parties not to aid and abet Argentina – is removed, Argentina could lose the battle here but still continue business as usual (the holdouts have plenty of other unpaid judgments, and Argentina has flouted judgments from the World Bank’s arbitration tribunal, ICSID, and remains in default to Paris Club creditors). What would be the risks of continuing to pay the exchange bond holders but not the holdouts in contempt of the ruling? Possibly mostly embarrassment – Argentine officials could be denied entry to the US, for example. But Argentina would remain locked out of international capital markets so Argentine companies would find it harder to raise money, with a knock-on effect on investment and growth. Meanwhile, Argentina’s poor-relation neighbours, Bolvia and Paraguay, can issue debt at under 5 per cent.
Is the case all over bar the shouting? No. Judges and investors may not all have the same concerns, so in the end, the Second Circuit’s decision could hinge on what Vladimir Werning at JP Morgan called in a note to clients “a narrow technical angle riddled with subtle interpretations of the vocabulary” of legal clauses key to this case on funds transfers (UCC 4A) or on injunctions and restraining orders (FRCP 65).
If Elliott loses the battle, can it still win the war? Probably, acknowledge both the exchange bond holders and market participants. After all, a holdout’s ultimate leverage is the ability to block bond issues and holdouts do have a history of ending up getting paid. One day, the thinking goes, Argentina will want or need to tap capital markets.
But let’s not get ahead of ourselves. Are we sitting comfortably? Let the Second Circuit show begin.