We have been following the tortuous path of litigation between NML and Argentina for a few years now, with growing concern at the way the US courts have interpreted the respective rights – and wrongs – of the parties in relation to Argentina’s debt, following the economic collapse, devaluation and default in 2001. See our November 2012 article “Don’t (cry for me) pay up now, Argentina!” for our analysis at that point.
To recall, by 2010, over 90% of Argentina’s original bond-holders accepted new exchange bonds paying around 30% of the face value of the old ones in return for regular payments under the new, which have been made till now by Argentina. But NML (who bought up old bonds at knock-down prices) and other hold-outs claimed 100% of the principal and interest under the original bonds.
Today, we publish our latest PRIME report, “Partial Justice: the US courts v Argentina” which provides an in-depth critique of the way the US courts at all levels have interpreted the law and exercised the wide discretion available to them.
It complements the issues raised in Professor Raffer's post yesterday, and goes into more detail in analysing the rights (some) and wrongs (numerous) of the US courts' decisions.
Partially, the US courts got it right when they decided that Argentina was in breach of the bonds’ pari passu clause, which said that Argentina’s “payment obligations shall at all times rank at least equally” with all its other present and future external unsecured debt. By enacting the Lock Laws which precluded the government from paying anything on the original bonds, Argentina had legally ranked NML’s bonds below later ones.
But we argue that the US courts went wrong in also claiming that “rank” was not limited to legal ranking, as previously understood, but also covered different treatment of creditors in practice.
And above all, the way the US courts exercised their discretion was partial, i.e. the opposite of impartial. They wholly subordinated the general public interest in orderly post-crisis debt restructuring processes to the narrow financial interests of NML.
Click here for the pdf: Partial Justice - the US Courts v Argentina
The worst of the US courts’ decisions, however, was the order to Argentina not to pay a single cent of the latest instalment payment due to the other creditors (the exchange bond-holders who had accepted the severe “haircut”) unless it paid at the same time the totality of the face value of principal plus interest on the original bonds which NML had bought at knock-down prices.
This puts NML in a far more beneficial position than all the other creditors – a perverse conclusion which was absolutely not required by law. On the contrary, the court turned a supposedly “equal treatment” pari passu clause into its opposite - a vehicle for providing unequal treatment, by which NML would recover the enormously high rate of interest on its speculative investment, whilst the exchange bond-holders continued to received their smaller stage payments over several years.
Our report proposes that the fairest discretionary remedy – consistent with the principle of equal treatment - would have been to put NML and other hold-outs in precisely the same financial position as the exchange bond-holders under their new (haircut) bonds. This would have obliged Argentina to pay the hold-outs something, but would not have discriminated against the exchange bond-holders, nor disrupted orderly debt restructuring, nor promoted the moral hazard posed by vulture funds.
The NML v Argentina series of court cases demonstrates once more the urgent need for a fair international process to deal with issues of sovereign insolvency, outside national legal systems with their increasingly narrow, pro-creditor bias. After all, almost all sovereign debt crises are the fault not of just one party (usually seen as the debtor), but of several parties.
In the case of Argentina, responsibility for her collapse and crisis in 2001 is shared between Argentina herself, the creditors who hugely encouraged more and more unsustainable borrowing (at interest rates that priced in the risk of default) by Argentina, and the IMF, who encouraged an unsustainable economic policy through its own lending and moral support.
The absence of an international insolvency procedure for sovereigns is extremely damaging to both debtors and creditors (who have no way of ensuring equal treatment between themselves). The present non-system is analogous, as the FT’s Martin Wolf has said, to the debtor’s prison of yesteryear, before bankruptcy laws were passed. A poor country’s citizens are left vulnerable to economic enslavement to creditors, if there is never a way of writing down debts or assessing ability to pay.