Quelle blague with the pari passu saga, sometimes.
You go to all this effort to scare off the IMF from so much as bleating some tame reservations to the Supreme Court about how a ratable payment of holdouts by Argentina might hurt global ‘policy’ on sovereign debt restructuring. Despite ‘policy’ being something many expected the fund to look at.
Then you watch the French swoop in anyway. And they’re much fiercer than the IMF was going to be.
As Isabelle Couet reported for Les Echos on Friday, France did indeed go where the US feared the IMF to tread last week, filing an amicus curiae brief in favour of taking the pari passu case onto the Supreme Court’s docket.
Now, as Anna Gelpern points out, it’s hardly going to discourage the court from asking for the views of the US in a few months’ time. That means the IMF could have another go at filing as an amicus, and last week’s unpleasantness would be forgotten. Whether any of it will convince the court — Argentina’s legal position tends to be seen as pretty hopeless at this point anyway, though it clearly wouldn’t mind buying yet more time — is another question, especially when it comes to policy versus issues of conflicts in federal law.
But there’s also that ferocity.
France chairs the Paris Club, where rich governments meet to arrange “treatment” of their loans to another government in distress and, critically, expect private creditors to swallow similar treatment. (“Although it does not speak here on behalf of the Paris Club…” says the French brief.)
The Paris Club are not namby-pambies when it comes to Argentina. Much like the way it’s treated the holdouts, the country owes Club lenders billions of dollars in past due debt, locking it out of bilateral borrowing (financing for, say, infrastructure projects) until it plays ball.
(A fun sovereign finance fact: the first country to strike a deal in Paris to restructure debts to other governments — creating the Club — was Argentina, in 1956.)
We wonder if the holdouts could accuse France of “signaling support for Argentina’s attempts to repudiate debts that it has ample resources to pay” (as they did to the IMF), assuming letters of complaint wouldn’t go straight into the déchiqueteur. The French brief is deeply sniffy about the holdouts — a certain bird is mentioned, they’re basically implied to smell of elderberries, etc — but it’s here to get its money back too, and to control its credit risk on future loans to governments. And while the French make a lot here of governments lending to vulnerable debtors from Afghanistan to Zambia… they are also sitting on a great deal of eurozone sovereign exposure.
Interesting, then, that ‘policy’ for France goes much further than the IMF, in particular warning that ratable payment to private holdouts may leave less to go round for paying back bilateral lenders. By contrast, the IMF (going by this May report) sounded as if it was going to issue a very general caution about “collective action problems” and about the pari passu case giving holdouts greater ‘leverage’ to demand more of the pie.
The French brief even has warnings on a standoff between the governing laws of bonds and loans:
In fact, the reach of the Court of Appeals’ decision is so wide that it may also impact creditors whose bonds are not governed by New York law. If, for example, a sovereign borrower has bonds governed by New York law and also has bonds governed by another foreign law, then, following the Court of Appeals’ decision, a court could condition payments of bonds governed by the foreign law upon the making of ratable payments on the New York law governed bonds.
On risks of spillovers to bilateral lending:
This decision may also impact official bilateral loans contracted by a sovereign if it has a mix of bond, bank and official bilateral borrowing—as do many sovereigns… The mere existence of a New York law-governed bond among a sovereign’s borrowing structure may expose payments under its loans to the Court of Appeals’ injunctive remedy if the bonds include a common pari passu clause that links the ranking of payments on loans and bonds within the scope of the sovereign’s external indebtedness.
On threats to inter-creditor equity:
Notably, Paris Club agreements include a “comparability of treatment” clause, which aims specifically to ensure balanced treatment of the sovereign’s debt and fair burden-sharing among all external creditors—sovereign lenders, bank lenders and bondholders… Furthermore, as a matter of equality of treatment, this clause is designed to ensure that claims of taxpayers in the lender countries—for example, U.S. or French taxpayers—are not subordinated to those of other, private-sector creditors. Crucially, it facilitates fair burden-sharing among sovereign creditors.
And on why it’ll be the poor what pays:
While private funding for the most vulnerable countries amounted to less than 10% of the total external public and publicly-guaranteed debt stock of these countries as of 2011, bilateral sovereign loans accounted for close to 40%. In addition, sovereign bilateral disbursements represent a steady share of new external financing for these countries, at more than 35% of total disbursements in 2011…
The idea of sovereign lenders fighting each other over pari passu doesn’t sound outlandish. France cites Grenada’s current battle with a holdout official lender whichwants to enjoin “payments to sovereign or official creditors on Grenada’s external debt”. The IMF wasn’t planning to.
Other parts of the French brief are very similar to what the IMF would have come out with: there’s a section taking the Second Circuit to task for its optimism that collective action clauses make it “highly unlikely” a future sovereign default will produce as many holdouts as Argentina’s did.
Only 17 of the 36 foreign-law bonds saw CAC activation in Greece’s restructuring, says France, which left almost 30 per cent of foreign-law debt by value to be paid in full under the ultimate backstop of eurozone taxpayers… including French taxpayers.
Other parts still venture straight where the IMF would never have gone, into law, not policy: France is annoyed that the Second Circuit “erred” by using its powers of equity to “compel payment of a debt” by approving this injunction. Argentina’s own cert petition argues similarly. The French brief doesn’t say anything about actual sovereign immunity from enforcement, the grounds for Argentina’s other big complaint to the Supreme Court. Argentina recently won a big victory over immunity in the French courts.
But still — much further than the IMF would probably have gone.
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