I may have been too quick to believe that Argentina actually intended to follow through on a pledge to the U.S. Supreme Court.
Last Friday, I credited the Argentine government with an historic concession in its May 27 brief to the court, in which Argentina pledged to comply with an injunction from the 2nd U.S. Circuit Court of Appeals prohibiting it from making payments to holders of its restructured debt before paying off hedge funds that refused to exchange defaulted bonds. Argentina is trying to persuade the Supreme Court to grant review of the 2nd Circuit’s so-called pari passu (or equal footing) injunction, and I believed that the promise of compliance from a country notorious for defying bondholder judgments against it was a show of good faith.
But NML Capital, one of the hedge funds opposing Argentina at the Supreme Court, presented evidence Friday afternoon to a Manhattan federal judge suggesting that the country is secretly planning to evade U.S. court orders in the event that the justices refuse to hear its case. NML told U.S. District Judge Thomas Griesa, who has been presiding over the Argentine bond litigation for more than a decade, about a newly surfaced May 2 memo from Argentina’s lawyers at Cleary Gottlieb Steen & Hamilton to the country’s Minister of Economy and Public Finance. The five-page memo lays out various scenarios for resolving Argentina’s dispute with the hedge fund holdouts and concludes that if the Supreme Court denies cert, the government’s “best option” would be to default “and then immediately restructure all of the external bonds so that the payment mechanism and the other related elements are outside of the reach of American courts.” (NML didn’t file the confidential memo because of privilege concerns, but The Financial Times’s FTAlphaville blog has an English translation of the entire document, which has also been reported in the Argentine press.)
NML contends that a restructuring designed to put Argentine debt beyond the reach of the U.S. courts would violate anti-evasion provisions in trial court orders that have already been affirmed by the 2nd Circuit. The hedge fund, which is represented by Dechert and Gibson, Dunn & Crutcher, went so far as to suggest to Judge Griesa that Argentina may have committed a fraud on the court. According to NML, Cleary’s May 2 memo to the Argentine minister indicates that the law firm and its client are, in fact, contemplating how to avert compliance with the directive that they must pay holders of defaulted bonds — even though lawyers at Cleary assured the judge at a hearing last November that there were “no steps being taken to evade the plan or to evade the injunction.”
So did Argentina mislead the Supreme Court when it said on May 27 that it intended to comply with the 2nd Circuit injunction if the justices denied cert? Here is exactly what the brief by counsel of record Paul Clement of Bancroft said: “Argentina’s recourse to judicial review does not represent unwillingness to comply with its legal obligations, but it shows Argentina’s struggle to continue honoring its debts to the exchange bondholders. Contrary to respondents’ assertions, absent relief Argentina will comply with the injunctions; though, since Argentina lacks the financial resources to pay the holdouts in full (what would amount to $15 billion) while also servicing its restructured debt to 92 percent of bondholders, Argentina will have to face, objectively, a serious and imminent risk of default.”