Extra! Extra! Today is just another day in Argentina's bond saga. It may well come and go with no payments either to the NML plaintiffs or to the restructured bondholders. However, a Sunday
filing by Argentina's Euro-denominated exchange bond holders might lead to substantive developments eclipsing the purely symbolic significance of a missed payment date and the start of a 30-day contractual grace period. The Euro bond holders' move is a good place to start thinking about the next steps and beyond.
Fighting the Global Injunction. As many have observed, Judge Griesa's injunction is breathtakingly extraterritorial on its face. The November 2012 order names a slew of foreign entities, including "the clearing corporations and systems, depositaries, operators of clearing systems, and settlement agents for the Exchange Bonds (including but not limited to ... Clearstream Banking S.A., Euroclear Bank S.A./N.V. and the Euroclear System), ... trustee paying agents and transfer agents for the Exchange Bonds (including but not limited to The Bank of New York (Luxembourg) S.A. and The Bank of New York Mellon (including but not limited to the Bank of New York Mellon (London))." The sweeping language reflects the NML plaintiffs' contention that all payments on Argentina's bonds somehow implicate the United States. As far as the English-law Euro-denominated bonds are concerned, this is a pretty strained reading, since their only connection to the United States appears to be the intermediaries' affiliates and representative outposts in New York, uninvolved in the Euro bond payment stream. Worse, using payment and clearing systems in Belgium and Luxembourg to pressure Argentina would violate national laws in those jurisdictions, enacted in response to earlier enforcement capers by NML's affiliate, Elliott Associates. The Second Circuit never bothered to address the Euro bond problem, promising instead that the District Court would clarify the reach of the injunction if and when Argentina decides to pay anyone without paying NML. The bond holders now ask for an emergency clarification.
I suspect Judge Griesa, who is on vacation, would not be inclined to spare a subset of the restructured bondholders while slamming the rest. A ruling in favor of the Euro bond holders would weaken the force of his injunction, though it would still be plenty potent. The bigger problem is precedent: exempting the Euro bond holders would create a sharp distinction between onshore and offshore payment flows, boosting the argument that creditors and service providers who do not want to get caught up in third-party spats should steer clear of New York. Seeing as there is no chance of Belgian-style legislation shielding payment and clearing systems in New York, this could be a big deal. Even so, I continue to believe that debtors and creditors discount the possibility of a messy default when bringing new issues to market, so that I do not expect a mass shift of new issues to London, even if the Euro bond holders win. Contract terms facilitating a shift in payment mechanics are more likely.
Free-Rider Frenzy. Regardless of how the court rules on the Euro bond holders' request, Argentina now has a 30-day grace period to solve the mother of all collective action problems: getting each and every one of its holdout creditors into a settlement. At least in theory, each of the remaining creditors has the same rights under the pari passu clause as the NML plaintiffs. They would need the court to say so, but it is hard to see why it would not, seeing as everyone has the same contracts. As a result, each of the remaining creditors has effective veto power over the potential settlement, and every incentive to hold out for 100 cents on the dollar. In fact, if Argentina settles with some creditors for less than 100 cents, the remaining holdouts could simply replicate the NML lawsuit the next day. Anything less than full participation opens up the entire debt stock to NML-style ambush, and does not get Argentina or any of its creditors the certainty they need.
Argentina seems to be out of legal leverage, which might explain its periodic threats to drive off the cliff and take all its citizens and creditors with it. A better route would be for the courts to declare the rights of the remaining creditors to set the table for a comprehensive negotiation. A court order could also help dispense with the RUFO clause bogeyman. However, with no trust left in any relevant quarters, it might be premature to count on help from the courts.
Uniqueness and Other Existential Distractions. Meanwhile, the argument that Argentina is "unique" and therefore that the case is irrelevant to other sovereigns would not go away. It is naive at best, manipulative at worst. Consider that there are over 2000 companies listed on the New York Stock Exchange, and fewer than 200 countries in the entire world, of which only a few dozen issue foreign bonds. What is a typical country in a sample of 30? Brazil? Cyprus? Greece? Grenada? Ecuador? Turkey? Uruguay? Zambia? For better or worse, every country and every debt crisis is "unique," and every one is precedent for the next. And yet, every other article about the case seems to go on the uniqueness detour.
Instead of arguing about uniqueness, it is useful to ask in what ways Argentina's courtroom dramas might or might not impact crises and restructurings going forward.
First, the court rulings have exposed lots of government debt contracts to holdout challenge. Argentina's pari passu clause is
exceedingly common in New York and English law bonds. Ukraine and Cyprus are the latest examples in the news with nearly identical contract provisions. This means plenty of chances for creditors to test the boundaries of the Second Circuit interpretation--and a good decade for the market to adapt new contracts, should it wish to do so.
Second, most countries who restructure their debts appear to be at risk of being found in breach. Argentina's breach, as described by the Second Circuit in breathlessly broad terms in its October 2012 opinion, includes behavior such as not paying the holdouts, not appropriating budget funds to pay the holdouts, disclosing that it is not paying the holdouts ... The one truly unusual thing Argentina did was enacting the Lock Law, but the District and Circuit courts specifically refused to limit their definition of breach to the Lock Law, despite entreaties from the United States. The courts' rhetoric about Argentina's unique recalcitrance is uniquely unhelpful, since it does not tell countries where the danger zone stops and the safe zone begins.
Third, the structural features that make Argentina's debt stock vulnerable to NML-style attack are ubiquitous. Anyone raising money in the global capital markets has paying agents, fiscal agents or trustees, and links with clearing and payment systems with a presence in New York, all of which would be at risk of sanctions by a New York court in the next pari passu litigation--unless Judge Griesa exempts the Euro bond holders from his order.
In sum, thanks to NML and Argentina, countries contemplating a debt restructuring and creditors contemplating participation have entered a giant dust cloud of uncertainty. Whether, when, and how it clears is a matter for market and policy adaptation.
There is one way in which Argentina is unusual. Few countries have the economic and political resources to fight holdout creditors for over a decade. Most simply cannot afford it, just as most creditors cannot afford to emulate NML and chase countries in perpetuity. Paradoxically, Argentina's and NML's respective perseverence has created a problem for smaller, poorer countries and small-time creditors. Poor countries confronted with a pari passu lawsuit are more likely to settle pari passu lawsuits quickly and profitably for holdouts, which would make it harder for the country to convince creditors to take haircuts. On the other hand, small creditors that cannot buy blocking positions in bonds with collective action clauses might be swept into a restructuring, only to have their payments interrupted for the sake of holdouts.
In all, NML and Argentina, with the help of the court system, have done a uniquely impressive job of messing it up for everyone else.
