Don’t worry about an Elliott vs Argentina precedent

January 11, 2013

If you want to stay on top of what’s going on in the case of Elliott vs Argentina, here’s your one-stop shop: Shearman & Sterling’s invaluable page on the subject, with links to all the briefs and filings you could possibly ever want to read on the subject, plus Shearman’s own detailed and useful summaries of what they say and mean.

The latest news in the case is quite important. A group of Argentine bondholders — real bondholders, not the vultures holding defaulted debt — were understandably unhappy at the Second Circuit’s interpretation of the pari passu clause in New York law bond documentation. That interpretation is, for the time being, the last word on what the pari passu clause means — but the problem is that a majority of observers, including myself, don’t actually believe that the pari passu clause means what the Second Circuit says it means.

So Argentina’s creditors had a bright idea. New York courts are the ones in charge of determining what contracts mean when they’re written under New York state law. So they asked the appeals court to send the case over to the New York Court of Appeals, for a new ruling on the meaning of the pari passu clause.

They lost: the appeals court just said no to that idea. As a result, the world has already changed dramatically: from here on in, settled law is going to say that pari passu boilerplate can and should be read to mean that debtors should make a “ratable payment” to all equally-ranking creditors, and that they can’t pay Peter without paying Paul. This is an important precedent in the world of sovereign debt, and is almost certain to make debt restructurings that much more difficult, at the margin. Indeed, the FT ran an article last week saying that the ruling is so important we should maybe try to resuscitate the IMF’s doomed Sovereign Debt Restructuring Mechanism proposal from 2002. Please, anything but that.

The Second Circuit’s ruling is almost certainly here to stay; there are a couple of appeals going on, one to the whole circuit sitting en banc, and the other to the Supreme Court. But the chances of either appeal succeeding are vanishingly slim. But let’s not overemphasize the importance of the precedent here. There is a very real chance that Argentina could wind up in technical default as a result of this ruling, but it’s far from clear that the ruling is going to prove particularly important to any country that’s not called Argentina.

The reason is that the Second Circuit’s interpretation of the pari passu clause ultimately boils down to “hey Argentina, if you’re paying these guys, then you have to pay those guys too”. But there was never any doubt that Argentina had a legal obligation to pay those guys. Even Argentina itself doesn’t dispute that. Anybody holding defaulted Argentine bonds can very easily go to just about any court they like, and get a judgment saying that they have to be paid, whether or not anybody else is being paid at the same time.

So really, the interpretation of the pari passu clause is neither here nor there. What’s important — what’s absolutely crucial, in this case — is the remedy that Judge Griesa has come up with in retaliation against Argentina for not paying NML Capital (a/k/a Elliott). I explained that remedy using Lego last month; the important thing is that Griesa isn’t just delivering judgments against Argentina, but that he’s also binding intermediaries like Bank of New York Mellon and generally the entire financial clearing system.

That’s what all the briefs in front of the Second Circuit are now litigating: not the meaning of the pari passu clause, but rather what courts can and can’t do if they determine that the clause has been breached.

There’s a huge spectrum of possible rulings from the Second Circuit on that front, ranging from a full affirmation of everything that Griesa has done, all the way to a declaration that while Argentina has indeed violated the law, innocent third parties can’t be enjoined or punished for its actions. But whatever the Second Circuit rules, the ruling will only affect Argentina, and won’t be a particularly useful or important precedent for anybody else: remedies aren’t precedents in the same way that rulings are. In future, any judge finding a debtor guilty of violating a pari passu clause will still have full discretion in terms of the remedies she can impose, and will never be impelled to follow in Griesa’s footsteps. And even Griesa only started getting this harsh on Argentina after a full decade of Argentina cocking its sovereign nose at his court.

So while a lot of sovereign-restructuring geeks will breathe easier if the Second Circuit strikes down the most extreme part of Griesa’s ruling, nothing the court can do would be enough to justify broad-based panic about sovereign restructurings more generally, and very few investors would consider an Elliott victory here to be a green light encouraging them to try the same tactics in future restructurings. The Argentina case is unique on many levels, and is likely to stay that way — no matter how the Second Circuit rules.


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