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from Alison Frankel:

The other loser in Argentina debt saga: U.S. courts

There's been a lot of talk in the Argentine debt crisis about whether U.S. courts have overstepped their bounds. At the end of 2011, you'll recall, U.S. District Judge Thomas Griesa of Manhattan ruled that the pari passu, or equal treatment, clause of Argentina's bond contracts entitles hedge fund holdouts that refused to participate in debt restructurings to payments alongside the more obliging exchange debtholders. Since then, Argentina and its allies, including the U.S. Justice Department, have argued that Griesa's interpretation of the pari passu clause -- which was subsequently affirmed by the 2nd U.S. Court of Appeals and left intact by the U.S. Supreme Court last month -- gives too much power to creditors and undermines sovereigns.

On Wednesday, Argentine officials chose to default on exchange bonds rather than pay about $1.6 billion to, or otherwise reach a settlement with, the hedge fund holdouts. That decision exposed a stark truth: All the might of the U.S. judicial system cannot force a foreign nation to pay its debtors. U.S. judges can't order the seizure of a foreign sovereign's assets and they can't throw foreign officials in jail for contempt. As Georgetown law professor Adam Levitin wrote in a very smart column in the Wall Street Journal, "There's no way to bind a sovereign to its promise of complying with court orders any more than there is to its promise of payment."

Griesa and the 2nd Circuit thought the pari passu injunctions were the club that would finally bludgeon Argentina into submission, after years of Argentine defiance of court-ordered judgments for NML Capital, Aurelius Capital and other holdout debt investors. The holdouts -- many of which acquired defaulted Argentine debt on the cheap, gambling that they'd be able to recover from Argentina via litigation -- tried all kinds of maneuvers to attach Argentine assets, only to run time and again into the country's immunity as a foreign sovereign.

The pari passu injunctions, though, implicated not just Argentina but also the global banks that transfer money from Argentina to its exchange bondholders. Technically, the injunctions barred Argentina from making interest payments on its restructured debt without also paying the holdouts. Practically, the injunctions meant that financial institutions such as the bond trustee Bank of New York Mellon could not transfer interest payments from Argentina to exchange bondholders without violating U.S. court orders. Unlike Argentina, global banks that do business in the United States can't simply ignore U.S. rulings they don't like.

from MacroScope:

Euro zone inflation to fall further?

draghi.jpg

Euro zone inflation is the big figure of the day. The consensus forecast is it for hold at a paltry 0.5 percent. Germany’s rate came in as predicted at 0.8 percent on Wednesday but Spain’s was well short at -0.3 percent. So there is clearly a risk that inflation for the currency bloc as a whole falls even further.

The Bundesbank has taken the unusual step of saying wage deals in Germany are too low and more hefty rises should be forthcoming, a sign of its concern about deflation. But the bar to printing money remains high and the European Central Bank certainly won’t act when it meets next week. It is still waiting to see what impact its June interest rate cuts and offer of more long-term cheap money to banks might have.

from Counterparties:

MORNING BID – On GDP, the Fed, Argentina, and lots of other things

To paraphrase Kevin Costner in Bull Durham, we’re dealing with a lot of stuff here. The U.S. economy did end up rebounding in the second quarter, with a 4 percent rate of growth that’s much better than anyone anticipated – and the first-quarter decline was revised to something less horrible, so investors worried about the economy are a bit less freaked out at this particular moment.

Of course, that still means that the economy only grew 0.9 percent in the first half of the year, and that’s not all that amazing, but the economy in the second quarter grew in areas that matter the most – business spending, consumer spending and to a lesser extent government, which was such a drag on GDP for a good long time that can’t be just ignored. In tandem with the GDP figure, the ADP report said 218,000 jobs were added for private payrolls for July, another strong month that portends a good showing out of the Labor Department figures on Friday. That’s all at a time when the housing indicators continue to weaken, which is still a concern, and some even believe that auto sales have probably hit their apex as well for this cycle, given so much of the buying was based on incentives, but we’ll get better clarity on that on Friday.

from Breakingviews:

Argentine opportunity cost is reason to cut deal

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Argentina’s debt negotiators need to think about opportunity cost. A failure to reach agreement with holdout creditors by Wednesday might not make things immediately worse. But it would set back recent efforts to curry favor with international financiers – efforts that could pay off richly for the Argentine economy.

from Counterparties:

MORNING BID – Tango de la default

Red letter day for Argentina comes tomorrow, with the holdout investors and the South American nation coming down to the wire on a potential deal that would offer the holdouts something better than what everyone else agreed to in 2005 and 2010. Without getting into issues of vultures vs. violating debt agreements, the situation probably comes down to three scenarios.

First, Argentina defaults. One cannot underestimate this too much – Argentina has already defaulted before, and the stakes are nowhere near as high for the country as they were the first time. But it is still pretty darned damaging – it puts the country into another level of pariah with international capital markets (double secret probation, and here’s where we once again note that had John Vernon lived, he would have solved this whole mess), it causes even more capital flight from the country and worsens the outlook for the currency, which is already trading at a level much lousier than the going real rate.

from Breakingviews:

If only Argentine economy matched soccer success

By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

If only the Argentine economy’s success matched that of its soccer team. The nation’s strong World Cup showing, making it into the final against Germany, reflects astute management of its big fan base and valuable on-field talent. That contrasts with a 100-year record of wasting its human and natural resources. It’s not too late: Avoiding policy own-goals could one day make Argentina an economic champion.

from Counterparties:

MORNING BID – Next for Puerto Rico, Argentina and the Fed

The market's recent chatter has revolved specifically around whether the strength in the jobs figure from last week moves forward the expected timing of the first interest-rate hike from the Federal Reserve.

The answer: yes, but probably by not that much. Jobs growth of 288,000 for June was better than expected, and that 6.1 percent unemployment rate looms large for those who figured the Fed would be ready to start raising rates after at least 6.5 percent was surpassed. So we're there on that, but as Kristina Hooper of Allianz points out, the wage growth seen hasn't been terribly strong, and the types of jobs being created – a lot of which are in lower-paying industries like retail – don't portend the same kind of economic strength that might have been manifest by now in other iterations of U.S. recoveries.

from Counterparties:

MORNING BID – Two to Tango

Wednesday's version of reading tea leaves involves Argentina's economy minister Axel Kicillof, who will be in New York to speak to the United Nations about Argentina's debt situation. In case the U.N. missed it, Argentina defaulted a while back - 12 years ago - and they've been fighting with a group of investors on paying some of their debt since. Which is a roundabout way of saying Kicillof may not just be in New York to talk to the U.N., not when NML, Aurelius and the other holders are all also in New York too, and the judge in question, and any special envoy he introduces to try to wring some kind of compromise out of this situation. There's a big coupon payment due June 30, and the country has been prohibited from doing so unless it pays the holdouts, which it has pledged not to do, giving it a 30-day grace period before being declared in default.

So the thing to watch for is something like a clandestine meeting between all parties to find a way to reach an accord, even if it's the kind of thing that comes down to the July 30 wire - when Argentina would be considered in default again (double-secret default, as Dean Wormer would have it, and really, if John Vernon were alive, he'd have solved this mess a long time ago).

from Alison Frankel:

Judge says Cleary Argentina memo is privileged, he won’t ‘make use of it’

The hedge fund NML Capital is going to have to execute some fancy footwork to maintain its argument that Argentina is plotting to evade a ruling by the 2nd U.S. Circuit Court of Appeals that prohibits the foreign sovereign from making payments to holders of its restructured debt before paying off hedge funds that refused to exchange defaulted bonds.

As I told you last week, NML presented U.S. District Judge Thomas Griesa with what it considered smoking-gun evidence: published accounts of a May 2 memo from Argentina's lawyers recommending that the country's "best option" if the U.S. Supreme Court refuses to hear Argentina's appeal of the 2nd Circuit decision 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."

from Alison Frankel:

In new SCOTUS brief, Argentina pledges to comply with U.S. courts

The most notorious deadbeat in the U.S. courts made an historic concession this week.

In a May 27 response brief at the U.S. Supreme Court, Argentina said that, contrary to the accusations of its hedge fund foes, it will comply with directives from the 2nd U.S. Circuit Court of Appeals to pay renegade sovereign debtholders if the Supreme Court refuses to hear its appeal. That pledge marks a big departure from the outright defiance Argentina showed last year at the 2nd Circuit, when its lawyers informed the court that the government "would not voluntarily obey" a U.S. court order it disagreed with. Even after the appeals court ruling -- which upheld an injunction that bars Argentina from making payments to holders of its restructured debt before it pays more than $1 billion it owes to the hedge fund holdouts -- the Argentine government vowed that it would never negotiate with the rapacious hedge funds. Argentina now seems to be reconsidering that vow, both outside of the courts, as Reuters reported Thursday, and within the U.S. litigation, as the May 27 filing indicates.

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