postings by Anna Gelpern
About a month ago, smart folks zeroed in on a single clause in Russia's two-year $3 billion loan to Ukraine. The December 2013 loan was documented as an ordinary-looking eurobond, apart from a promise by Ukraine to keep its debt under 60% of its GDP. No other Ukrainian bond had the debt/GDP clause, which naturally looked awkward when the sole bondholder started hacking at the denominator of the debt/GDP fraction (Crimea, about 3% of GDP; east and south, about 45%).
Since then, I have communed a bit with Ukrainian bond prospectuses, and stumbled on another clause only found in the Russian bond. All of Ukraine's state and state-guaranteed foreign bonds cross-default to one another: if Ukraine skips a bond payment due in 2014, holders of the bond due in 2021 can accelerate. However, the Russian bond also cross-defaults to "any indebtedness ... owed to the Noteholder or to any entity controlled or majority-owned by the Noteholder". Compare the cross-default provision in this Ukrainian bond to this one (search "Events of Default", "Indebtedness of Ukraine" and "Relevant Indebtedness").
One wonders whether they were thinking of Gazprom, majority-owned by the Russian government, and perennially claiming billions in arrears from Ukraine's Naftogaz. If Ukraine is late with its gas bills, Russia can accelerate its $3 billion. Since, according to Russia, Ukraine was already in gas arrears at the time the $3 billion bond was issued, that bond might have been callable at will all along.
Today is the day for filing amicus briefs with the U.S. Supreme Court in NML v. Argentina (pari passu case). Brazil, France, Mexico, the Jubilee Network and Nobel Laureate Joseph Stiglitz are all asking the court to take the case. Others will doubtless come in on all sides; then the court might ask for the United States to say something ... it's a long story; stay tuned.
For now, I only highlight Mexico's priceless intervention against the courts' misuse of Collective Action Clauses (CACs) in the pari passu argument. Recall that according to the Second Circuit, NML v. Argentina has no policy significance because CACs can be used since 2003 to bind holdouts in a sovereign debt restructuring. No holdouts, no lawsuits, no pari passu. This happens to be completely wrong because CACs specifically provide for dissent and mechanisms to hold out, and because not all debt instruments have CACs.
It is one thing for me to rant about it--but Mexico has unique credibility on CACs. In February 2003, Mexico spearheaded the very market shift in New York on which the court relies to make its totally wrong statement. And this amicus is not shy about its special status:
Mexico is thus well positioned to disagree with a stated foundation for the Court’s reasoning: that contract provisions in sovereign debt instruments known as “collective action clauses,” or “CACs,” will limit the decision’s ramifications to Argentina alone. CACs permit a specified majority of bondholders to adjust the terms of sovereign bonds. While Mexico adopted CACs for its own external debt instruments in 2003, and was the first nation to do so in the modern era, Mexico also understands that CACs have clear limitations and will not eliminate the threat to orderly debt restructuring engendered by the decision below. In addition, Mexico—like other nations—has legacy debt obligations with no CAC protection at all.
Now, whether any of this adds up to review and reversal is another story ...
Every elementary school summer I was shipped out of Leningrad on a two-day train journey to the Black Sea, where a succession of family members would make me eat tomatoes and roast in the sun for three months to store vitamins for the winter. A human conserve. My Soviet engineer parents would rent a room in someone's rickety dacha on the outskirts of Sevastopol--one rouble per bed, except for the high-end place with lace-trimmed pillowcases that went for one-fifty. The fellow to the right was our landlord, already chocolate-brown in early June, sleeping it off next to his sandy-brown boxer, when we were still fresh-from-the-north gray-green (photo courtesy dad). Sevastopol was a "closed" military city then, but to me, it was one happy, sleepy, dusty morning walk to the beach, trying to spy a poppy flower, sand, salt, sand, and sleepier afternoons under the sour cherry tree, trying to spy the landlady's grandson. Bleached, salty brown with a spot of red.
Earlier today Argentina filed itspetition for Superme Court review of the Second Circuit decision in the pari passu case. You may recall that its last request was rebuffed without explanation, perhaps because it was premature -- the Second Circuit had not quite finished ruling against Argentina. Now the appeals judges are all done, and Argentina has filed the the real thing. The new petition is notable for raising a broader range of issues than the first.
This need not reflect a view that the new "question presented" on contract interpretation is a big winner. The Foreign Sovereign Immunities Act may still be Argentina's best chance for review. However, having Argentina raise the contract point hould make it easier for more would-be friends of the court to chime in on the different things they care about. France might have company this time. Mark your calendars for the last week of March. Another year, another party.
You may have read about those radical plans by the International Monetary Fund (IMF) to force governments to default on their debts as a condition of IMF support. Debates over the place of sovereign debt restructuring in a financial crisis are getting more muddled and acrimonious, in no small part because no one wants to face the underlying governance challenge: political pressure to lend public money to contain the crisis, even if it means paying private creditors in full and adding to a sky-high pile of sovereign debt. As this year of public debt drama draws to a close, it is useful to separate fact from fiction before considering the way forward.
As a special treat for the Argentina-Is-Unique contingent, Mitu Gulatishows the way to get rich quick off recent developments in sovereign debt litigation. Bring him your tattered, your fading, your just-bought-on-eBay bonds that matured a century ago, and he will guide you to a happy retirement via the latest doctrinal shifts in sovereign immunity, statute of limitations, and intercreditor equity.
His example is especially attractive because it involves more than a promise of equal treatment, but a promise of absolute priority by the Chinese Imperial Government. If you had bought this baby, you'd be first in line. No Latin mumbo jumbo to hide behind, just a straight up problem of sovereign payment prioritization, familiar by now to all ye debt ceiling geeks (see Chapter 6).
Ah, sovereign debt -- irresistable, unenforceable, immortal.
To the surprise of nobody, the Supreme Court rejected Argentina's June 2013 request to review the Second Circuit's October 2012 decision that it violated the pari passu clause in its defaulted bonds. The court gave no reason, which is normal.
The August 2013 Second Circuit decision has not yet been appealed. The 90 day clock for Argentina to file starts running after the Second Circuit rejects its en banc review petition (who knows when, but soon).
This Supreme Court rejection of the June appeal was widely expected, especially since the Second Circuit itself snarkily observed in footnote 6 of its August decision that Argentina should have waited. All it means is that the saga continues.
Argentina is not precluded from raising the issues it raised in June when it appeals the whole case again sometime later this year -- or next -- depending on how long it takes for the remaining process in the Second Circuit to run. More interestingly, as my colleague Amanda Frost has observed, SCOTUS is free to raise issues on its own if and when it were to take the case.
So please do go back to your morning coffee--the end is not in sight.
More interesting to me are the non-participation of Justice Sotomayor, and the implications from President Cristina Fernandez de Kirchner's illness. But those are for another day.
With little to add to Mark's wonderful analysis of the Second Circuit decision in NML v. Argentina and the ensuing crazy, my thoughts drift to settlement. Until recently, my entire view of this case had been premised on the two sides locked in a mortal battle, driven by factors far beyond the law and economics of the transactions at hand. I had assumed that for Argentina, it was primarily about anti-vulture politics, publicly defined as not paying NML more than the rest--while for NML, it was primarily about finding a superior enforcement path, defined as getting paid demonstrably more than the rest. By definition, neither can live while the other survives.
Contemplating recent events while cut off from civilization, something felt different.
I wonder if this is how late night comedians feel about Anthony Weiner. He is, surely, the biggest gift that keeps on giving to their profession. On the other hand, it is summer, a time to relax and tell some knock-knock jokes ... but some people just cannot help themselves.
And so it is with pari passu. On the one hand, I will never have to look for content again. On the other hand, I do wish we could use the hiatus before the Second Circuit rules against Argentina to learn macrame or the Volcker Rule. But no. Another federal district judge in New York refused to dissmiss another pari passu case yesterday, and sent it full steam ahead to media frenzy.
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)
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?
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 impermissiblyextraterritorial (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.
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.