Q. You are a foreign judge being pulled into one of the longest, biggest, stupidestsovereign debt cases in history, one which is presently in limbo in a US court. The debtor has become distracted by a political nervous breakdown at home and may have taken leave of reality altogether. The creditors can’t stand each other, and no one has been getting any money for months, because of the effects of a single bond clause drafted over two decades ago. How do you proceed?
A. Politely.
Click below for the attempt of Mr Justice David Richards of the High Court of England and Wales:
On Friday he ruled on a case brought by investors in Argentina’s euro-denominated restructured debt (including George Soros’s family office, and Kyle Bass’s Hayman Capital) against their own trustee, Bank of New York.
These bonds are governed by English law. Mr Justice Richards’ ruling was to declare that yes, indeed, that is true, they are English-law bonds. And he politely left it at that.
That this even matters — and sparked a rally in the euro bonds on Friday — says a bit about just how wide-ranging the pari passu saga is, even in its slumber.
English law has previously wafted through this saga as a kind of alternate reality. Its judges might have very different ideas to US ones about what pari passu clauses ‘mean’ in sovereign debt and whether these clauses can basically be used to embargo other creditors in the name of the ‘equal treatment’ they promise. That is the substance of how the holdouts led by Elliott finally cornered Argentina in New York. If the saga had been an English court case, it might have gone very differently.
This case is not about that. It dates back to a $539m payment Argentina tried to make to restructured bondholders as the embargo finally slammed shut last summer, just before Argentina defaulted on everyone and the saga hit stalemate.
The money ended up jammed in BNY — which preferred not to get hauled before Judge Griesa of the US District Court for helping Argentina to violate the embargo. But €226m of the money was destined for the euro bondholders, who claim English law protects them from the orders of a US judge.
This case, as Mr Justice Richards has decided it, isn’t even about that either. The euro bondholders wanted him to declare that the English-law trust indenture attached to their bonds still requires BNY to fork over the money even if it is subject to Judge Griesa’s injunction.
He disagreed. It was “clearly right to leave these matters open” instead, just in case there’s something in English law which actually does let BNY cite the injunction as a compelling force.
Don’t feel too sorry for the euro bondholders. Friday’s rally left their investment — which is in default – trading above 90 cents in the euro.
That’s partly because in the background, restructured creditors are waiting for the day Argentina pays off the holdouts, despite (or because of?) the political instability consuming its government at the moment. But also, they can now take the English-law declaration as evidence to Judge Griesa:
This court is, of course, very concerned not to intrude improperly into matters which are before the US courts. But the making of a declaration in the terms sought by the claimants would not, in my judgment, do so. The declaration would establish the status of the funds held by the trustee as a matter of English law. As the letter dated 5 December 2014 states, issues of English law have not been raised before the District Court. A declaration as to the effect of a trust indenture governed by English law is in my view peculiarly within the proper jurisdiction of this court…
This might sound positive for the euro holders’ case. It depends how Judge Griesa reacts. We’d just note that he hasn’t been known so far for loosening his injunction given his general anger at Argentina’s constant defiance.
But the idea it would depend on Griesa also shows how powerful the original injunction was in the first place. It’s left to the original judge to decide on the potential clash of two legal systems which together dominate bond markets as he tries to enforce a ruling against a sovereign debtor.
As polite as the English judge was, that’s quite a faultline for the future.
And speaking of politeness — this English case has also shed some interesting light on another trend in the saga.
Have a read of the letter which Elliott’s lawyers sent to the euro bondholders in December when invited to take part in the English case. It ends thus:
Our clients do not wish to validate your clients’ tactical and abusive conduct by participating in the English proceedings.
And other holdouts, who did respond, suggested the bondholders don’t even have legal claims, incorrectly as the judge noted on Friday:
The claim made by them that the issue of the exchange bonds has been ruled illegal by the US courts is wrong. The US courts have never ruled or even suggested that the exchange bonds were illegal. The injunction granted by the District Court is concerned with compelling payments to Holdout Creditors in conjunction with payments under the exchange bonds, not in any sense with the legality or otherwise of the exchange bonds themselves. Further, it is wrong to suggest that the trust indenture has been “abrogated or suspended” by the injunction granted by the District Court or that the injunction created a constructive trust which superseded the trust indenture…
What happens when you can’t get money out a defaulted sovereign through ‘equal treatment’? Creditor is pitted against creditor.
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