Why Argentina’s likely to beat Elliott Associates
There were lines out the door of 500 Pearl Street on Monday afternoon, as a surprisingly large crowd of jurists and hedgies and bankers and wonks — and even a few journalists — filed into the Ceremonial Coutroom of the Second Circuit Court of Appeals for an hour-long hearing about two sentences in old Argentine bond documentation. The case is huge in the world of sovereign debt, arguably the biggest that world has ever seen. And it was no surprise to see Treasury’s lawyer get up in front of the judges to make his case that they should overturn Thomas Griesa’s lower-court decision, which seeks to force Argentina to pay off its holdout bond creditors.
If you want some extremely smart analysis of what happened at the hearing, I’d point you to two pieces: Anna Gelpern’s, at Credit Slips, and Vladimir Werning’s, for JP Morgan. The two of them take different routes to arrive at much the same conclusion: although Argentina’s lawyer, Jonathan Blackman, got beaten up much more than Ted Olson, who was representing Elliott Associates, ultimately the chances are that Argentina will prevail.
If nothing else, the hearings made it clear that a decision to uphold Griesa, and to find in favor of Elliott, would have such enormous consequences, not only for Argentina but for the entire world of sovereign debt, that I can’t imagine it wouldn’t be appealed all the way to the Supreme Court. (Where, interestingly, Antonin Scalia wrote one of the more important precedents for this case, in Argentine litigation dating back to 1992.)
One key precedent that the Second Circuit would set, were it to find in favor of Elliott, would be a significant weakening of the Foreign Sovereign Immunities Act (FSIA). Sovereigns have sovereign immunity, and can basically do what they like, and all sovereign bondholders know this — but in order to uphold Griesa’s order, the New York court would essentially be constraining what Argentina can do with its own foreign exchange. Everybody in the court agreed that Argentina’s foreign reserves are immune from attachment, but if the order were upheld, then Argentina would find itself in one of two states. If it continued to pay existing bondholders who tendered into its bond exchange, it would have to pay holdout bondholders as well. Alternatively, if it continued to refuse to pay holdout bondholders, it would be barred from paying holders of the new bonds at the same time.
Under the FSIA — and the US government made this argument reasonably forcefully on Monday — it’s really hard to make the case that the US can or should force Argentina’s hand in either case: it can’t compel Argentina to pay holdout bondholders, and it can’t restrain Argentina from paying other bondholders. Which means that no matter what the pari passu clause means, the FSIA presents a formidable roadblock to Elliott Associates, and one which the Second Circuit is likely to be reluctant to dismantle. The way that one judge, Reena Raggi, put it, if Argentina was determined not to pay its holdouts, it could do anything it wanted with its money — even spend it on hookers and blow, if it wanted — except pay its other bondholders. And as Gelpern notes, the FSIA “does not provide for sliding scale immunities”.
What’s more, upholding Griesa’s decision would have significant waterfall effects: it would hit not only Argentina, but a lot of private-sector institutions in New York as well, not least Bank of New York, which is the trustee for Argentina’s new bondholders. Olson made it very clear that if the order was upheld, and Argentina kept on trying to pay its new bondholders while stiff-arming its holdouts, then Elliott would go after Bank of New York for “aiding and abetting” Argentina in flouting the order.
That would put Bank of New York in a very invidious position. On the one hand, it acts as a trustee for the new bondholders, and if it is given a coupon payment by Argentina, then that coupon payment belongs to the bondholders. BoNY has to pass the coupon payment on to them. On the other hand, if it does so, it might well be found in contempt of court. The Second Circuit is going to have to think long and hard about what exactly it would expect BoNY to do in such a situation — not least because that subsidiary case is very likely to come up in front of them if they find in favor of Elliott here.
Finding in favor of Argentina, then, is the easy way out, and as a result the appeals court is likely to hold its nose and find in favor of a defendant whom they really don’t like. That might explain why the justices were so hard on Argentina during oral argument: if they’re going to find in the country’s favor in their decision, they really ought to at least make the country’s lawyer squirm a bit in person. It’s — almost literally — the least they can do.