Argentina’s Defiant Bond Appeal Meets Court SkepticismBob Van Voris and Christie Smythe
Argentina’s claim that a U.S. court can’t tie its obligation to make defaulted bondholders whole to payments on restructured debt faced skepticism from judges as a lawyer for the country said it won’t obey orders to pay as much as $1.3 billion of defaulted sovereign debt.
Jonathan Blackman, the attorney for the South American nation, said yesterday that Argentina would default on its restructured debt if it’s forced by a three-judge appeals panel in New York to pay holders of the defaulted debt.
“So the answer is you will not obey any order but the one you propose?” U.S. Circuit Judge Reena Raggi asked Blackman during more than two hours of arguments.
“We would not voluntarily obey such an order,” Blackman said. Hernan Lorenzino, Argentina’s minister of economy, and Vice President Amado Boudou sat at the counsel table as the lawyer addressed the panel.
Blackman claimed that a lower-court order obliging Argentina to pay the defaulted bonds whenever it makes payments on restructured debt violates its sovereignty, threatens to trigger a new financial crisis and would quadruple the number of Argentine bond cases in New York federal court, rather than resolving them.
“If that’s the confrontation the court seeks with the injunctions, that is the court’s decision,” Blackman said. “We’re representing a government and governments will not be told to do things that fundamentally violate their principles.”
A range of third parties with a stake in the outcome -- including the holders of Argentina’s restructured debt, international payment intermediaries and banks, and the trustee for the restructured bonds -- claim the lower-court’s actions also threaten their interests.
Holders of defaulted bonds, led by Elliott Management Corp.’s NML Capital Ltd., run by billionaire hedge-fund manager Paul Singer, and Aurelius Capital Management, have won U.S. court judgments recognizing their right to be paid and are asking the appeals court to uphold the lower court to give them the ability to collect the $1.3 billion they say they’re owed.
Argentina says a ruling in the creditors’ favor would open it up to more than $43 billion in additional claims it can’t pay. The country defaulted on a record $95 billion in debt in 2001. Holders of about 91 percent of the bonds agreed to take new exchange bonds in 2005 and 2010, at a deep discount.
The appeals panel heard arguments from both sides, as well as from lawyers for the Exchange Bondholder’s Group, which represents holders of the restructured debt, and for Bank of New York Mellon Corp., the indenture trustee for the restructured bonds. The court may not rule for weeks or months.
Judges expressed doubt about arguments by BNY Mellon that it can’t be subject to U.S. District Judge Thomas Griesa’s order barring third parties from helping Argentina pay the holders of restructured bonds without also paying the defaulted bondholders. Blocking BNY Mellon is key to the defaulted bondholders’ efforts to halt payments on the restructured bonds as a means of forcing payment to them.
“Argentina cannot violate this injunction without participation of the Bank of New York,” Theodore Olson, representing NML Capital, told the judges. Holders of the defaulted debt are seeking “what they are owed,” he said.
The holdout creditors are seeking to uphold rulings by Griesa that require Argentina to pay them the full amount they’re owed whenever it makes a required payment to the holders of the exchange bonds. The Exchange Bondholder Group claims the ruling improperly threatens their investment.
“We’re innocent parties,” attorney David Boies argued for the Exchange Bondholder Group. “I represent people who did what they thought was right. All I’m saying is what they did shouldn’t count against them.”
Griesa’s order shouldn’t apply to restructured debt holders, Boies told the panel. The court can’t hold them hostage, he said.
“If you allow Judge Griesa’s injunction to exist unchanged, everybody in this courtroom knows what’s going to happen,” Boies argued. “Argentina is going to default.”
Boies and Olson also opposed each other in the litigation that decided the 2000 U.S. presidential election -- Olson for Republican George W. Bush and Boies for Democrat Al Gore.
The extra yield that investors demand to hold Argentine debt instead of U.S. Treasuries narrowed 17 basis points, or 0.17 percentage point, to 1,097 basis points at 4:52 p.m. in New York yesterday, according to JPMorgan Chase & Co.’s EMBI Global index.
The cost to protect $10 million of Argentine government debt against non-payment over 12 months using credit-default swaps surged 192 basis points to 5,266 basis points, the highest in the world, according to data compiled by Bloomberg.
The yield on Argentina’s New York law bonds due in 2017 that were issued under debt restructurings rose 5 basis points to 15.7 percent, according to data compiled by Bloomberg. The price fell 0.09 cents to 78.99 cents on the dollar.
“I hope that the common sense will be enforced and that means that a bondholder can’t get something different than another one,” Lorenzino said in an interview with Telesur after yesterday’s hearing.
Argentina won’t violate its own law on debt payments, Boudou said in an interview with C5N.
“It’s a very strong comment to say that they won’t comply with a ruling, a lot stronger than what I expected,” Ezequiel Aguirre, a strategist at Bank of America Corp., said yesterday in phone interview from New York. “What matters is what the court of appeals says, and it’s not going to rule today.”
Argentina’s government officials have characterized holders of the defaulted debt as “vultures,” and the country’s legislature in 2005 passed a law barring payment of the defaulted bonds. Argentina has spent the past decade opposing claims brought in U.S. courts by holders of the defaulted bonds.
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 holders of defaulted debt 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 appeals court has already affirmed Griesa’s ruling that an equal-treatment, or pari passu, clause in the original bond agreements prevents Argentina from treating defaulted bondholders 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.
Griesa said the order applied to BNY Mellon and other third parties and said Argentina must pay the full $1.3 billion when it makes its next scheduled payment on the restructured bonds.
Olson urged the judges not to let Argentina defy the authority of the courts.
“That is telling this court and all the courts in the United States that the laws of the United States mean nothing,” he said.
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).