Argentina is stuck, like its frigate used to be.

Photographer: STR/AFP/Getty Images.

Now Argentina Can't Even Pay Bonds in Argentina

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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U.S. District Judge Thomas Griesa issued an opinion yesterday in the long-running Argentine bond dispute. Here is a paragraph that I found pretty stunning:

As discussed, the operative paragraphs of the Injunction do not speak in terms of “external indebtedness,” and as a result, Citibank’s participation in making payments on exchange bonds is prohibited. This is true whether or not the exchange bonds are external indebtedness. Nonetheless, the court finds that the vast majority of exchange bonds governed by Argentine law and payable in U.S. dollars would not constitute DFCI, but rather would qualify as external indebtedness of the Republic. Thus, payment on these exchange bonds would violate the Equal Treatment Provision of the FAA, providing an additional reason as to why the Injunction applies.

That needs some unpacking, which we'll get to, but first I want to talk about that bold sentence (my emphasis): It means, even if Griesa is wrong about stopping Citibank from paying some Argentine bonds, he's doing it anyway. The rest of the paragraph says that he's not wrong, but that's not the point. There is a time for dispassionate analysis of clever legal arguments, and there is a time to knock it off and do as you're told. Griesa is long since fed up with cleverness.

The issue, as everyone probably knows by now, is that Argentina has outstanding two important categories of external bonds: some old bonds issued in 1994, which it stopped paying in 2001, and its "exchange bonds," which it issued in 2005 and 2010 in exchange for most of the old bonds, and which it was paying until last year. But the remaining holders of old bonds, led by Elliot Management's NML Capital unit, sued Argentina, arguing that the pari passu clause in the old bonds -- which required Argentina to rank the old bonds equally with any other "external indebtedness" -- meant that Argentina couldn't make payments on the exchange bonds without also paying off the old bonds in full. They won, Judge Griesa issued an injunction prohibiting Argentina from making payments on the exchange bonds, Argentina lost various appeals, and Argentina has been in default on the exchange bonds since last summer.

In addition to the external bonds, though, Argentina has issued bonds in Argentina under Argentine law. Some of those are denominated in pesos; others are denominated in dollars. Some were issued in the 2005 and 2010 bond exchanges; others were issued at other times. Citibank's Buenos Aires branch is the custodian for some of the dollar-denominated local-law bonds issued in the exchanges, and Argentina has made payments (in Buenos Aires) to Citibank with instructions to pass them on to the bondholders. This creates a pickle for Citi: It will get in big trouble with Argentina if it doesn't pass on the payments, but it will get in big trouble with Judge Griesa if it does.

So it went to Judge Griesa and asked him for permission to make the payments in Argentina on the Argentine-law bonds. Its argument was that the pari passu clause that formed the basis for Judge Griesa's injunction applied only to "external indebtedness,"  and that these bonds are not that: They're Argentine-law bonds, so they're internal indebtedness, which Argentina can pay freely even if it doesn't pay the old bondholders.

Judge Griesa disagreed, but more than that, he didn't care. His point in the passage quoted above is just that his injunction told Argentina not to pay "any amount due under terms of the bonds or other obligations issued pursuant to the Republic’s 2005 or 2010 Exchange Offers" without first paying off the old bondholders, and told "participants" like Citi that they were "prohibited from aiding and abetting any violation" by Argentina, including "any effort to make payments under the terms of the Exchange Bonds without also concurrently or in advance making a Ratable Payment to NML." The Citi bonds were "Exchange Bonds," issued in the exchange offer, so whether or not they're "external indebtedness," they're covered by the literal words of the injunction. So Citi can't help Argentina pay them.

I mean obviously Judge Griesa could have changed the words of the injunction -- he's the judge! -- but he was in no mood for that.

In any case, he also found that the Citi bonds were "external indebtedness." Some of that is for boring technical reasons applicable only to those bonds, but some of it is because he found that they were "offered" outside of Argentina, which is enough to qualify as "external indebtedness." Argentina had argued that because the bonds were technically only sold to CRYL, an Argentine clearinghouse, which holds them on behalf of investors, they were only "offered" in Argentina and were thus domestic debt. Judge Griesa disagreed (citation omitted):

The Republic argues that the exchange bonds governed by Argentine law were offered locally because they were registered at and payable through CRYL, an Argentine entity. But this argument goes to where the transactions were consummated, or in the parlance of contract law, where the exchanges were “accepted.” It does not go to where the exchange bonds were offered.

This is relevant not only to Citi's predicament, but also to Argentina's efforts to sell new Argentine-law bonds. We talked about those efforts a few weeks ago: JPMorgan and Deutsche Bank were trying to find investors to buy new, dollar-denominated, Argentine-law bonds, on the theory that such bonds would not be "external indebtedness" and would not be subject to the pari passu clause.  I said then that:

  1. Lots of sovereign-debt types (lawyers, investors, JPMorgan, Deutsche Bank) seem to think that Argentine-law bonds marketed in Europe are in fact "offered exclusively within the Republic of Argentina," even though that is not a particularly literal reading of the situation, but
  2. Judge Griesa would have none of it.

He had none of it. So JPMorgan's and Deutsche Bank's dream of selling new dollar-denominated Argentine-law bonds would seem to be dead:

“The court’s reasoning is very broad,” Mark Weidemaier, a professor at the University of North Carolina School of Law, said in an e-mail response to questions. “The opinion suggests the court might be willing to expand the injunction to cover almost any foreign-currency debt, even new debt payable in Argentina.”

Last time we discussed this, I also drew a little map to try to represent the situation: Bonds "offered exclusively within" Argentina are safe from Griesa, bonds offered elsewhere in the world are at risk, and bonds whose payments flow through New York, where Judge Griesa sits, are basically out of the question. Anna Gelpern says that yesterday's decision "effectively blocks Argentina from issuing new foreign currency debt under any law, killing Matt Levine's glorious map," but I prefer to think of it as just redefining the geography a bit:

Source: I draw arrows real good.

Now everywhere is New York. You don't get to get around New York by cutesy legal arguments about where your bonds are "offered." You may not even get around New York by actually issuing bonds in Argentina. Argentina can still make payments on its local-law, local-currency bonds, just because that is completely within its control and never passes through a U.S. bank. But if you've got any ties to New York, and you help Argentina put off its day of reckoning with its creditors, Judge Griesa will find you and kick down your door, and then where will you be?

Judge Griesa's exasperation is clear:

The court has long urged the Republic to participate in negotiating a resolution to the claims in this case, and has appointed a Special Master to facilitate that process. The court urges the Republic, once again, to avail itself of the Special Master's services.

Lots of people -- Argentina's government, its lawyers, its bankers, certainly me -- have long interpreted Judge Griesa's urging as more of an optional suggestion that Argentina should sit down and negotiate a resolution with NML, unless it can think of a clever way to get around his injunctions. It's increasingly clear that nothing will ever be clever enough to appease Judge Griesa: He wants Argentina to pay off those old bonds, and nothing it does to raise money without paying off those bonds will work, as long as he has anything to say about it. And since all those arrows point to New York, he'll have something to say about almost any financing that Argentina tries.

  1. The clause is section 1(c) on page 2 of the 1994 Fiscal Agency Agreement:

    The Securities will constitute (except as provided in Section 11 below) direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness (as defined in this Agreement).

  2. "External Indebtedness" is defined in section 11 on page 16 of the FAA. Judge Griesa's opinion today has a good quick summary of the arguments on whether or not the local-law bonds are "External Indebtedness." Here is Citi's argument that they're not, and NML's that they are.

  3. And since they're not "Exchange Bonds" -- they'd be newly issued for cash -- they also would not be subject to the injunction (provided that they were in fact not "external indebtedness").

  4. I've discussed potential clever tricks -- of various (low) levels of cleverness -- here and here and probably elsewhere. Some of those tricks rely on doing things in Europe, through European clearinghouses like Euroclear, which are bound by laws that might be more favorable to Argentina than New York's is. But Euroclear is also, if not subject to New York law, at least at risk of a door-kicking from Judge Griesa. It's got a New York office. If I worked there I'd be a little nervous about any Argentina tricks.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net