So after a lull, the arguments kick off again on Friday in Argentina’s legal fight not to pay so-called “holdout” creditors, and their fight to force the country, finally, to cough up.
Argentina has until midnight New York time on Friday to file its brief to the New York Second Circuit Court of Appeals – and it will be hoping that the interested parties and “friends of the court” who have emerged in recent weeks – including holders of restructured bonds issued under non-New York jurisdictions, the US government, which could file an amicus brief on Friday too, and a local brokerage, Puente – will convince the judges that Judge Griesa’s order has got to go.
Recapping the case quickly: Defaulted creditors (aka “holdouts” led by Elliott Associates, who spurned the country’s restructuring exchange after its 2001 default and “held out” for payment), won a legal victory in October when the Second Circuit appeals court ruled that Argentina cannot discriminate between the holders of defaulted and performing debt. The court upheld much of an earlier ruling by New York Judge Thomas Griesa but sought clarification from the judge on two key points – how the payment mechanism would work and the impact on third parties.
Judge Griesa had ordered the government to pay holdouts when it made payments to holders of its restructured bondholders and in November said Argentina needed to pay $1.33bn into escrow for the holdouts.
But with markets in a lather over the prospect of Argentina defaulting rather than paying the holdouts, the Second Circuit court put that order on ice pending its review of the ruling. That has granted Argentina a breather at least until a hearing scheduled for February 27.
Why is this important? Well Argentina, the exchange bondholders and others make three main arguments:
1) the judge’s ruling is unfair because the holdouts bought bonds cheap after the default and want to collect in full;
2) the order would prevent the restructured bondholders’ trustee (the Bank of New York Mellon) from doing its fiduciary duty and delivering money which, once it is deposited in the BNY Mellon account in Buenos Aires, belongs to the bondholders; and
3) this is a bad precedent for future sovereign restructurings and New York’s important status in the financial and bond world.
Federico Tomasevich, president of Puente, says “there’s no room for a negative ruling against Argentina”.
Indeed Argentina seems to be hoping that the Second Circuit court will be scrutinising the judge’s definition of pari passu, or equal footing (ie the status of the defaulted debt vis-à-vis the restructured debt) – the nub of the issue in this case. The Second Circuit, however, did not object to Judge Griesa’s interpretation in October.
So is it wishful thinking for Argentina to hope that it may do so now? Time will tell. Firmly in the other camp, meanwhile, is Professor John Baker, a visiting fellow at Oriel College, Oxford. He told a teleconference organised by holdout lobby group the American Task Force Argentina:
The Second Circuit should be applauded for determining that Argentina must be bound by its contractual commitment to treat creditors equally, and Argentina’s claims that holdouts do not deserve to be paid are a clear strategy meant to continue avoiding the payment of billions of dollars it owes bondholders. Under Argentina’s logic, debt contracts would be irrelevant.
The latest wrinkle in all this is that the exchange bondholders, who say they are being held hostage in all this, now want to involve a third court – the New York Court of Appeals (CoA). Without a definition from that court on what pari passu really means in this context, how can the Second Circuit hope to rule, is the gist of the argument. It is not yet clear when the Second Circuit will rule on whether it grants the request to involve the CoA.
There are plenty of questions still outstanding: Could Argentina offer to pay in full but up to 2038, when the restructured bonds are due? Not likely, Gabriel Rubenstein (@GabyRubenstein) said in a Twitter forum on the issue on Thursday. Can Argentina wheel out a new killer argument on Friday? Probably not, according to Eugenio Bruno, (@eugeniobrunolaw) a former holdouts lawyer – the arguments will be similar but there is still doubt about whether Argentina will offer to reopen the debt restructuring swap.
Emboldened by the release of its flagship navy training ship, the Libertad, which was impounded for more than two months in Ghana at the behest of Elliott, Argentina may think it is on a roll and there is certainly the feeling in Argentina that the heat is off.
But it would be premature to hazard a guess yet as to how this one will go.