What does the Argentina Supreme Court decision mean?

by on June 17, 2014 at 7:19 am in Current Affairs, Economics, Law, Uncategorized | Permalink

Joseph Cotterill writes:

Pari passu will now be enshrined as a powerful enforcement device in New York-law sovereign debt.

The Supreme Court declined to hear the case, meaning the current ruling will stand.  The bottom line is that if Argentina tries to bypass a holdout debtor and make a payment somewhere else, the denied debtor has a potential legal claim to those funds.  To expand on that a bit:

This law supports courts in deciding that ratable payment could be a remedy to use against sovereigns who refuse to pay their debts, and that third parties — settlement banks, clearing systems, other bondholders — may be sued if they are seen to handle funds in violation of such orders.

In more practical terms, that raises the cost to banks which are still dealing with Argentina or other defaulting nations.  Most likely, this means creditors have a stronger incentive to be holdouts in the first place.  I take that to be a negative and welfare-decreasing.  If creditor rights were weaker up front, as I would prefer, it would be harder for nations to over-borrow in the first place, and ex post less of the cost of that over-borrowing will fall on the taxpayers and citizens of the poorer citizenry.  Furthermore this could mean that associated financial institutions will be quicker to run for the exits once trouble materializes for a country, and that may worsen “sudden stop” and “runs” problems with lending to sovereigns.

In a separate but related judgment yesterday:

Ruling seven to one, the justices decided that the holdouts are allowed to “seek infor­mation about Argentina’s worldwide assets generally” to enforce judgment debt.

You can think of both judgments as telling Argentina they cannot default in the manner in which they had attempted to.  And what might Argentina’s response be?  They might once again…default.  The country has two weeks to try to make it work under the current arrangements.

Here is yet another explanation.  Here is Peter Coy on the same.  Here is The EconomistThis piece discusses the constraints on negotiating with the holdouts.

Anon. June 17, 2014 at 7:29 am

Sovereigns can choose the level of rights they want to give to creditors. If they issue bonds domestically, creditors have essentially no rights whatsoever. If they issue abroad (depending on the country), the creditors may have strong rights. The difference is typically reflected in the interest rate.

We saw a clear case of this in the Greek restructuring: bonds under English law continued to be paid fully and on time while those under Greek law had to take huge losses.

y81 June 17, 2014 at 9:06 pm

Exactly. How can it be welfare-decreasing for tribunals to enforce their rules, when the parties chose the tribunal in advance? The parties could definitely have chosen a tribunal (like the courts of Argentina) where creditors were less protected. I think Prof. Cowen is approaching incoherence on this issue, unless he has some exciting new proof that monopoly is generally more welfare-enhancing than competition.

Just an Observer June 17, 2014 at 7:49 am

Is what Cato says true – that taking it on the chin is clearly the best option for “Argentina’s long-term economic prosperity”? Not so clear to me..

John Schilling June 17, 2014 at 10:41 am

Cato conspicuously fails to mention that “taking it on the chin” means not only paying the hedge-fund holdouts full price, but paying all the original bondholders who settled in 2005/2010 full price – the terms of their deal with Argentina means that they can claim any better terms that Argentina offers in the future to any holdouts. It seems likely that the 2nd Circuit and the Supremes would uphold those terms as written, in which case Argentina would be on the hook for probably a bit over $30 billion if they go along with this.

It is not obvious that it is in their best interests to go along with this. Particularly now that they can default and blame it on the Evil American Government, which I suspect will go over quite well in some quarters. And it’s not even obvious that they can go along with this. If Cato’s figures are right (big if…), Argentina has less than $30 billion on hand.

It is obvious that Cato botched this one. Their ideological bias is obvious, but they are usually better at getting the facts right. This, I think, qualifies as lying by omission.

Axa June 17, 2014 at 7:55 am

Yesterday, in front of TV cameras, the president said there’s no payment for the creditor’s who didn’t accept the haircut in the 2005 debt restructure. That means they’re ignoring the court decision and will keep paying only restructured debt. So, it’s open season for Argentina’s assets around the world.

http://www.presidencia.gob.ar/informacion/actividad-oficial/27626

prior_approval June 17, 2014 at 9:14 am

‘So, it’s open season for Argentina’s assets around the world. ‘

Thankfully, after decades of practice, the U.S. is now able to extend its jurisdiction to the dealing of other countries – though whether the Swiss or Spanish, for example, will play along is another question.

And equally interestingly, nationalization of stock holdings is still possible, at least in Germany –

‘With the German state (via SoFFin) already owning 90% of HRE, an extraordinary general meeting on 5 October 2009 approved a €1.30 per share squeeze out of the remaining private shareholders,[12] including J.C. Flowers (which a year earlier had taken a 25% stake at €22.50 per share).[13] The decision resulted in the complete nationalisation of the firm[12] within a year of it having been a DAX constituent.’ http://en.wikipedia.org/wiki/Hypo_Real_Estate

Don’t count sovereign nations out quite yet – well, at least those nations without a tradition of being pushed around in that part of the world where the Monroe Doctrine is a long standing tradition.

Widmerpool June 17, 2014 at 10:38 am

You are talking out of your hat p.a. The reason why the Swiss or the Spanish would play ball (and I’m sure sure obliged to under the relevant treaties) is that the obligations are reciprocal, and Swiss or Spanish (and even German!) judgments can be enforced in the US.

Brian Donohue June 17, 2014 at 12:04 pm

Hooray for German state capitalism?

Mark Brophy June 17, 2014 at 2:33 pm

There is no such thing as state capitalism; there is only state socialism and private capitalism. Fascism is the use of corporations to enforce state laws, a form of socialism.

JWatts June 17, 2014 at 10:22 am

To some degree, I have little sympathy for the lenders. Don’t lend to Bad credit risks & don’t lend to countries that can’t manage their debt.

Rahul June 17, 2014 at 2:15 pm

Even if it is a bad credit risk a lender legitimately deserves his fair share of the debtor’s assets after liquidation following a default.

JWatts June 17, 2014 at 3:24 pm

Oh, I certainly agree with that, and I’m fine with the judgment as it stands. I certainly don’t think one group of creditors should make off better than the others. I just think the entire group of creditors should have known better than to lend money to Argentina. This is hardly the first time Argentina has defaulted.

Andrew' June 17, 2014 at 7:58 am

7 to 1. Funny.

Rahul June 17, 2014 at 8:11 am

If creditor rights were weaker up front, as I would prefer, it would be harder for nations to over-borrow in the first place

Does Tyler advocate weaker creditor rights in general or only in the context of sovereign debt?

andrew' June 17, 2014 at 8:14 am

Relatively, I presume. There is no risk-free rate.

8 June 17, 2014 at 8:24 am

The Consumer Bankruptcy Reform from 2005 wasn’t so hot.

Rahul June 17, 2014 at 8:30 am

If this were an ordinary creditor of a bankrupt firm the courts wouldn’t grant holdouts any special rights, right? Every creditor has to abide by the terms of settlement? OTOH, there’s no third party to make fair terms in sovereign defaults so forcing creditors to abide is a bit iffy.

It’s an interesting situation. Wonder what the legal basis is that differentiates sovereign bonds from regular bonds.

Yancey Ward June 17, 2014 at 9:08 am

I think the difference is that Argentina isn’t in US bankruptcy court, like a bankrupt firm would be.

J June 17, 2014 at 9:27 am

Yes but all payments must be made through Argentina’s NY-based trustee bank, which I believe is BNY, IIRC, so while they can’t force the Argentinian government to appear in court, they can enforce terms under which the bonds must be paid. Of course if Argentina chose to they could cut the cord entirely, “default,” and re-domicile the bonds somewhere else, but that’s a big step.

al June 17, 2014 at 1:18 pm

If there was no collective action clause and the bonds were renegotiated in a process outside of bankruptcy, then absolutely there would be similar rights for holdouts. If Argentina wants to declare bankruptcy let them submit to the jurisdiction of a bankruptcy court for the purpose of liquidating assets to pay creditors.

MD June 17, 2014 at 5:05 pm

Under which chapter of the US BK code would Argentina declare bankruptcy?

mark June 17, 2014 at 5:35 pm

Courts don’t grant holdouts rights. Contracts and statutes specify their rights. Absent a collective action clause in a contract, or a statute, no one, private or public, has a right to default in payment on a note. In such absence, any individual creditor has a right to payment in full. No, every creditor does not have to abide by the terms of a settlement. Only those who contract to settle.

The legal bases that differentiate sovereign bonds from “regular” bonds are that (1) there is no bankruptcy law for sovereigns. They just don’t pay. (2) The foreign sovereign immunities act specifies certain rights of sovereigns in American courts. One of those is the right not to be sued. Sovereigns usually have to waive that to raise money. Another is the exemption of noncommercial property from judgment. Apparently Argentina did not waive that, leading to the effort of NML to seek Argentinian property in other jurisdictions where the FSIA does not apply.

Rahul June 17, 2014 at 11:36 pm

Very interesting, thanks!

So, is there previous case law where a sovereign had waived immunity & gotten sued in a US court for not paying a bond obligation?

Obviously, there’s no bankruptcy law for sovereigns but do courts treat it as (a) Sovereigns can never shed debt obligations or (b) Sovereigns can shed debt obligations unilaterally however they please

Of course, without an immunity waver both (a) & (b) are moot since US courts won’t have any jurisdiction at all.

Ed June 17, 2014 at 8:33 am

I apologize for being pedantic, but this post was mistitled. This was a U.S. Supreme Court decision affecting Argentina. Argentina has a Supreme Court -their constitution was originally copied from the U.S. constitution- which has yet to my knowledge weighed in on this matter.

Since Argentina is a soveriegn country, they certainly can blow off an unfavorable judicial decision in another country, following another country’s laws, at the price of lowered protection for their investments in the rest of the world, lower trade in the rest of the world, and decreased ability to borrow from the rest of the world. This is similar to the costs of defaulting in the first place.

Z June 17, 2014 at 8:41 am

Exactly. Unless our robed masters have access to an army capable of enforcing their decision, the decision means bupkis.

Rahul June 17, 2014 at 8:48 am

I don’t think so. There are many non-holdout creditors within USA & this decision impedes paying them off.

I think it might also create a claim on general Argentinian government funds being handled within the US or by an US entity. That’d create a pretty broad claim.

Technically, you may be right about not being to enforce the claim *within Argentina* but in practice enforcing it won’t be that hard because Argentinian funds pass through US jurisdiction all the time. I might be wrong.

Yancey Ward June 17, 2014 at 9:11 am

You aren’t wrong. Any party that accepts funds from Argentina and is within reach of US law can and likely will be sued by the holdouts in US federal court.

prior_approval June 17, 2014 at 9:17 am

‘Any party that accepts funds from Argentina and is within reach of US law ‘

That is the fascinating part, isn’t it? As essentially, the U.S. now claims universal jurisdiction. Without actually being in a position to universally enforce its will.

Cliff June 17, 2014 at 9:32 am

I always wonder why non-lawyers decide they should have strong opinions on legal topics and then post vehemently about them. Don’t you think you probably have no clue what you are talking about? The court never claims to have “universal jurisdiction”

Andrew' June 17, 2014 at 10:17 am

I certainly think I can have strong opinions on certain legal matters. I have watched the “highest” lawyers and am not always impressed. For example, John Roberts thinks the government can tax anything. I’ve asked, well don’t you at least have to balance the power to tax against the power to destroy the other things protected by the constitution? If you can pick one guarantee in the constitution to selectively negate all the others, then it is a nothing but a sham and a mechanism of selective control. It’s not. Roberts just didn’t want to have to overturn ACA.

Just for example, I know zero about this case, but how often do you see a 7 to 1 ruling? Interesting isn’t it?

Andrew' June 17, 2014 at 10:20 am

Oh, and they were flat-out wrong about the EPA ruling (specifically about new cars) that Obama is erroneously stretching even their flawed logic beyond breaking to apply (to old coal plants) to regulate CO2.

So yeah. I think I’m plenty qualified to point out hacks. But I limit myself to obvious cases. This I wouldn’t dare comment on other than it is funny that when it comes to getting paid, it appears almost embarrassingly unanimous.

Andrew' June 17, 2014 at 10:34 am

And they neglected to hear the Bundy case. Poor choice. This is just in the last year or few off the top of my head. The corporations are people thing, which I’m not sure about. Heller, which I appreciate aesthetically but troubles me on 10th amendment grounds. Then there is the cell-phone searches and other search cases where they do their scope creep thing. Throw in various non-protections such as the NSA and plenty of creative legal theories and standing gimmickry to shirk their duties. I can’t think of a single one that I think was a home run. These are the best and brightest…so we are told.

The situation is downright dire. They are in certainly no position for rank-pulling.

It is certainly for god damn sure I wish I didn’t have to understand their jobs.

Urso June 18, 2014 at 10:49 am

You’re certainly entitled to have opinions (even strong ones!) but there’s no guarantee your opinions will be even slightly coherent. Most obviously, your idea that the decision being 7 to 1 is somehow meaningful or suspicious is, as they say, “not even wrong.”

Axa June 17, 2014 at 9:18 am

That’s right. An invasion is not needed. Argentina uses the US financial system to pay the creditors that accepted debt restructure between 2005-2010. The court ruling makes possible to intercept that money and pay “vulture” bondholders. So, without access to US financial system, the finance minister of Argentina must find a way to pay creditors. This afternoon he has announced a press conference and everybody expects and explanation. If they find a way to continue paying the restructured debt, the NY court ruling will be harmless for Argentina, will they?

mark June 17, 2014 at 5:37 pm

This is correct, although it requires finding an intermediary who is not doing business in New York, a difficult but theoretically possible task.

Z June 17, 2014 at 9:41 am

That’s fine in theory, but in practice it is never going to work that way. Unless the US government is prepared to freeze Argentine assets in the US, the holdouts will go broke chasing their money. We are already near a decade to reach this point. By the time any money changes hands the money is going to the estates of the bond holders.

The hard cold reality of life is sovereign states can and will default on their debts. Unless you are ready and able to break their stuff and kill their people, there is not much you can do about it, other than enrich some lawyers to chase your money through the courthouse.

While I sympathize with your position, I’m just being realistic.

Yancey Ward June 17, 2014 at 9:51 am

The holdouts are almost surely all vulture buyers of the old debt, and thus paid a fraction of the face value. They have some room for profit, still.

On the freezing of assets, I am not quite sure how that will work out. A court will likely order the freezing of assets of the non-holdouts and those of the Argentinian government. Whether or not the administration enforces either order is an open question, I think. I am of the opinion that Argentina will now stiff everyone.

Axa June 17, 2014 at 9:58 am

Chasing Argentine assets in the US is not that difficult. There’s only 1 door to knock.

“Argentina generally pays bondholders through their trustee, the Bank of New York. The judge said that the Bank of New York would be held in contempt of court if it made payments to those bondholders without Argentina paying back Elliott. Argentina might flout a federal ruling, but the Bank of New York would not.”

http://www.newyorker.com/online/blogs/currency/2014/04/argentinas-unending-debt.html

Anon. June 17, 2014 at 10:10 am

>Unless the US government is prepared to freeze Argentine assets in the US

They are.

Z June 17, 2014 at 12:10 pm

@Yancey: That’s a great point about the current holders. This is more of a collection agent story than a bond holder story.

@Axa: That just means Argentina stops paying everyone. In effect, the SCOTUS just the other bond holder a bill for Elliot’s legal fees.

@Anon: I’m skeptical. Our government is not very good at this whole law thing. But, it underscores my point. Unless the Feds are willing to go to war over it, this court case is meaningless. I suppose you can argue the court has now greased the rails for the government to go forward with tough measures, but they are not obligated to do so.

Going back and forth with you guys on this, I see the real issue at hand is what it means for restructuring going forward. Simply getting most bond holder to sign off on a restructuring will not be enough, making future workouts more difficult.

Vivian Darkbloom June 17, 2014 at 4:26 pm

“I apologize for being pedantic, but this post was mistitled”.

Surely no reason to apologize, but your sense of syntax is perhaps too finely tuned, at least for this forum.

Urso June 18, 2014 at 10:51 am

I had the same reaction for what it’s worth. The “Supreme Court Decision about Argentina” would’ve been clearer. Or you could try the excreble “SCOTUS,” which is apparently how the cool kids say it these days.

Nigel June 17, 2014 at 8:57 am

Just another manifestation of Exorbitant Privilege, I guess.

Andrew' June 17, 2014 at 10:23 am

To whom do we make out the privilege cheque?

Yancey Ward June 17, 2014 at 9:14 am

This was the right decision. The law is pretty damned clear on this matter. Nothing says Argentina has to abide by the ruling, but any third parties within the US jurisdiction who accepts funds from Argentina will have to abide by it. Argentina can continue to pay the non-holdouts or not, but the non-holdouts had better keep their funds out of the reach of US law.

prior_approval June 17, 2014 at 10:17 am

So, this will be more effective than American claims – on the behalf of often non-American (though often Cuban) previous foreign owners – concerning Cuban assets?

The world ignores, pretty much utterly, any American legal framework that claims Cuba is an economic pariah, or a state that is subject to American claims enforced through any third nation.

Widmerpool June 17, 2014 at 10:42 am

BNP begs to differ.

Axa June 17, 2014 at 10:50 am

A little bit of history, Peru: Elliot case, Appendix IV page 48 from this interesting IMF report:

https://www.imf.org/external/pubs/ft/scr/2001/cr0148.pdf

So, it’s not the first time. Elliot Associates cornered Peru on Sept. 29 2000 into payment by:

a) Getting a restraining order in New York that prevented Chase (in this case NYB) from making any payments to bondholders in behalf of Peru. Check.
b) They also got a restraining order in New York to prevent Peru from using their properties in the US for any payment.
c) Elliot got the support of UK, Netherlands, Belgium, Germany, Switzerland, Canada and Luxembourg to seize any Peru property in their respective jurisdictions.

Any comment on American claims enforced through any third nation?

prior_approval June 17, 2014 at 11:49 am

Well, is Peru more like Cuba, or Cuba more like Peru?

After all, Peru hasn’t had anywhere near Cuba’s experience at being an affront to America’s pride. And all courts in the EU (not to mention Canada or Mexico) would laugh at any American claims to any Cuban aset which is found to be in violation of American law (that is, essentially all Cugan assets).

Ignacio June 17, 2014 at 9:28 am

This will not necessarily affect future issuances of debt by sovereigns. It will simply mean that lawyers need to be more careful when they draft documents; the pari passu clause will be elminated from future versions.

Frankly, I do not understand what people expected; if you include a provision, such as pari passu, why is everyone surprised when it is enforced? or am I too naive to think that courts generally enforce provisions against sovereigns?

Andrew' June 17, 2014 at 12:38 pm

But which way is pari passu?

Imagine you are an individual whose hedge fund manager is one of the holdouts. He is risking outright default hoping to obtain full-value.

The non-holdouts helped the country by accepting a mark-down.

Are the holdouts being treated evenhandedly? Or are they bond mercenaries holding others hostage keeping people from fairest outcome?

Andrew' June 17, 2014 at 12:40 pm

““Singer’s NML Capital is among the investors that refused the exchange. Argentina calls those investors ‘vultures’ because they bought many of the bonds post-default at a discount, angling to eventually collect a windfall.”

After a total of 30 seconds of background I have found we have yet another unequivocal home run for our illustrious Supreme Court. Great job guys!!!!

Andrew' June 17, 2014 at 12:42 pm

The funny thing is that I assumed in the first comment hedge funds were involved.

Please please please don’t get me wrong. I would LOOOOOOOOOOOOOOOOOVE it if we had a judiciary where it took a nobody like me at least 45 seconds to show they are hacks.

Rahul June 17, 2014 at 1:45 pm

Was the pari passu clause unique to Argentinian debt or is it fairly typical?

Andrew' June 17, 2014 at 2:25 pm

It is a perfectly reasonable band-aid probably resulting from the last wound.

You don’t want some bond holders to cut a deal cutting out other bond holders. However, you also don’t want holdouts, especially hedge fund managers (don’t get it twisted that there is something wrong with hedge funds, just their tactics in this case) forcing a general default due to the free-rider problem.

I can’t figure out if there was a collective action clause (http://www.creditslips.org/creditslips/2012/05/sovereign-restructuring-after-nml-v-argentina-cacs-dont-make-pari-passu-go-away.html) but as I say with pre-nups, it is not that you don’t have one, it is that you have a super slow, super expensive, horrible one. And then if you don’t like that one the courts, apparently as with CACs they can just ignore them anyway.

mark June 17, 2014 at 5:39 pm

It’s extremely typical in all kinds of debt. It is one of the most basic covenants in debt instruments.

Rahul June 18, 2014 at 1:35 am

One thing I didn’t understand is even with the pari passu clause, shouldn’t it just mean that the holdout creditors have to be treated at par with the ones who agreed to restructuring?

If so, why is it such a big problem? In the first place when restructuring was offered the hold outs could have gotten it anyways.

So it isn’t as if the hold outs are getting a deal any better than the others?

What am I missing?

mulp June 17, 2014 at 10:18 am

So, if a default on US Treasuries occurred, T-bill holders could attach the funds for direct deposit for paying for weapons for the US military or for Social Security benefits?

JWatts June 17, 2014 at 10:32 am

I think the equivalent would be if the US defaults that it couldn’t privilege some of the bond holders at the expense of the others. The US, assuming pari passu, would have to mistreat all debt holders equally.

Anthony June 17, 2014 at 2:55 pm

If the U.S. is facing default on bonds issued under U.S. law, then Congress can change the law to arrange the default any way it likes. Or it can let the courts sort it out. If the U.S., or any state, or subdivision thereof, issued bonds in a non-U.S. jurisdiction, and defaulted, it would be subject to the law of that jurisdiction and the terms of the bonds it issued.

In the 1820s, several U.S. states defaulted, and the U.S. courts weren’t very nice to foreign bondholders. As a result, state and local debt could only be issued in the U.S. for over 150 years.

JWatts June 17, 2014 at 3:28 pm

Well yes, but your comment doesn’t read like you actually read mine. At the vey least you seemed to have missed the phrase assuming pari passu.

Andrew' June 17, 2014 at 1:02 pm

HFS. Now I wish I hadn’t started reading. The vultures stole a naval boat! This issue, no pun intended, lies at the heart of sovereign debt, trade, the world and everything!

I guess the SupCo has really important things going on that they can’t carve out time to decide how the world will end. It’s not like the US would ever need guidance from the high court on how disorderly bankrputcies happen. As if that could ever happen here!

Maybe there is a contentious, fundamental, armed land dispute they are busy not hearing…

Andrew' June 17, 2014 at 2:22 pm

Theoretically, a hedge fund can buy a single bond and a boat load of shorts. This may not be a new situation, but the Supreme Court can’t be troubled to delve into a fundamental issue of global capitalism? They aren’t as ambitious as your intrepid MR commenter.

Andrew' June 17, 2014 at 2:31 pm

You know what, not to ANY individual, but to the notion, fuck that shit. What gives lawyers any reason to think they can deal with finance?

EB June 17, 2014 at 8:34 pm

Surprisingly some lawyers have been following the story for a long time. I recommend to read Professor Anna Galpern’s posts and papers at http://www.creditslips.org/creditslips/GelpernAuthor.html (the one posted yesterday is about the SC’s decision) and http://www.law.georgetown.edu/faculty/gelpern-anna.cfm

You may also benefit from other authors’ Credit Slips posts on sovereign debt at http://www.creditslips.org/creditslips/sovereign-debt/

And if anyone is interested in the origins of the pari passu clause, read http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2397929

TallDave June 17, 2014 at 11:37 pm

I have to disagree, Tyler. Incentives matter.

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