Argentina Bets on Skeptical U.S. Judges to Avoid Crisis

Argentina’s 12-year fight to shake off its 2001 financial crisis is in the hands of U.S. judges who assailed its “continual disregard” for creditor rights and refused to overturn lower court orders the nation repay billions of dollars in debt it defaulted on when its economy buckled.

Argentina contends that enforcing those orders may expose it to more than $43 billion in claims it can’t pay, possibly triggering another meltdown. Investors in the defaulted debt countered that if the country wants to pay holders of bonds restructured after its 2001 collapse, so-called exchange bonds, it has to pay them too. Until now, the U.S. courts have agreed.

On Wednesday, a three-judge panel of the U.S. Court of Appeals in New York will hear arguments from both sides, addressing some issues in a prelude to a decision that could be the final word, as a hearing before the U.S. Supreme Court may be unlikely, legal experts said. Simultaneously, Argentina is seeking a rare rehearing of earlier rulings by the same appellate court that held it must treat holders of defaulted debt the same as those who took the exchange deal.

Argentina may face an uphill fight. U.S. District Judge Thomas Griesa in New York has presided over the litigation for a decade. While he has often ruled in Argentina’s favor, last year he cited the country’s “intention to defy any money judgment issued by this court.” The appeals court, in challenges to Griesa’s decisions, criticized Argentina for ignoring the rights of its creditors and the authority of the U.S. courts.

Hedge Funds

In the Feb. 27 hearing, a group of investors in the defaulted debt, led by Elliott Management Corp.’s NML Capital Ltd., run by billionaire hedge fund manager Paul Singer, and Aurelius Capital Management, will seek to uphold rulings that may force Argentina to pay them $1.3 billion in principal and interest. Argentina claims a ruling in the bondholders’ favor would violate its rights as a sovereign nation.

The country’s 2001 default on a record $95 billion in debt came amid a widening budget deficit and three straight years of economic contraction. The crisis fueled unrest in the country that left more than two dozen people dead.

The bonds at issue in the appeal were sold beginning in 1994. Some individual plaintiffs, including hundreds of Italian pensioners, have held the bonds since before the default. Some of the hedge funds bought the bonds as distressed debt as recently as 2010.

In 2005 and 2010, Argentina offered a deal to holders of the defaulted bonds, letting investors trade for new so-called exchange bonds at a discount of as much as 75 percent. Holders of more than 91 percent of the defaulted debt participated.


Argentina has made all required payments on the exchange bonds. The government has vowed not to pay holders of the defaulted debt, whom officials have characterized as “vultures,” and the legislature in 2005 passed a law barring payment of the defaulted bonds. The country has spent the past decade opposing claims brought in U.S. courts by holders of the defaulted bonds.

The bond contracts specify that disputes be resolved under New York state law before courts located within the state, which in this case is a federal court.

For more than a decade, lawyers for Argentina have squared off against the hedge funds before, Griesa, now 82 years old. Appointed to the federal bench in 1972 by President Richard Nixon, the judge has required Argentina pay holders of the defaulted bonds when it makes payments to holders of restructured debt, and forbade third parties from aiding the country in making any payments in violation of the order.

’Bludgeoning’ Everyone

“This injunction operates by causing headaches to third parties in the hopes that then reverberates against Argentina,” said Anna Gelpern, a law professor at American University who specializes in government debt. “You’re kind of bludgeoning everyone around Argentina.”

In November, Griesa quizzed a lawyer for Argentina about press statements by President Cristina Fernandez De Kirchner and Economy Minister Hernan Lorenzino that the republic wouldn’t pay the “vulture funds” trying to collect on the defaulted bonds.

“I don’t know literally what the intentions of the republic are,” Griesa said in the Nov. 9 hearing. “But I have had some modest amount of experience, and that is that the republic will not comply with the judgments which have been entered against it.”

James Glassman, a former U.S. State Department official who is a member of the U.S. Securities and Exchange Commission’s Investor Advisory Board, called Argentina a “rogue nation” at a panel last month on the country’s debt.


Over the past decade, many holders of the defaulted Argentina bonds have won U.S. court rulings requiring the country to pay them. Despite the favorable rulings, courts have generally prevented the defaulted debt-holders from moving to seize the country’s assets, citing the Foreign Sovereign Immunities Act, which limits the ability of plaintiffs to sue foreign countries in U.S. courts.

The three judges on the appeals panel hearing arguments this week are Rosemary Pooler, appointed by Bill Clinton; and Barrington Parker and Reena Raggi, both named to the court by George W. Bush.

Last year, the court upheld a ruling by Griesa that would allow Singer’s NML and other bondholders to collect, albeit indirectly, by blocking the nation from paying its restructured debt without also paying the defaulted bonds, something Argentina said it can’t afford to do.

Pari Passu

On Oct. 26, the appeals court affirmed Griesa’s ruling that such an equal treatment, or pari passu, clause in the original bond agreements prevents Argentina from treating defaulted bond-holders less favorably than exchange bondholders. The appellate court upheld an injunction issued by Griesa that barred Argentina from paying the exchange bondholders without also paying holders of defaulted debt.

In addition to blocking the payments to exchange bondholders by Argentina, which has ignored other court orders to pay the holders of defaulted bonds, Griesa prohibited “all parties involved, directly or indirectly, in advising upon, preparing, processing, or facilitating any payment on the exchange bonds.”

The ruling by the appeals court affirming Griesa’s decisions gave bondholders including NML a means to enforce their court-determined right to collect. Argentina could pay them, which it vowed never to do, or defy the court and potentially be forced into default on the restructured debt, triggering a new flood of litigation.

Escrow Account

Griesa attempted to give his rulings teeth by requiring Argentina pay $1.3 billion into an escrow account if it went ahead with about $3 billion in planned December 2012 payments to restructured bondholders. The decision, put on hold pending this week’s appeal, sparked a rout in Argentine bonds and prompted Fitch to cut ratings on the country’s debt to CC, eight levels below investment grade.

In its October ruling upholding Griesa’s “pari passu” decision, the appeals court asked the judge to explain how his order affected third parties, including banks and payment intermediaries.

The judge said the order barring third parties from helping Argentina avoid payment covers Bank of New York Mellon Corp., the indenture trustee for the restructured bonds, as well as registered owners and depository nominees, clearing systems and “attorneys and other agents” of Argentina or institutions including third-party banks.

The court also asked him to supply the formula by which Argentina must pay the holders of the defaulted bonds.

In response, Griesa made things even worse for the South American nation. He ruled that whenever Argentina makes a full scheduled payment to holders of exchange bonds, even if it’s a small percentage of what is owed, the country must pay the holders of the defaulted bonds in full.

Payment Formula

These two rulings by Griesa -- on the payment formula and on applying the order to third parties -- are to be considered by the appeals court Wednesday. Robert Cohen, a lawyer for NML Capital, and Jonathan Blackman, who represents Argentina, didn't immediately return e-mails seeking comment on the case.

Argentina is supported in the appeal by Fintech Advisory Inc., which holds exchange bonds. Bank of New York Mellon, Clearing House Association LLC, Euroclear Bank SA and the American Bankers Association also support the country’s case.

Bank of New York Mellon may be the key institution in the appeal. As indenture trustee on the restructured bonds, it’s pivotal to receiving payments from Argentina for distribution to the bondholders.

The bank said Griesa unconstitutionally hampered its role without giving it, a nonparty to the litigation, a forum to complain. It claimed in court papers that his order threatens to interfere with relations between debtors and creditors.

If the appeals court agrees with the bank, the holders of defaulted bonds will continue to be frustrated in their efforts to collect, said American University’s Gelpern.

“The remedy goes away in a puff of smoke,” she said.

En Banc Rehearing

This week’s hearing isn’t the only business Argentina has before the U.S. Court of Appeals. The appellate court’s rulings affirming Griesa’s decisions on investor contract rights, and on the pari passu clause in particular, are the subject of a separate petition by Argentina, which seeks a rare appearance before a larger group of appellate judges, a so-called en banc rehearing.

The rarity of such proceedings, and the nature of the laws at issue, however, makes it unlikely the rulings against Argentina will be reversed.

Such rehearings were granted by the New York-based appeals court in only about 0.03 percent of cases from 2000 to 2010, according to a 2011 study by the Federal Bar Council. That’s the lowest rate of any of the 12 regional U.S. appeals courts, according to the study.

Supreme Court

The nation can also seek to appeal to the U.S. Supreme Court. But because contract issues in the case were based on New York state law, it’s unlikely they would be reviewed by the U.S. Supreme Court, said Henry Weisburg, an international litigator at New York-based Shearman & Sterling LLP.

Argentina has said it plans to reopen the bond exchange on terms similar to the earlier swaps, offering holders of the defaulted debt another chance to cash out, though at a discount. While the country has mentioned the proposed exchange in its court papers, it isn’t among the issues to be considered in the appeal.

The holdout bondholders, now closer to collecting their returns at 100 cents on the dollar than they’ve ever been, may not accept a heavy discount now, said Weisburg.

‘Crystal Clear’

“It’s crystal clear the plaintiffs can keep the contracts they have and the court won’t force them to take a different contract,” Weisburg said.

Weisburg also said Argentina probably won’t get far with a defense based on the Foreign Sovereign Immunities Act, which it has raised in its appeal.

“I expect the FSIA will come up, but it won’t be important,” he said. Argentina may be raising that argument with an eye toward a possible petition to the Supreme Court, he said, a move Weisburg said is also unlikely to succeed.

The lower court case is NML Capital Ltd. v. Republic of Argentina, 08-06978, U.S. District Court, Southern District of New York (Manhattan). The appeal is NML Capital Ltd. v. Republic of Argentina, 12-00105, U.S. Court of Appeals for the Second Circuit (New York).

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