So Argentina plansto ditch Bank of New York Mellon, deposit funds with a local payment agent, invite bondholders to swap into local law and local payment bonds, etc.

Sovereign Chicken

posted by Mark Weidemaier

So Argentina plansto ditch Bank of New York Mellon, deposit funds with a local payment agent, invite bondholders to swap into local law and local payment bonds, etc. Not an optimistic sign for those hoping for a quick resolution. And such a transparent violation of the injunction that there really isn't much to say about it. Here's Judge Griesa anyway, from yesterday'shearing: "I want to be very clear, and I want to state it right now. This proposal is a violation of the current orders of this Court and of the Second Circuit. It is illegal, and the Court directs that it cannot be carried out."

But still, no contempt sanctions. Judge Griesa knows he can't win this game of chicken. A federal court's power to impose contempt sanctions on a foreign government is uncertain. The issue is complicated not only by sovereign immunity but by the intricacies of contempt law. There is some precedent for imposing monetary fines, at least for civil contempt. (A contempt order is civil if it is intended to induce compliance; it is criminal if intended to punish past non-compliance. The latter is especially problematic in the sovereign context.) Here's a case imposing a $50,000-a-day fine against the Russian Federation until it complies with a court order to turn over cultural artifacts. But imposing a fine is not the same as collecting it. Russia hasn't paid its rapidly-accumulating fines, which now total around $15 million. Stay tuned; the plaintiffs want a money judgment for that amount, which they can then try to enforce by seizing Russian assets. (Funny, right?) The US government opposes the request.

An order imposing contempt sanctions would just give Argentina something else to ignore.  So the court, quite sensibly, took a pass. But it hardly matters. In a very real sense, Argentina is not the target of the injunction. The targets are the payment intermediaries, who still risk contempt if they facilitate a swap into local bonds. (As, in theory, do bondholders who participate in the swap or modify their rights to facilitate a violation of the order, although this risk seems remote.) Even if there is a swap, then, participation will probably be low. And that's before we even get into the "murky" particulars of a swap. Argentina watchers might want to find a comfy chair, because the case doesn't look like it's going away soon.

Car Crash image courtesy of Shutterstock

August 22, 2014 at 2:47 PM in Sovereign Debt