Policy Research in Macroeconomics

Argentina’s debt: the English court pulls its punches

A Group of Vultures Waiting for the Storm to "Blow Over"--"Let Us Prey" by Thomas Nast, Wood engraving published in Harper's Weekly newspaper, September 23, 1871

A Group of Vultures Waiting for the Storm to “Blow Over”–“Let Us Prey” by Thomas Nast, Wood engraving published in Harper’s Weekly newspaper, September 23, 1871

The absurdities and contradictions of the US courts’ judgments and decisions in and out of the NML –v- Argentina litigation continue to manifest themselves ever more clearly – but so does the extent of the extra-territorial (one can say legal imperialist) impact of their abuse of jurisprudential power.

Last Friday, an English judge gave judgment on an issue of English law on Argentine exchange bonds covered by English (and Welsh) law, and denominated in Euros. The case was brought by a group of bond-holders against the Bank of New York Mellon (BNY) and its subsidiary, as trustees on their behalf of moneys duly paid by the Republic of Argentina to its account.

The judge made the following Declaration:

“that the sum of €225 million transferred by the Republic of Argentina to the account of the trustee with Banco Central de la República Argentina and still held to the credit of that account is held on the trusts declared by a Trust Indenture between the Republic as Issuer and The Bank of New York as trustee dated as of 2 June 2005 and subsequently amended, such trust being governed by English law, (as would be any other funds paid to it in attempted satisfaction of the Republic’s payment obligations under the Euro Debt Securities)”.

So the only modest link with the US in this tale is that the BNY is incorporated under New York law.  And has been made subject to the extraordinarily broad injunction by the US courts that prevent it making otherwise utterly lawful – and due – payments to bond-holders in relation to bonds that have no jurisdictional connection with the US or the US litigation.

Misunderstanding the US courts’ findings

But alas, the English court declined to go further in challenging the US court’s overreach – and has in the process misconstrued the US courts’ perverse and unjust injunctive use of the pari passu clause in the bond agreements governed by US law.

Here is what the Mr Justice Richards says on this point:

18.    The Holdout Creditors have relied on a term of the FAA bonds to argue that no payment of interest may be made on the exchange bonds without making a rateable payment of the amount due on the FAA bonds.    As the full amount of principal of the FAA bonds is due and payable, this means that if, for example, the Republic wishes to pay the full amount of interest due on the exchange bonds on a particular interest payment date, it must simultaneously pay the full amount due on the FAA bonds.  The provision in question, known as a pari passu clause, reads so far as relevant as follows: 

“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).”

19.    In 2012, the District Court held in favour of the Holdout Creditors’ construction of the pari passu clause, a decision which was subsequently upheld on appeal by the Court of Appeals for the Second Circuit (the Court of Appeals).    The US Supreme Court has declined to hear an appeal against this.   This construction is controversial but, as Newey J said in a judgment to which I will later refer, this is of little or no significance because the clause has been definitively interpreted in accordance with its governing law by a court of competent jurisdiction.    

Taking the last point first, it is true that – from the perspective of the US legal system – the pari passu clause has been “definitively interpreted” by a court of “competent jurisdiction” (the word “competent” not having its ordinary demotic meaning here!).  It is certainly true that the interpretation is “controversial”, and most legal experts and commentators would add, wrong.

What the English judge could and should have said, in my view, is that the US courts’ interpretation may be definitive for other US courts, but their interpretation is in no way binding on or of persuasive authority to the courts of other nations (including of course the English courts). 

Further, and more importantly, Mr Justice Richards has misunderstood the relationship between the US courts’ interpretation of the pari passu clause, and the consequences of that interpretation on the discretionary remedy that was granted, by way of injunction.

We have previously analysed the legal situation in depth, in our “Partial Justice: the US Courts v Argentina” (July 2014).  But it is necessary to go over this ground once more, as many people besides the English judge are still confused.

Broad discretion in deciding on terms of injunction

First up, it did not and does not follow as a matter of law that – to make a “rateable payment” to the hold-outs – this necessarily involved a requirement that Argentina “must simultaneously pay the full amount due on the FAA bonds” to the vultures by way of the totality of principal and rolled-up compound interest, if it “wishes to pay the full amount of interest due on the exchange bonds on a particular interest payment date”.  

Judge Griesa and the US Appeals Court had an enormously broad discretion to interpret the meaning of “rateable payment” in this context.  It absolutely did not have to mean the full outstanding amount. Indeed, the Appeals Court at one stage sent the matter back to Judge Griesa to clarify what he meant by his proposed injunction.  In October 2012, the Appeals Court put it like this:

 “The Injunctions provide that “whenever the Republic pays any amount due under the terms of the [exchange] bonds,” it must “concurrently or in advance” pay plaintiffs the same fraction of the amount due to them (the “Ratable Payment”). We are unable to discern from the record precisely how this formula is intended to operate. It could be read to mean that if, for example, Argentina owed the holders of restructured debt $100,000 in interest and paid 100% of that amount then it would be required to pay the plaintiffs 100% of the accelerated principal and all accrued interest.

Or it could be read to mean that, if such a $100,000 payment to the exchange bondholders represented 1% of the principal and interest outstanding on the restructured debt, then Argentina must pay plaintiffs 1% of the amount owed to them. We cannot tell precisely what result the district court intended. On remand the district court will have the opportunity to clarify precisely how it intends this injunction to operate.” 

Note that the Appeals Court does not say that either interpretation was wrong – it left it to Judge Griesa to clarify! Yet the difference between an injunction ordering Argentina to pay 1% each time to the hold-outs is rather different from an order to pay them 100% whenever paying exchange bond-holders 1% of what is due to them!

Judge Griesa chooses to back the vultures

Judge Griesa chose to impose the harshest possible formula, to the huge disadvantage of the exchange bond-holders.  He made clear that this was not required simply as a matter of law, but was his own choice in terms of the remedy he wanted to apply:

“Of course, what is being done here is not literally to carry out the Pari Passu Clause, as would be done in a normal commercial situation, but to provide a remedy for Argentina’s violation of the Clause.. Yet, the remedy must bear some reasonable relation to the Pari Passu Clause in order to be a sensible remedy. One definition of pari passu in Black’s Law Dictionary (8th ed. 2004) is “proportionally,” obviously referring to the use of the same proportion in paying down two kinds of debts. This is clearly reflected in the Ratable Payment provisions in the Injunctions, as correctly interpreted. 

These provisions properly start with the fact that if 100% of what is currently due to the exchange bondholders is paid, then 100% of what is currently due to plaintiffs must also be paid. The payment to plaintiffs must surely relate to a debt actually due to them. And this leads to the problem which this court finds in the second hypothetical posed by the Court of Appeals. There is simply no debt owed to plaintiffs on terms providing for payments of 1% of some sum of money, spaced out over 100 instalments of 1% each. Again, there is no suggestion of interfering with what the exchange bondholders are due to be paid. 

The question raised by the Court of Appeals relates solely to how much plaintiffs are to be paid at the time exchange bondholders are paid. But the fact is that the amount owed to plaintiffs by Argentina is the accelerated principal plus accrued interest. Argentina owes this and owes it now. No one has suggested any basis in contract or in policy why Argentina deserves to have payment of the amount due to plaintiffs spread over some period of time.”

judge Griesa’s moral framework

Note the use of the word “deserves”. Judge Griesa then added more of his own moral interpretation, which sheds light on his own moral or ideological framework (close to the vulture funds’ own!):

“Moreover, and this is most important, to apply the second hypothetical of the Court of Appeals and spread payment to plaintiffs over a period of time, would be a far cry from a proper remedy for the flagrant and intentional contract violations committed by Argentina….

In accepting the exchange offers of thirty cents on the dollar, the exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating their rights on the [original] FAA Bonds. However, they knew full well that other owners of FAA Bonds were seeking to obtain full payment of the amounts due on such bonds through persisting in the litigation. Indeed, the exchange bondholders were able to watch year after year while plaintiffs in the litigation pursued methods of recovery against Argentina which were largely unsuccessful. However, decisions have now been handed down by the District Court and the Court of Appeals based on the Pari Passu Clause, which give promise of providing plaintiffs with full recovery of the amounts due to them on their FAA Bonds. This is hardly an injustice. 

The exchange bondholders made the choice not to pursue the route which plaintiffs have pursued. Moreover, it is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes. After ten years of litigation this is a just result.” 

In “Partial Justice”, we summed it up as follows:

“This is really quite breath-taking in its intellectual audacity and paucity. Taking the last point first, the judge is telling the exchange bond-holders in effect that since they took the “safe” route out of the problem by agreeing to the debt sustainability restructuring, they have only themselves to blame for ending up worse off than the hold-outs! 

No mention of the fact that most of the hold-outs buy up their bonds dirt cheap and take their speculative chances in enforcement. No hint of a thought that an orderly settlement of a debt crisis to enable a country to return to debt sustainability might just be in the public interest. No.  Just unadulterated judicial support for the Cayman Island billionaire vulture funds.”


It is – in a modest way – positive that the English court has given a clear Declaration on the fact that sums paid by Argentina as interest under bonds governed by English law are indeed held by BNY as trustee for the bond-holders. 

But the judge has lost a chance to make clear – in however polite terms – the abuse of power involved in the US courts extra-territorial scope of its injunction – and its punishment of the exchange bond-holders which extends to bonds that have virtually no connection with the US.

Sadly, like many others, Mr Justice Richards has also misunderstood the relationship between the US courts’ interpretation of the pari passu clause (bad enough for a start) and the terms of the injunction granted to NML and other vultures.  

The terms of that injunction were not required as a matter of law, are wholly biased in favour of the vulture funds, are wildly unjust to the exchange bond-holders – and are entirely within the broad discretion of the court.  

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