A while back, I wrote a lengthy piece about Argentina's blue market, their black market for dollars, which tended to be rather different from the official exchange rate. Why there was such a gulf between the two, at the time, was what I was trying to figure out. My findings pointed to outstanding debt held by distressed debt hedge funds (in particular, Elliot Management) as the culprit for why Argentina was doing what it was doing. Well, interestingly enough, the problems with their outstanding debt have reached the point where they asked the Supreme Court of the United States to weigh in and the nine justices have obliged. Dealbook has a great (albeit older) piece about the particulars surrounding the upcoming case:
It started in the wake of Argentina’s default. There is no bankruptcy regime for sovereign countries (at least not yet). So back in 2005 and then again in 2010, Argentina forced the debt holders into a deal offering them new bonds at 25 to 29 cents on the dollar. More than 90 percent of the bondholders accepted, given the alternative of getting nothing for the bonds.But there were holdouts, including thousands of Italian pensioners, and more important, some hedge funds, which have been trying to get Argentina to pay the bonds in full. Since then, a number of entities, led by Elliott Management and Aurelius Capital Management, have sought to compel Argentina to pay up.
These holdouts weren't going to take being stiffed lying down. In 2012, they used the country's default to sieze a naval vessel in Ghana, and Argentina's president, because of this, does not fly abroad on government owned planes. What makes the upcoming case interesting is the novelty of it all:
American judges have acknowledged that they could not order Argentina to [pay old bondholders, in particular, the hedge funds, first], but they justified the ruling on the ground that it is affecting the conduct of the parties in the United States that are transferring the money.Argentina has reacted with a fury to the rulings, stating in its petition to the Supreme Court that “no sovereign nation would stand idly by while a foreign court takes its citizens and other third parties hostage in order to commandeer the public fisc.” A number of Argentine officials have stated that the country will default on its current bonds if it is required to first pay the old holders.
Given Argentina's perspective, what, exactly, is it that they're trying to get out of the process?
Argentina asks two big questions in the petition. First, it is asking whether under the sovereign immunities act, Argentina’s payments to its new bondholders can effectively be seized to make payments on the defaulted debt. Second, Argentina is asking the court to certify the interpretation of the pari passu clause to the New York Court of Appeals, the highest court in the state.The second argument is a clever one. The Argentine bond documents were written under New York State law and the federal courts were interpreting that law. But the judge’s ruling was a novel interpretation and a New York State court could feel differently. Argentina is basically saying, “Look, this really should have been decided by New York State all along, and let’s just see what they say. What could be the harm?”
What do you monkeys think? How will this work out? What kind of effect could this have on sovereign distressed debt investing?
This is a very old case, I think another user is tracking updates and bumping a thread with new info as it progresses. Would be helpful to link that here.
http://www.wallstreetoasis.com/forums/elliot-capital-management-seized-…
Paul Singer's a BAMF
What do you mean by "very old case"? Oral arguments were on Monday.
Joseph Cotterlli does a great series on this, I highly suggest anyone interested in distressed debt to read his series:
http://ftalphaville.ft.com/2014/03/24/1807002/pari-passu-plus-ca-change/
Just for some international law context - Simply put - a sovereign nation does not 'have' to do anything it does not want to - especially not the judgement of a foreign court (all international 'persons' are equal before international law - there is no ability to 'enforce' things legally). Therefore all of the proceedings are essentially a way of peer pressure. Essentially it would be in Argentina's interests to just keep the litigation going, and hope that the bondholders get tired, lest they try and steal things again.
Saying these proceedings are essentially a way of peer pressure is absolutely false. This case has broad implications on boilerplate pari passu clauses currently active in many sovereign debt structures. While sovereigns have complete fiscal authority, Rogoff & Reinhardt have shown that confiscation of assets as well as the real effects of devaluation of the sovereigns currency & the lack of continued foreign credit gives the foreign community considerable de facto authority.
My point transcends the private international law considerations you are dealing with in order to address the public international law consideration - that Sovereigns have complete 'sovereign' authority. I can even demonstrate this;
Under what authority do you purport that the 'foreign community' has 'de facto authority' - I mean this in a legal manner, as any other consideration whether it be physical/economic/financial would fall under 'peer pressure' (which is not to say that it is ineffective, but neither is it to say that it is authoritative).
Simply put - the only 'de facto authority' would be an order from the UN security council - and disobeying that authority would not necessarily be 'illegal' - it simply would trigger sanctions/intervention.
Not to belittle your position - I fully appreciate that you have a greater technical knowledge on the subject of distressed debt and default regimes - but that knowledge is predicated on the assumption that there is an authority to enforce the regime, to which I answer, no there is not a 'legal' authority, the only 'authority' would be via peer's pressuring through physical, economic and financial mechanisms.
Silver banana just for the pic ...
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