We cannot allow that we are prevented from honouring our commitments to 93 per cent of bondholders. We are going to initiate a debt swap to pay the bonds in Argentina, under local legislation…
That would be Axel Kicillof, Argentina’s economy minister.
Late on Tuesday, Kicillof revealed the Argentine government’s actual plan for life after its final defeat in the pari passu case — a canje, or swap out of New York legislation into local law for its restructured debt, to avoid paying everyone (or no one) in New York as per the pari passu injunction.
If you can’t get the US courts to throw the problem out of your bonds, get your bonds away from US courts.
A flawless plan — if the US courts weren’t already furious with Argentina, and if the entities whose help the republic would need to organise a swap (lawyers, payment agents, and so on) weren’t subject to those courts.
As a plan, a local-law swap isn’t terribly original. We saw it coming a while ago, back when Argentina lost its first appeal against the case. As a distressed exchange it may be a default and trigger CDS, although that’s not a focus of this post.
There was also a reference to moving payment mechanisms out of the reach of US courts in Cleary Gottlieb’s recent memo to Argentina about what to do if the case was lost. This is the memo which the holdouts immediately seized upon as evidence that Argentina was seeking to defy the order and that third parties, also in defiance of the order, were trying to help it. This was all argued to the order’s author, Judge Thomas Griesa, including a draft of an even fiercer injunction.
Which reveals the small flaw inherent in Argentina’s plan.
Argentina plans to continue talking to Judge Griesa at the same time.
Or rather, Cleary will be put on the task of trying to avoid a default. Incidentally, Kicillof presented default as otherwise inevitable. He cited the government’s usual figure of $15bn as the amount it will have to end up paying holdouts (it gathers up all the copycat holdout claims which could follow NML) and the infamous Rights Upon Future Offers clause in the restructured bonds, which supposedly prevents holdout negotiations. (We doubt it.)
With a restructured bond payment looming on June 30, the aim of talking would have to involve getting Judge Griesa to agree to maintain a stay on the injunction for a while. That means showing good behaviour.
That would have been a lot easier to do before announcing a swap.
The existing order, based on Rule 65 of the Federal Rules of Civil Procedure in the US, already requires third parties not to act in concert with the target of the injunction, Argentina. Any third party involved in preparing Argentina’s swap will be looking at their obligations very carefully here.
This may notably include Bank of New York, which both has obligations to restructured bondholders as their trustee, and has tried and failed to get itself out of the purview of the order. Might it even extend to restructured holders themselves?
Maybe they do have some short-term economic incentive to attempt a local-law swap anyway.
Those holders have already watched their investments fall ten points in price on news of the defeat. In the new world of sovereign debt enforcement created by the pari passu case, the holders also face payments from their debtor being intercepted by holdouts, if Argentina tries to pay them alone. Argentina’s existing local-law bonds have already begun to trade dearer than foreign-law ones. That also overturns an old truism of sovereign debt: foreign law is always safer as it means governments can’t change contractual terms by legislative fiat.
But if restructured bondholders take the deal, and if holdouts convince Judge Griesa to respond so fiercely that swapping becomes impractical, the former would only have helped Argentina to construct an expensive bluff.
The other option is to push Argentina to settle instead. Although Kicillof — who referred to the holdouts as “vultures… vultures because they do not negotiate”, and cried “no pasaran” at them — didn’t seem minded to attempt to settle anyway.
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