The Holidays have come and gone. I hope that everyone enjoyed themselves and that you took some time out from celebrating to reflect over the direction of your lives. We have our own unique paths in life to follow. I must make some changes in my life if I am going to obtain my goals and be a better person. I wish everyone the best of luck for 2013.
Let’s return to the issues at hand and see if we can resolve some of them in 2013.
There have been some significant developments in the long running litigation between NML Capital and the Republic of Argentina. In my last post on this contentious litigation I reported that Judge Griesa of the Federal District Court, Southern District, New York State had addressed the issues that the Federal Appeals Court of the Second Judicial Circuit had remanded to him for clarification. Judge Griesa’s ordered Argentina to pay the plaintiffs what they are owed on their defaulted bonds. The District Court crafted a payment solution in which monies paid to the trustee for the exchange bond holders would be diverted to pay the plaintiffs. In a sense the District Court crafted a levy against the debtor’s assets here in the U.S. If Argentina attempts to get around (again) the court order the Republic would default on the bonds held by the exchange holders.
It should not have come as a surprise to anyone that Argentina on December 28, 2012 filed (again) an appeal with the US Court of Appeals for the 2nd Circuit seeking to overturn Judge Griesa’s order. The appeals court issued a temporary stay of the lower court’s order and set oral arguments for February 27, 2013. The will decide the case sometime in early summer.
For the time being Argentina will be able to pay the exchange bond holders without having the trustee divert money towards the satisfaction of the Plaintiffs’ judgment(s). The appeals court accepted briefs as friends of the Court from the exchange bondholders, involved banks and other concerned persons. Importantly, the United State once again submitted papers in support of Argentina’s overall position; that it, as a sovereign nation, has an absolute right to force a re-negotiation of debts on bond holders. According to the Argentine position anyone who fails to take part in the restructuring stands to lose their investments. The Justice Department in its papers again argued national political concerns over accepted legal theory and law. According to Justice Department lawyers the Executive branch’s policy goals take precedent over Argentina having to obey the lawful commands of the federal judiciary.
One has to question the fairness of allowing Argentina to unilaterally decide which of its creditors it will pay and which ones will receive no payment. I do not believe that the US government would take such a position if it was the creditor that was having its investments controlled by a foreign nation’s political whims.
I think that the US should use it power to insure that its private equity companies are paid on investments that they have made in foreign governments’ sovereign debt. Promoting private investment in foreign debt offerings seems to be a good policy when it ultimately relieves the American taxpayers of having to bare the risks of such an investment. America should not promote a policy that effectively ends private investment in sovereign debt. Private companies cannot and should not take the risk of investing in sovereign debt if the issuing nation can unilaterally change the terms of the investment or simply not pay on the investment.
In another important development in the NML Capital v. the Republic of Argentina litigation the exchange bond holders filed suit with the New York State Court of Appeals. The legal action seeks a declaratory judgment over the legal definition of the pari passu clause in the bonds, which is at the heart of the dispute raging in federal court. The plaintiffs in this new case argue that the interpretation of the clause is a matter of state law. Accordingly, the plaintiffs urge New York State’s highest court to accept the case and decide the legal significance of the clause. In this respect the plaintiffs are correct, but that does not mean that only a New York State court can definitively resolve the issue. The exchange bond holders seek a ruling that declares that all bondholders should be treated equally. It is unclear that the state’s highest court will accept the case or how it might rule if it does. For many reasons I doubt that the state Court of Appeals will issue a ruling contrary to the federal court’s interpretation of the clause. The judges who sit on the Empire State’s Court Appeals will not relish their roles as “appellate judges” who must review Judge Griesa’s order.
In my opinion the exchange bond holders have good reasons to fear losing (again) their investments if Judge Griesa’s orders are ultimately sustained. I do not believe that any holder of Argentine debt is confident of being paid according to the terms of his bonds or a forced restructured agreement. Lately, the South American former economic power has developed a harsh and belligerent stance towards its creditors and foreign investors. The Argentine President along with other high-ranking governmental officials have repeatedly stated that Argentina will never pay NML Capital and the other plaintiffs monies that the US judiciary have declared to be due and owing. Argentina has engaged in the expropriations of foreign investments without fair and reasonable payment for the taking. It is obvious to everyone that Argentina has simply stopped playing by the long establish rules.
On the other hand the investors who comprise the plaintiffs in the federal case have good cause to suspect that the exchange bondholders are working to help Argentina circumvent Judge Griesa’s orders. The New York State filing by the exchange bondholders supports this suspicion. In the end the exchange bond holders and the NML Capital plaintiffs are going to find themselves in the same untenable position; Argentina is not going to pay anyone (again) and blame the US for preventing it from making proper payment.
The US Administration should realize that the Argentina’s tactics and complete disregard for American judicial mandates weakens Wall Street as the world’s financial center, pits American investment companies against one and other and diminishes the country’s status as a world leader in finance. The idea that one (including an entity) should pay his or her just debts should be fully embraced by America and exported in the name of free and sustainable commerce.
It is ironic that the US is advocating that Argentina and nations in general be granted flexibility in refinancing their external debt. The credit rating agencies are quickly running out of patience with the US’s continued failure to deal with its own burgeoning debt problem.