On the 26th floor of the Daniel Patrick Moynihan United States Courthouse in New York, the seats are packed. Billions of dollars and the fate of an entire country – Argentina – are on the line and everyone from bondholders and Wall Street analysts to dozens of lawyers, have come to see in whose favour Thomas Griesa, a senior judge in the southern district of New York, will rule.
Judge Griesa, a small, bespectacled, rather hunchbacked figure, is not going to let the gravitas of the moment cramp his style. Nor does he appear entirely amenable to Argentina’s arguments. The republic’s lawyer, Jonathan Blackman of Cleary Gottlieb, argues that an unfavourable ruling would halt the country’s debt exchange, agreed to by three-quarters of bondholders. “It will be back to square one,” he warns. “Reduce the rhetoric,” is Judge Griesa’s response. Given that it is already three-and-a-half years since Argentina defaulted on its $82bn in debt, this is definitely bad news.
Frozen bonds
At issue are $7bn in bonds sitting in the Bank of New York – bonds tendered by bondholders who agreed to the exchange offer that closed in March. Thanks to Judge Griesa, those bonds have now been frozen.
The plaintiffs, however, disagree. They are bondholders who did not agree to the exchange but spotted the fact that the exchange gives them a rare opportunity to get their hands on Argentine assets on US soil. In the nanosecond that the old bonds are exchanged for the new ones, they will be the property of Argentina, not other bondholders, and hence up for grabs.
The plaintiffs’ lawyers argue that, by suggesting that the judge would put the entire debt exchange in jeopardy, Argentina is just playing hardball. The country could easily proceed with the exchange if it wanted to: “All they have to do is set aside enough money to cover our judgments,” says Mark Kalish of Moss & Kalish, acting for two smaller bondholders.
As the sophisticated legal strategy suggests, the plaintiffs are not a group of poor Italian pensioners who lost their shirts in the default. They are led by two hedge funds, NML Capital and EM Ltd, which bought the bonds at a substantial discount and are hoping to profit from them. And that is partly why Argentina’s lawyers have adopted a take-no-prisoners approach. In the court of Argentinian public opinion, the suing parties have been widely written off as vultures that are trying to make a quick buck.
Money-making strategy
Making money out of sovereign defaulters using the legal system is by no means a new strategy. NML Capital is linked to Elliott Associates, the hedge fund that made legal history – and good money – out of Peru by getting a Brussels appeal court to put a restraining order on Euroclear; through which Peru was paying other creditors. With a default on its then newly-issued Brady bonds at risk, Peru ended up paying Elliott 100% on the debt it had bought up – turning a $20.7m investment for the fund in 1996 into a $55.7m payout in 2000.
For some, cases like this are utterly vital to the smooth functioning of the international capital markets. “Thank God for Elliott Associates. Thank God for the NML lawsuit,” says Walter Molano of broker BCP Securities. “Because that is the thing that keeps sovereign lending alive – those lawsuits, and the glimmer of hope that they give to creditors that they can reclaim part of their investment. Showing that recourse exists is the thing that is going to allow future lending to occur.”
It is irrelevant that the hedge funds themselves did not lose money. They have taken the bonds off the hands of other investors who perhaps did not have the time, money or inclination to enforce their creditor rights, preferring to sell out.
Cases could multiply
Critics argue that, in a world where loans by a small number of banks have given way to bonds issued to thousands of investors, many more cases like this and sovereign debt restructurings could become a free-for-all. Banks and financial institutions could be disrupted as tenacious investors rush around trying to seek judgments in a variety of jurisdictions, grabbing any asset they can get their hands on.
Nor is Argentina’s the only recent case in which legal action has interfered with a major international financial transaction. “One thing that people worry about is US courts imperialistically reaching out,” says David Skeel, a professor of corporate law at the University of Pennsylvania. “And that US courts are going to go around resolving issues that they have no business resolving.”
He cites the example of Yukos: a US bankruptcy court in Texas initially allowed a case to go forward that temporarily brought the Yukos sale to a halt nine time-zones away, in Russia. The case was eventually thrown out but not before Deutsche and other international banks with assets in the US had been barred from providing financing or otherwise participating in the proposed auction. It was dramatic testimony to the fact that international financial entities, with their presence in multiple markets, are vulnerable to court action.
“The bankruptcy court didn’t purport to do anything in Russia,” says Professor Skeel. “But, by enjoining the banks, it slowed down the whole auction process. And, to the extent that there are international entities and banks in particular that can be reached in lots of different countries, it opens up options that wouldn’t otherwise be available.”
Observers also worry about the issue of competence in technical financial matters because judges are not specialists. “The courts may not be familiar with the practices of sovereign bond markets; as such, their rulings, regardless of which party benefits, could potentially undermine how these markets work,” says Carola Sandy, an analyst at CSFB.
Ms Sandy would prefer the courts not to be involved. “These are securities that were bought and sold in the market. How this debt is restructured should be decided by the bondholders and the government, not by the courts,” she says. If Argentina had been a bit less stingy with its creditors, perhaps there would be less animosity between bondholders and the government, she adds.
Still, it could be argued that judges do not have enough power. As with all international bond issues, the bonds are drawn up under a legal jurisdiction – in Argentina’s case, that of New York. If New York’s laws have no impact on Argentina, why bother with the paperwork; why not save on legal fees?
“What the bondholders involved in the lawsuits are trying to do is perfectly legal. They are asking the judges to seize assets that they feel entitled to, under the laws of New York,” says Ms Sandy. And legal experts agree that if Argentina had been a company or an individual, the issue would have been resolved long ago.
“It would be an easy issue,” says Professor Skeel. “And part of me thinks that it should be that way, even with a sovereign, though it’s more sensitive. After all, there are limits to what could realistically be seized, even if you take a broad view of what counts as Argentina’s US assets.”
Drama unfolds
For two hours, the courtroom drama unfolds. The judge seems to side first with Argentina and then with the hedge funds. Ultimately, perhaps because in enforcing a bond contract he has wandered into the realm of international politics, he takes the cautious route. He lifts the freeze. All is lost for the plaintiffs.
Then comes the reprieve. The freeze will remain in place until an appeal court hears the case. “This is a serious case with problems and merits on both sides,” Judge Griesa concludes.
As The Banker went to press, the court of appeal hearing had taken place but it had still not made a decision. With the freeze in place, Argentina had indeed halted its debt exchange, blaming the plaintiffs for the move.
